Rupee’s Plunge Prompts Refiner to Embrace Iran

Bloomberg

India is increasing imports of crude oil from Iran as policy makers risk flouting U.S. trade sanctions in their scramble to halt the slump in the rupee.

Mangalore Refinery & Petrochemicals Ltd. (MRPL), India’s biggest buyer of Iranian crude, plans to buy five cargoes of 85,000 metric tons each this month, compared with three in August, Managing Director P.P. Upadhya said in an interview. Shipments from the world’s only producer that accepts rupee payments for oil are estimated to rise to 4 million tons in the year ending March 31, versus 3.9 million tons in the previous 12 months.

India is among a few countries eligible for a waiver of a U.S. law that imposes financial sanctions unless they can show they have “significantly reduced” purchases from the Persian Gulf country. Prime Minister Manmohan Singh is seeking options to revive the $1.8 trillion economy, which relies on imports to meet 80 percent of its energy needs, as he struggles to stem capital outflows that have weakened the rupee by 19 percent this year against the dollar.

“Importing crude oil from Iran is crucial as it helps in curbing dollar outgo in a big way,” Upadhya said by phone from Mangalore on India’s west coast. “We can make part payment in rupees. That’s the arrangement.”
Atomic Research

The U.S. and European Union are seeking to curb trade in Iranian oil, arguing the Persian Gulf state’s atomic research is aimed at producing weapons. The government in Tehran says it is for civilian purposes. Asian customers of Iran, including China, India and South Korea, won waivers from the U.S. allowing imports of Iranian crude as they were able to show purchases had been curbed.

While India has abided by several rounds of United Nations sanctions on Iran over the country’s nuclear program, it has publicly criticized unilateral American sanctions as an infringement on its sovereignty. Finance Minister Palaniappan Chidambaram told reporters last month that India is considering stepping up imports without breaching UN rules.

Indian refiners buying Iranian crude deposit at least 45 percent of their payments in rupees into a bank account, former junior oil minister R.P.N. Singh said in August last year. Iran in return paid for imports of commodities including rice from India in rupees. The nations also briefly traded in euros after the Reserve Bank of India dismantled a mechanism used to settle payments in dollars in December 2010.
Currency Benefit

“Buying more crude from Iran is positive for Indian refiners like Mangalore Refinery due to currency benefit and lower freight cost,” said Kamlesh Kotak, head of research at Asian Markets Securities Pvt. Ltd. “This would be a short term benefit, and the government needs a structured policy to handle the current-account deficit better.”

South Korea imported 815,447 tons of Iranian crude in July, 38 percent higher than a year earlier, Korea Customs Service said on its website Aug. 15. China’s imports in the month fell 13 percent to 1.69 million tons, according to data from General Administration of Customs in Beijing.

Curbs on buyers have made Iran the sixth-biggest producer in the Organization of Petroleum Exporting Countries, dropping from the No. 2 position. The nation has the capacity to produce 3.5 million barrels per day, almost equivalent to India’s total import requirement. Output rose 0.4 percent in August to 2.57 million barrels a day from the previous month.
Halted Purchases

Mangalore Refinery and Hindustan Petroleum Corp. (HPCL), the nation’s third-biggest state refiner, and Chennai Petroleum Corp. (MRL) halted crude purchases from Iran in April after Indian insurers declined coverage. India’s government is preparing a 20 billion-rupee insurance fund for future purchases, Financial Services Secretary Rajiv Takru said Aug. 19.

“If the government wants us to import Iran crude, we can do so, since we have processed this crude in the past,” A.S. Basu, managing director at Chennai Petroleum, a unit of Indian Oil Corp., said in a Sept. 2 phone interview. “How much volume we might actually take this year will depend on what price is being offered.”

Iran’s Naftiran Intertrade Co. owns 15.4 percent of Chennai Petroleum, making it the second-biggest holder, according to data compiled by Bloomberg.

In the absence of Iranian oil, refiners would need to buy crude from the spot market which is typically more expensive. Mangalore Refinery reported a loss of 4.5 billion rupees ($68 million) in the three months ended June 30, its third consecutive quarter of losses. Raw material costs rose 6.8 percent to 144.1 billion rupees compared with a year earlier.
Shares Drop

Mangalore Refinery’s dropped 1.4 percent to 30.90 rupees in Mumbai trading today. The stock has dropped 49 percent this year, heading for its worst annual performance since 2008. Chennai Petroleum has slumped 57 percent since January and Hindustan Petroleum has slid 43 percent, compared with a 6.1 percent decline in the benchmark S&P BSE Sensex (SENSEX) index.

Oil imports have contributed to India’s widening current-account deficit, which in turn is undermining efforts to revive economic growth from its slowest pace in a decade. Gross domestic product rose 5 percent in the year to March 31, the smallest gain since 2003, while the rupee plunged to an all-time low of 68.845 a dollar on Aug. 28.

India imported about 7.2 percent of its crude from Iran in the past fiscal year, down from about 11 percent in the previous 12-month period, according to the oil ministry.

“If India is able to adjust oil imports from Iran against exports using the Indian currency, it will squeeze our dollar demand significantly,” said Chokkalingam G., the chief investment officer at Centrum Wealth Management Ltd. in Mumbai, which manages the equivalent of about $290 million in Indian stocks. “It will make a big difference to India’s exchange rate management and at the same time push up export of commodities.”

To contact the reporters on this story: Debjit Chakraborty in New Delhi at [email protected]; Rakteem Katakey in New Delhi at [email protected]