Pricing formula batters Lanka IOC as diesel sales drop

By Ranshitha Kularatne

The Government-regulated pricing of fuel has resulted in Lanka IOC suffering a drop in diesel sales as its price point is Rs. 6 higher than its sole competitor, State-owned Ceylon Petroleum Corporation (CPC).
Speaking to The Sunday Morning Business, Lanka IOC Senior Vice President Retail Sales Siddharth Agrawal said that the latest adjustment of prices on 10 October according to the fuel pricing formula has had an immediate impact on Lanka IOC.
“With each passing day diesel sales are declining. Petrol is being sold at the same price so it doesn’t have much impact but diesel sales have gone down. It has been just a week since the prices changed and gradually sales are dropping.”
Agrawal added that the drop of sales was more pronounced in certain locations.
Expressing his thoughts on the declining sales of diesel, Lanka IOC Managing Director Shyam Bohra told The Sunday Morning Business:“At this point there is a chance that IOC will lose volume. We don’t want to lose volume and we don’t want to increase prices but there is no choice. This will affect the sustenance of the company; we are not only depending on diesel but it is going to impact us.”
Bohra said that IOC does not receive subsidies from the Government, unlike the CPC, and in order to sustain the company a reasonable price point has to be maintained.
“If we sell at the same rates as CPC we will lose money and won’t even be able to import the products” he added.
He said the full impact on sales and revenue is too early to estimate.
When inquired on whether he had alerted the Government about this issue, he said that there was no need for the company to inform them, as the Government is already aware of the issue and has to take a final decision.
However, both Bohra and Aggrawal expressed confidence in the long term sustenance of Lanka IOC due to its diversified product portfolio.
Interestingly, when contacted, the CPC said that it has not seen a boost in sales and that sales are in fact “almost flat”.
“CPC has not seen a remarkable increase in sales. Sales are almost flat, there is a slight change in sales but it’s almost average. It’s not price elastic at all,” said CPC Deputy General Manager Marketing W. M. K. R. B. Wickramasinghe.
Meanwhile, during a media briefing Minister of Finance and Mass Media Mangala Samaraweera revealed the much-discussed fuel pricing formula to the public on Thursday (18). The Minister presented the following formula and explained its components.
MRP = V1 + V2 + V3 + V4
MRP = Maximum retail price of auto fuel
V1 = Landed Cost (includes Singapore plats price per barrel, weighted average premium per barrel, loss due to the evaporation, and exchange rate (US$)/LKR applied)
V2 = Processing Cost (includes local port charges, transportation cost, dealer’s margin including losses due to evaporation to dealers, and stockholding cost)
V3 = Administration Cost (includes administrative expenses such as personnel cost, depreciation, and other cost elements).
V4 = Taxation (includes customs duty, excise duty, ports and airports development levy, and nation building tax).
Samaraweera mentioned that the fuel pricing formula is put together by a committee of senior officers from the Ministry of Finance and hinted at a possible price reduction in November.
“Fuel prices in the international market are being lowered now but it is better not to be too optimistic as prices can fluctuate. At this point the prices have decreased by $ 5 per barrel resulting in the price coming down from $ 85 to $ 80.
“Let’s hope this price reduction will prevail so the price moderation for November will be a beneficial adjustment to the public.”
Justifying the imposed tax rates on fuel prices, State Minister of Finance Eran Wickramaratne stated that fuel tax rates for Sri Lanka is lower than India, Pakistan, and UK. According to him, India, Pakistan, and UK have imposed 33%, 58%, and 60% tax on diesel price, respectively, while Sri Lanka charges a 19% tax on diesel.
On Petrol prices, India has enforced a tax of 43% while Pakistan’s and UK’s tax rates remain at 38% and 61% respectively. Sri Lanka’s tax percentage on petrol is at 34%.
Both Samaraweera and Wickramaratne emphasised the importance of taxes stating that they have to be charged since tax money is an important source of income which enables the Government to provide subsidies for sectors such as education and health.