CPC, SCB hedge effective from March 1 - May 31

by Elmo Leonard

In what was called a bid to stem the outflow of currency and buttress the depreciating Sri Lanka rupee, the import laden Ceylon Petroleum Corporation (CPC) contracted a hedge with the local Standard Chartered Bank (SCB), covering CPC oil imports. The hedge for 150,000 barrels of oil per month, became effective March 1 and ends May 31.

If the average cost of a barrel of gas oil is: above $72, SCB will pay $2 per barrel to CPC. If $72 is higher than $70, SCB will pay the difference between the average price and $70 to CPC. Below $70 but higher than $67.50, there will be no cash flow. Below $67.50, CPC will pay the difference between the average price and $67.50 to SCB, the bank's head of global banking, Rukshan Dias told the media. Last week, CPC's imports of crude Dubai, was $55 per barrel.

The international trend indicates high oil prices between March to May and was also the norm, last year.

While CPC chairman Asantha de Mel said that the hedge was just a first step, another hedge for 300,000 barrels of diesel is likely to be contracted. Then, tenders will be called from more banks. Deutsche Bank, from among three banks tendered for the March-May deal, but SCB's ambition, clinched it, it is reliably learned.

Central Bank, assistant governor, Dr. H N Thenuwara called petroleum a crucial product, which siphoned out $2.7 million in foreign exchange during 2006, from half of that amount a few years ago.

When petroleum prices go up in the international market, the oil dependent electricity rates rise, and with it, the rate of exports climb, making the nation less export competitive. Fifty percent of petroleum imports goes for transportation and the outflow of dollars, makes the rupee drop.

That, being among reasons for turning to hedging, he said. Dr. Thenuwara called on other organisations involved in imports of petroleum based products to consider hedging. Hedging, new to CPC was employed by many local private sector firms, as at today, he said.

SCB CEO, Clive Haswell, said he was delighted to structure the first commodity option in Sri Lanka. The bank, as a commitment to its customers and as part of corporate services had quoted for the hedge, he said.

In December last, SCB structured Sri Lanka's first USD/LKR option. SCB, with its long presence in Sri Lanka, is firmly committed to working with regulators and industry leaders to bring the island nation on par with other big regional financial markets.

Also, to play a pivotal role in contributing to the development of the local economy. Haswell said that as the country embarks on an ambitious growth path, it is important that products and industry expertise be available to minimise risk, while encouraging growth.

Standard Chartered PLC, listed on the London Stock Exchange and Hong Kong Stock Exchange is consistently ranked in the top 25 FTSE-100 companies by market capitalization. SCB, is over 150 years in banking, and operates in many of the world's fastest-growing markets.

The bank covers an extensive global network of over 1,400 branches, including subsidiaries, associates and joint ventures in over 50 countries in the Asia Pacific region, South Asia, the Middle East, Africa, UK and the Americas. Thus, SCB claims it is one of the most international banks.

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