Sri Lanka IOC unit profits fall on taxes, hedging costs

Oct 31, 2008 (LBO) – Profits of Lanka IOC, a unit of India’s IOC fell 83 percent in the September quarter to 109 million rupees amidst high taxes and hedging costs, while six months profits were flat at 1.1 billion rupees, an official said. Lanka IOC managing director R Ramakrishnan said his firm was losing money also on petrol with a 26,000 tonne stock imported at 144 dollars a barrel. At one time the loss was 8 rupees a litre, he said.

In Sri Lanka petrol is retailed at 157 rupees a litre. According to Central Bank data, refined petrol in Singapore was 43.25 rupees a litre (with US dollar at 111 rupees), diesel 50.6 and Kerosene 53.14 rupees, yesterday.

Lanka IOC has hedged about 30 percent of its volumes. The contracts are due to run out in July 2008.

State Taxes

In September a 15 rupee tax was imposed on petrol. The company was also hit by amounting to 39.50 rupees a litre on petrol and 10 rupees on diesel.

Sri Lanka’s government has imposed discriminatory import duties on imported refined products hurting Lanka IOC more than the state run Ceylon Petroleum Corporation, which refines a part of its products at home.

A fuel retailer should not have an imperative to hedge its products if a price formula and competitive pricing of fuels was allowed.

A price formula allows costs to be passed down to customers and businesses within an economy, who should then take a decision on whether to hedge their costs or not.

Hedging gives certainty about future prices. But in Sri Lanka ignorant policy makers claimed that it ‘saved’ foreign exchange.

Foreign exchange movements are purely a monetary phenomenon driven by central bank printing of money, as people in Sri Lanka are beginning to realize, belatedly but painfully.

Exchange Rates

Sri Lanka’s central bank has also tried to underwrite exchange rate movements, something that should be left to economic players to manage, resulting in the current troubles with the island’s exchange rate.

Analysts say Sri Lanka’s forex dealers have also thrived on the ‘nanny state’ attitude, rushing to the central bank like crybabies whenever they got a large inflow of dollars, to prevent the rupee appreciating and reducing their profits.

The situation is however perpetuated by restrictions on banks’ overnight holdings of currency.

Yesterday the central bank allowed the currency to adjust. One of the hardest hit would be CPC, which had delayed payment with dollar borrowings from the Iranian state.

Sri Lanka’s fuel retailers led by the Ceylon Petroleum Corporation were also forced to hedge to avoid losses because politicians controlled fuel prices, in the mistaken belief that fuel ’caused’ inflation, which was also a monetary phenomenon.

CPC chief Ashantha de Mel said earlier that top global investment banks were predicting oil prices would end at 130 US dollar a barrel this year, despite classical monetary economists and the International Monetary Fund predicting a collapse in the oil bubble.

Bubble Trouble

The Economist magazine while reviewing a forthcoming book ‘The Ascent of Money: A Financial History of the World’ by Niall Ferguson said the peculiar behaviour of investment bankers was driven by poor knowledge of monetary history.

“..today’s senior financier would have started out in 1983, fully ten years after oil and gold prices first began the surge that ruined the previous generation of money men,” the publication said, quoting Ferguson.

In 1973 massive US money printing caused the collapse of the Bretton Woods monetary system and the dollar went off the gold standard, firing the first oil shock and commodity bubble, which was similar to the 2008 one.

The period gave rise to modern pure fiat paper money, which has now resulted in a global meltdown, after central banks, which manipulated markets by printing money to control interest rates for 30 years, finally lost their grip and market forces re-asserted dominance over politics.

In the past, pure paper money has not survived beyond half a dozen years, without causing a massive bubbles, hyperinflation, and economic collapse.

According to Ferguson, the Economist said, there was a “powerful justification for the study of financial history.”