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AfricaMoney | August 18, 2017

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Economy ExpertSpeak: Petroleum trading to expand economic horizons more than any other single development

Economy ExpertSpeak: Petroleum trading to expand economic horizons more than any other single development

Megh Pillay, the CEO of the State Trading Corporation (STC) of Mauritius, spoke to AfricaMoney on how the island is poised to develop itself into a regional petroleum hub. (Image: STC)

Megh Pillay, the CEO of the State Trading Corporation (STC) of Mauritius, spoke to AfricaMoney on how international petroleum trading is set to expand the island’s economic horizons more than any other single development. While noting that over 98% of households in Mauritius depend on LPG for their cooking and water heating needs, our economic expert forecasts 0% growth in LPG in Mauritius this year, as a result of Government incentives to use solar water heaters under Maurice Ile Durable.

Excerpts from an exclusive interview:

 

STC imports petroleum products, cement, wheat flour and rice. What is the relative mix of products in STC’s portfolio? 

Petroleum products comprise 96% of our portfolio. In fact, it would not be wrong to call us the Petroleum Corporation! (Laughs) In 2013, we handled 1.2 million tonnes of petroleum products comprising seven grades and 68,000 tonnes LPG. Yet, though wheat flour and rice comprise only 4% of our turnover, these commodities are critical from an economic perspective as we provide for nearly 100% of the wheat flour and as much as 20% of the rice being traded in Mauritius. Moreover, we deal in small batches of sugar from time to time.

 

What about cement? While cement continues to be an important pillar of the infrastructure sector, why did STC decide to disengage from it?

Historically, when only one supplier operated in the cement market, increases in world cement prices severely impacted local consumers despite Government’s efforts to fix prices. In that monopoly situation, it was also difficult to compel the local supplier to follow world prices when the latter trended downwards. Despite the arrival of a second supplier, there was no major improvement. At that stage, STC was called upon to step in for consumers’ benefit in terms of price stability and continuity of supply. Subsequently, the setting up of the Competition Commission provided the comfort that consumers’ interests would be safeguarded, and accordingly, STC’s intervention was no longer needed, as in fact we then recommended to Government.

Incidentally, STC was involved in cement trade for three years from mid-2008 to mid-2011, coinciding with the global financial crisis when international prices was going down in response to low demand for real estate. We exited the market when the CCM was firmly in place, but concurrently the global recovery also saw demand for property development reassert itself and so, the demand for cement increased too, causing prices to rise. Accordingly, at that time, there was some perception that STC had brought prices down, but disengaged at a time when consumers needed its involvement the most.

However, the hard facts are that despite gradual price increases over time, it is only in 2014 that cement prices have reached the same level as in 2008. So, with that understanding, the STC is no longer held responsible indirectly for the ‘high’ prices of cement. As a concrete check of the STC’s impact on cement prices, we floated two tenders and noted that prices were stable and following normal trends of demand and supply.

With the announced merger of Lafarge and Holcim, there is now need to review the whole matter jointly with the Competition Commission. In any case, the STC has been kept in standby mode should it be deemed necessary to intervene afresh on the cement market in the interest of the domestic market.

 

Could you comment on the basmati rice recently introduced by the STC?

With the proliferation of various brands of rice which did not conform to basmati quality, consumers were constantly at risk of paying the higher price of basmati rice but getting lower quality product. Since last January, we introduced two types of basmati rice in response to consumers’ preference for this variety of rice, with the objectives of protecting consumers’ interest and serving as a reference to identify basmati rice. We have pegged our prices close to the lowest cost basmati rice in the market to bring basmati rice within all consumers’ reach, but ours are of noticeably superior quality.

 

STC recently renewed an agreement to source petroleum products from Indian oil refiner Mangalore Refinery and Petrochemicals Ltd (MRPL). Can you comment on the specifics of the agreement?

Our agreement with MRPL is a standard supply agreement covering quality, quantity, delivery schedule and quality control parameters. For the past eight years, we have worked together and we are satisfied with this arrangement thanks to which we obtain all seven grades of petroleum products from the same refiner.

Although our total annual demand for 1.2 million tonnes may look large, it consists of many small shipments over the annual period and the seven grades of product. This translates into small quantities, which is unviable for the larger Middle-East oil suppliers. MRPL has been very flexible, taking into consideration our storage constraints and keeping its supply in sync with our low-volume and high frequency demand.

Moreover, the fact that MRPL is a subsidiary of ONGC (Oil and Natural Gas Corporation) which is one of India’s largest oil refiners, is a big source of comfort to STC. Even in a remote situation when MRPL could be unable to meet its commitments, ONGC guarantees that our contract will be honoured.

Unfortunately, certain media blew out of proportion one instance of natural emergency near Mangalore last year when priority was given to the water needs of the population, but suffice it to say that our business relationship is absolutely normal.

 

Mauritius sought the supply of over 65,000 metric tons of liquefied petroleum gas (LPG) in the year to June 2013. What is the estimated supply for the year to June 2014?

Last year, STC imported around 67,000-68,000 tonnes of LPG, which is the source of energy for water heating and cooking for 98% of Mauritian households. With respect to cooking, LPG is following a natural upwards trend of 1-2% yearly. On the other hand, in line with Government’s initiatives under Maurice Ile Durable to prioritise renewable energy through solar water heaters, LPG for water heating is in lower demand. Overall, this year we are expecting the same quantity of LPG to be delivered – essentially a situation of 0% growth in LPG sales.

 

Jet fuel is an important component of the petroleum products imported by STC. How competitive are the rates quoted by STC to various airlines?

STC is the sole supplier of jet fuel for long and medium haul flights run by all airlines to Mauritius, including but not limited to Air Mauritius. With some 250,000-270,000 tonnes of jet fuel in a year, this is far above the bare minimum quantity. In fact, certain airlines which do not have to stop over in Mauritius to refuel given their flight paths, actually do so. As former CEO of Air Mauritius and understanding the dynamics of the aviation industry in detail, I can safely say that airlines follow a policy of refueling to a bare minimum at the so-called red-listed airports – the ones that are more expensive than the average. We have reason to believe that Mauritius is currently in the blue-listed category of airports, where jet fuel is charged at a low price and gains result from selling higher volumes.

Secondly, our competitive jet fuel prices make us a frontrunner for being chosen by multiple airlines as an alternative airport. Such airports are identified by airlines in case of inclement weather or any other disruption in their normal route. Mauritius being part of such alternative routes benefits from this opportunity as a refueling station.

 

The government has adopted a policy promoting the development of Port Louis as a major refueling hub for growing maritime traffic plying between the West and the East via the Cape of Good Hope, across the Indian Ocean. How is STC contributing to this development?

Mauritius is strategically positioned in the middle of the Indian Ocean with increasing Atlantic traffic plying at one end towards Africa, Madagascar and the West, while on the other hand, there is also a steep rise in traffic moving towards India, China, Japan, Malaysia and Thailand – essentially Asia and the Far East – and in both cases, round the Cape of Good Hope.

Today’s new vessels with high speeds and perishable cargo cannot afford, and indeed do not need to wait and stand in queue to refuel at the Suez Canal bottleneck. Moreover, they cannot afford to bypass a refueling hub altogether as this would imply stocking higher quantities of fuel at the expense of more valuable cargo in their hold. Mauritius is a viable port of call for refueling vessels, resting their crew, allowing them to go onshore and to stock up on fresh water and fresh food. This, in turn, would also have a multiplier effect on consumption in the island economy.

STC plays a critical role in this development, as we are the sole importer and supplier of petroleum products in Mauritius. At the same time, we strongly support the government’s initiative to liberalize the market – expert players that are engaged in the supply of oil to ships would be best placed to tap into the opportunities arising from the development of Port Louis as a major refueling hub for maritime traffic.

 

Can you comment on the latest LPG storage facility launched by Petredec? Finally, how is Mauritius poised to transform itself into a petroleum hub?

Petredec is a big, global trader in LPG and their zeroing in on Mauritius to launch the largest on-shore storage facility for LPG of this type in all of Africa, is certainly a big boost to the island. Commercially, a big component in LPG supply is the cost of freight. If Petredec wins a contract to supply LPG to Mauritius, it will be in position to stock large quantities of LPG in Mauritius and supply it to other African countries with port facilities. In the past, Petredec had kept a floating storage that involved higher recurring expenses. The recent on-shore facility materialized in response to forecast for greater LPG demand over the long term.

As to how Mauritius is poised to transform itself into a petroleum hub, the island economy has a lot of potential to serve as a one-stop halt for vessels going to smaller ports in the region. For instance, a big player had envisaged a floating petroleum hub in Mauritius stocking several categories of petroleum products, to cater for such ships. The situation is conducive for the setting up of such a facility, but it would involve huge investment. What cannot be denied however is the positive impact it would have on the economy. Petroleum trading, especially in the context of international trade, will contribute towards expanding our economic horizons more than any other single development.

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