Case Study: Reliance Industries Swap Deal of Naphtha - TONTUF Money

Case Study Questions

The Economic Times, 22 October 2000, reported that Reliance Industries entered into a swap deal for the export and import of 36 cargoes of naphtha over the next six months. Accordingly, three cargoes of 50,000 tones each were to be exported every month from Reliance Petroleum's jarnnagar refinery and three cargoes of the same amount were to be imported to the Reliance Industries' Hazira facility. The deal was done through Japanese traders Mitsubishi, Marubeni, ltochu, 1dCmitsu and Shell. The export was done at around Arabian Gulf prices plus $22. 

    Reliance needs petrochemical grade naphtha for its Hazira facility which is not being produced at Jamnagar. Therefore, its cracker at Hazira gets petrochemical grade naphtha from the international markets in return for Reliance Petroleum selling another grade of naphtha from its Jamnagar refinery to the international oil trade. 

    If RIL imports naphtha for Hazira petrochemical plant, the company does not have to pay the 24 per cent sales tax, which it will have to pay on a local purchase, even if it is from Reliance Petro. Besides, Reliance Petro will also get a 10 per cent duty drawback on its crude imports if it exports naphtha from the refinery at Jamnagar. 

    The export of naphtha with Japanese traders is being looked as a coup for Reliance as it gives the company an entry into the large Japanese market. 

    Indian refineries have a freight advantage over the Singapore market and can quote better prices. 

Questions:

• Examine the Internal and External factors behind Reliance's decision for the swap deal

Internal factors behind Reliance's decision for the swap deal:

1. Reliance Hazira needs petrochemical grade naphtha which is not being produced at Jamnagar.
2. Reliance does not have to pay sales tax if it imports naphtha for Hazira petrochemical plant.
3. Reliance will also get a duty drawback on its crude imports if it exports naphtha from the refinery at Jamnagar.

External factors:

1. The company can get a better price by exporting naphtha to the Japanese market.
2. Indian refineries have a freight advantage over the Singapore market.

• What Environmental changes could make swap deal unattractive in future?

Environmental changes that could make the swap deal unattractive in the future:

1. A change in the tax laws that would make it more expensive for Reliance to import naphtha.
2. A change in the freight rates that would make it more expensive for Reliance to export naphtha.
3. A change in the demand for naphtha in the Japanese market.

• Could there be any strategic reason behind the decision to import and export naphtha?

Strategic reasons behind the decision to import and export naphtha:

1. Diversify its sources of supply.
2. Lock in prices for naphtha.
3. Reduce its dependence on the domestic market.
4. Gain access to new markets.

• Should Reliance import and export naphtha even if it does not provide any profit advantage? 

The decision of whether or not to import and export naphtha even if it does not provide any profit advantage depends on a number of factors, such as the company's strategic goals, its financial situation, and the overall market conditions. If Reliance believes that the swap deal will help it achieve its strategic goals, even if it does not make a profit, then it may be worth doing.

Here are some additional things to consider:

1. The swap deal could also help Reliance to improve its relationship with the Japanese traders. This could be beneficial in the future if Reliance wants to do more business with them.
2. The swap deal could also help Reliance to reduce its environmental impact. By importing naphtha from the international market, Reliance can avoid having to transport it from its own refinery. This can help to reduce emissions of greenhouse gases.

Ultimately, the decision of whether or not to enter into the swap deal is a complex one that Reliance will need to make based on its own specific circumstances.