Energy-Petroleum consumption: Weakness in industrial fuels; base affects auto fuels - Kotak

Domestic petroleum consumption declined by 6.1% yoy in August driven by (1) sustained weakness in off-take of industrial fuels, 29% decline in petcoke and 7-8% decline in FO/naphtha, and (2) 3.7% decline in diesel and 1% decline in gasoline from a higher inventory-led base of August 2016. Auto fuel volumes will normalize as daily fuel price changes prevent dealers to benefit from managing inventories; however, the sustained weakness in industrial fuels is worrying, perhaps reflecting the transient impact on the economy post GST.

Petroleum demand declines 6.1% yoy in August, staying flat in 5MFY18

Domestic petroleum consumption declined by 6.1% yoy to 15.7 mn tons in August 2017, after declining 1% in past two months and growing 3-5% in April-May 2017. We note that demand for industrial fuels, such as petcoke, fuel oil and naphtha, has weakened in the past few months, reflecting near-term slowdown in the economy, perhaps transient, from implementation of GST. Overall volumes remained flat in 5MFY18, somewhat better than 3% decline post-demonetization in 4QFY17, but quite subdued when compared to a robust 8% growth during pre-demonetization phase in 9MFY17, reflecting moderation in demand across all fuels.

Subdued off-take of industrial fuels likely reflecting impact from GST implementation

The off-take of industrial fuels, such as pet coke, furnace oil and naphtha, has reduced sharply over the past three months presumably reflecting slowdown in manufacturing activities around the implementation of GST. We rule out any significant substitution of liquid fuels by LNG, as consumption of the latter by the industries has remained flattish broadly during this period. The off-take of industrial fuels declined sharply in August with consumption of (1) petcoke declining 29.3% yoy, (2) fuel oil/ LSHS declining 6.8% yoy and (3) naphtha declining 7.6% yoy. In 5MFY18, domestic consumption of (1) petcoke has declined 12.4% yoy, (2) fuel oil/ LSHS declined 7.6% yoy and (3) naphtha declined 16.5% yoy.

Auto fuels demand declines in August impacted by higher inventory-led base of last year

Auto fuels demand was negatively impacted by a higher base—(1) diesel demand declined 3.7% yoy as compared to 13% growth in August 2016 and (2) gasoline demand declined 0.8% yoy versus 25% growth in the previous year. Auto fuel volumes in August 2016 were likely boosted by inventory build-up by dealers in anticipation of price hike on September 1, when retail prices were actually increased by 5-6%; implementation of daily fuel prices inhibits dealers to profiteer from any such fluctuation now. In 5MFY18, auto fuels demand growth has been moderate with diesel growing by 4.5% yoy and gasoline increasing by 8.3% yoy. Jet fuel demand remains strong growing at 10.6% in August and 9.7% in 5MFY18.

LPG growth remains strong as kerosene declines; other petroleum products gain pace

LPG demand grew 11.8% yoy in August 2017 and 11.5% in 5MFY18, reflecting increasing connections under the Pradhan Mantri Ujjwala Yojana scheme. This is also corroborated by accelerated sharp decline in kerosene consumption, down 41% yoy in August and 36% yoy in 5MFY18, further impacted by reduced quotas for the states. Lubricants and greases demand grew by 6.6% yoy in August, but declined 8.1% yoy in 5MFY18. Bitumen and other petroleum fuels consumption grew by 8-8.5% yoy in August 2017.

Source : Equity Bulls

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