Piramal Glass pleads for transparent furnace oil price reduction
Friday, 8 May 2015 00:00
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By Channa Fernandopulle
Piramal Glass Ceylon Plc Chairman Vijay Shah reiterated calls for a reduction in the price of furnace oil during a recent visit to Sri Lanka.
“As you know, the ceramic and glass industry are highly energy-intensive processes. We have been pleading with the Government asking for a reduction in the price of furnace oil for a long period of time. I don’t think anyone is really paying any attention to this serious issue. Nothing is being done and if this situation continues, our ability to compete in the global market will be severely eroded and we will be forced to reduce our exports as a result,” Shah warned.
Furnace oil, which is derived from the distillation of petroleum, is a critical raw material in the production of glass.
When oil prices peaked at $ 110 per barrel, local industries were purchasing furnace oil at Rs. 90 per litre.
However, despite a subsequent historic drop in the price of international crude oil by almost 50% to a range of $ 50-60 per barrel, furnace oil prices in Sri Lanka have remained stubbornly high at Rs. 80 per litre; a factor which has hurt Piramal and many other manufacturers, including ceramics.
In contrast to the Sri Lanka situation, furnace oil prices in India have stayed persistently low and currently hover at a price approximately equivalent to Rs. 50-60 in Sri Lanka, said Samit Datta, President Global Supply Chain of Piramal Glass Ltd., India
Speaking to the Daily FT just prior to leaving the island on Tuesday, Shah explained how 38% of Piramal Glass’ operating expenses flow directly into fuel costs, a position which he asserts puts Sri Lankan manufacturers including Piramal at a significant competitive disadvantage relative to large-scale, low-cost producers in countries like China.
“It is also frustrating to see that local refineries in Sri Lanka produce furnace oil from the distillation of crude oil which they proceed to export at a much lower price than what they sell to local private sector industry. Even the power sector receives a subsidy on furnace oil where they get lower that Rs. 80 per litre. Frankly speaking this is simply not fair to the glass and ceramics industry as a whole,” Shah criticised.
Commenting on the overall state of operations in Sri Lanka, Shah nevertheless expressed optimism for Piramal’s position moving forward.
“We have been in Sri Lanka for 15 years and I have to say that overall, we are extremely happy with operations here. We have expanded capacity in the past and are already planning on further expansion through an investment of Rs. 2.5 billion over the next 15 months which we go towards increasing capacity and jobs to match this new capacity
“Generally speaking successive Governments have always been very supportive of our industry and the performance of the domestic market is quite strong and looking to improve further. The issue with irrational furnace oil prices is simply the only real problem that we face in Sri Lanka,” Shah said.
Approximately 30% of Piramal’s production of high-end, speciality glass packaging is channelled into export markets in India, Australia, New Zealand, Philippines, USA, U.K and countries in the East and South African region.
When asked about the potential upside for Piramal and other ceramics and glass manufacturers in the event of a price reduction, Shah clarified that it was not simply a reduction in price that Piramal was seeking, but instead the implementation of a transparent pricing formula for furnace oil that could be linked to fluctuations in the price of international crude oil.
“All we are asking for is for a transparent formula for furnace oil price that is linked to international crude oil prices. Then if prices go up, we are justified in passing on the increased cost to the customer. Right now we are not able to pass on this increased cost because the customer will compare our prices with international prices and therefore they’ll simply get it from another source.
“If we were given parity with global prices, our business can become significantly more competitive and as a result, we can start to increase our export volumes which will bring in valuable foreign exchange into the country while creating more job opportunities,” he asserted.
He added that the creation of such a pricing formula would also serve to attract greater investment into Sri Lanka.
“Simply put, high energy costs will only stagnate economic growth. With a transparent and objective approach to pricing, more industrial investors will also want to look at Sri Lanka. This is a win-win,” he stated.
