Diesel: No longer a dilemma

Finance minister Pranab Mukherjee spared diesel from a price hike in Budget 2012-13 but gave a strong indication of a likely increase in prices by proposing to trim the petroleum products subsidy from 2.4 percent to 2 percent of GDP. So what does this mean for the common man? Is it a signal that diesel will now shed some of its subsidy flab and become leaner in terms of inching closer to the price of petrol and be more market driven?

Diesel-engined cars cost more than their petrol counterparts, deriving their economies from their higher fuel efficiency. Diesel fuel however costs less at Rs 40.91 per litre compared to Rs 65.64 per litre for petrol in New Delhi. In terms of running costs, diesel is 45 percent lower in terms of cost per kilometre compared to petrol. But diesel cars turn out economical only if they can clock substantial mileage of 1,500-2,000km monthly. For less than that, it’s advantage petrol.

OEMs give finaltouch to diesel plans

Post-Budget, OEMs, who had placed their plans for setting up diesel engine plants on the backburner due to a perceived lack of policy clarity, are now breathing easier. Maruti Suzuki has signaled its intention to go ahead with its new diesel engine plant at Gurgaon. Chairman R C Bhargava says that diesel pricing can impact production capacity and plant size but will not determine its decision to set up the facility.

Maruti will invest Rs 1,700 crore in a new diesel engine plant with an annual production capacity of 300,000 engines by 2014. It will continue to manufacture its 1.3-litre diesel engine that goes under the hood of the Swift, Dzire, Ritz and SX4 models.

To be built in two phases, the diesel plant will produce 150,000 units per annum by mid-2013 in the first phase with an additional 150,000 units being made in the second phase. “By 2014, our diesel engine availability will be around 700,000 units per annum,” adds Bhargava. “But we are still awaiting clarity on the auto fuel price policy after which our investments will be even more aggressive,” he adds.

While the company’s board has okayed an investment of Rs 950 crore as first instalment for the diesel plant, investments for the second phase will be finalised at the board meeting to be held in April. Bhargava also clarified to Autocar Professional on March 26 that the production capacity at its Gurgaon facility will be downsized to half a million from the current 7,15,000 units per annum. But the plant will not manufacture engines alone though the reduction of manufacturing capacity for cars will facilitate space for accommodating the new diesel engine plant.

“Since our Gurgaon plant is located in a residential area, moving cars out is inconvenient and we need space,” Bhargava explains. “At one stage, we planned to step up production of the Gurgaon facility to one million units by working an extra shift to tide over short-term expediencies.” But that is now out. Over a month ago, Maruti inked a deal with Fiat for the supply of 100,000 1.3-litreMultijet 75bhp diesel engines per year starting 2012 for a period of three years. Suzuki Powertrain, a joint venture of Suzuki and Maruti Suzuki, can supply 300,000 diesel engines annually. Besides, Maruti produces about 13.5 lakh petrol engines at Gurgaon.

With the increase in its engine bouquet, Maruti expects to close 2011-12 by selling 250,000 diesel cars out of one million expected sales. In 2012-13, this figure will be stepped upto 4,00,000 diesel sales out of 1.1 million sales, accounting for 37 percent.

With buyers preferring diesel, Maruti expects a sales slump of 50,000 petrol cars in 2012-13 that will be offset by sales of 150,000 more diesel units. Overall, it hopes to grow by 10 percent buoyed by both its petrol and diesel models.

Maruti Suzuki is also to make key announcements on its upcoming Gujarat foray by June. It has already identified about 1,200 acres for the new plant that will churn out two million cars. Paperwork is expected to be completed in six to eight weeks.

Meanwhile, fiscal 2011-12 has seen petrol car sales fall 15 percent while the diesel portfolio grew at about 35 percent. The estimated waiting list for diesel cars is around 400,000 units.

Even Hyundai Motor India is putting the finishing touches to its diesel engine project. “We will take about a month to arrive at a final decision,” says ArvindSaxena, director – sales and marketing. The company is expected to invest around Rs 450 crore for its new diesel engine facility. Some months ago, it deferred its plans for setting up the plant due to uncertainty over whether the Centre would tax diesel-engined cars.

Hyundai is likely to target a capacity of 150,000 diesel engines at its new plant and will make engines of 1.1, 1.4 and 1.6-litre configurations. At present, the i20 and Verna are the front-runners in Hyundai’s diesel portfolio. The Santro and i10 could also find diesel replacements once the new diesel engine plant goes on stream, according to industry sources.

Global impact gets oil majors worried

Meanwhile, the swing to diesel has implications for oil marketing companies (OMCs) as well, spiking up under-recoveries on their petroleum bouquet (petrol, kerosene, LPG, diesel) due to spiraling global crude oil prices. P K Goyal, director finance, Indian Oil Corporation, says OMCs lose Rs 12 per litre (without tax) on diesel and Rs 6 per litre on petrol which he says has not experienced a price hike since December 15, 2011.

Though the Centre compensates in cash a major chunk of the under recoveries, OMCs want the government to provide 100 percent compensation for reimbursement of under recoveries on three sensitive petroleum products – diesel, kerosene and LPG – including petrol in the sensitive bracket besides releasing cash compensation towards government’s share of under-recoveries on a monthly basis, reducing excise duty on petrol with consequent benefit to be retained by OMCs, permission to equate the selling price of sensitive petroleum products in line with prevailing international prices and allowing change in prices in line with the periodicity of changes in refinery gate prices.

For better clarity, the under-recoveries of OMCs are compensated by the government through a loss-sharing mechanism and are given in the form of cash assistance besides discounts on crude/products offered to OMCs by upstream oil companies (ONGC/OIL/GAIL). These added upto 92 percent in the last two years. The balanceis absorbed by the OMCs.

Though upbeat about the likelihood of diesel coming out of the regulated price framework, OMCs are batting for regulation of petrol pricing as well to counter the extreme volatility of the market. OMCs cannot hike petrol prices in tandem due to political exigencies that could cause a liquidity crunch and boost interest on bank borrowings, according to Goyal.

Estimated under-recoveries on diesel constitute about 55 percent of total under-recoveries borne by Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum on sale of sensitive petroleum products.

International crude oil prices have crossed the $130 per barrel threshold. OMCs fear that any reduction in compensation towards under-recoveries on diesel would seriously erode their financials. The estimated under-recoveries of the PSU OMCs on sale of sensitive petroleum products at prevailing prices is estimated to increase by around 55 percent in 2012-13 to around Rs 2,15,617 crore as compared to 2011-12.

As far as LPG demand goes and which is growing, the bulk is consumed for domestic use. Demand for LPG as an automotive fuel is very marginal at 1.5 percent of total LPG sales.

So clearly the way forward seems to be driven by diesel cars in the Indian market. Though the growth trajectory may not be smooth, it will carry spin-offs for all concerned stakeholders benefitting the automotive industry in the end.

SHOBHA MATHUR