Financial Times

LIOC in second phase of Trinco oil tank farm upgrade
Lanka IOC Ltd (LIOC) has embarked on the second phase of its modernisation of the China Bay oil tank farm in Trincomalee and is preparing to start bunkering operations which brokers say could be a significant new source of earnings for the company.

The second phase of the upgrade at China Bay will raise storage capacity there by another 75,000 tonnes. The company, a subsidiary of Indian Oil Corp., now operates 11 tanks with a capacity of 110,000 tonnes. "We have now started the second phase of the modernisation programme," LIOC managing director M. Nageswaran said. "This should be over in six months."

The modernisation of the tanks and pipelines in China Bay would also allow LIOC to starting bunkering operations in Trincomalee. The company plans to leverage the parent IOC's existing bunkering agreements with international shipping lines to negotiate its own bunker supply deals.

"We hope to start bunkering in 3-4 months. We will offer quality bunkers at economical rates," Nageswaran said. Stock brokers said bunkering could be a new source of profits for the company given the island's strategic location on the main shipping lane across the Indian Ocean where merchant ships would not have to deviate far from their trade route to refuel.

The ability for merchant ships to refuel in Sri Lanka means they could take on more cargo at their main ports of call. However, LIOC's success would depend on its pricing. Bunker prices in Colombo port are still among the highest in the world despite the privatization of the former state monopoly supplier, Lanka Marine Services, now a subsidiary of the John Keells conglomerate.

Asia Research, the research arm of brokers Asia Capital, said in a recent report that bunkering is a highly lucrative industry with margins varying from 5 - 15 percent, with payments being made in advance.

LIOC is using part of the US$15 million it raised from its highly successful IPO last year to upgrade and renovate its tanks in Trincomalee. The brokers said they estimate that 150 ships bypass Sri Lanka each day.

"Catering to just five percent of this market would result in LIOC potentially earning an annual profit contribution of Rs 1.6 billion from its bunkering services," Asia Research said. "At present, none of the ships in this potential market are serviced by the Colombo Port's monopolistic bunker operator Lanka Marine Services (LMS), given that LMS only caters to ships visiting the Colombo Port."

However, the brokers said that despite Sri Lanka's geographical advantage, capturing market share from the two established regional bunker market players, Singapore and Dubai's Fujairah, will remain dependent on LIOC's price competitiveness.

"Given that bunkers are essentially a commodity product, LIOC's major bargaining tool in competing effectively will be its ability to source marine gas oil at competitive prices," Asia Research said.

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