KARACHI – Local refineries are still taking advantage of higher oil prices primarily due to a 7.5 percent deemed duty on High Speed Diesel (HSD). The deemed duty is fixed in percentage terms, however, it varies in absolute terms on fluctuating international oil prices. The deemed duty on diesel (HSD) has hit a 30-month high, reaching $9.0 per barrel. This could inflate further incase oil prices remain firm. If this happens, National Refinery Limited (NRL) and Attock Refinery Limited (ATRL) would be the major beneficiaries, given their superior product mix. The high deemed duty has strengthened refinery margins despite liquidity crises faced by refineries. Arab Light crude oil prices are currently hovering at $110 per barrel. Thus, for every $10 per barrel rise in international oil price, deemed duty in absolute terms will increase by an average $0.75 per barrel. However, given the rising trend in oil prices, chances of a reduction in deemed duty to five percent have increased, said Nauman Khan at Topline. He further said that the deemed duty, in this case, would be around $6.0 per barrel – in line with the average deemed duty (in absolute terms) in FY10, he added. With base case assumption of deemed duty at 7.5 percent, any rise in oil prices would further strengthen the sector’s bottom line, as for ATRL and NRL, a $10 per barrel increase in crude oil prices would culminate into incremental earning impact of Rs 1.93 and Rs 2.37 per share, respectively.
