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Business


To beat volatile oil prices
Hedging mechanism mooted

CPC to take lead, with Standard Chartered, Deutsche Bank or Citibank; LIOC likely to follow

By Gamini Abeywardane
The Government is likely to give permission soon to the Ceylon Petroleum Corporation to establish a hedging mechanism with some of the leading international banks operating in Colombo, to minimize losses arising from volatile petroleum prices, highly placed sources said.
The Central Bank which has taken initiative in this regard has already held several seminars on this matter that were addressed by resource personnel from some of the leading foreign Banks operating in Colombo such as Standard Chartered Bank and Deutsche Bank, they said. Several other banks including Citibank have shown interest in this matter.
Once the Cabinet gives the formal nod the Ministry of Petroleum and Petroleum resources is expected to seek Cabinet approval for a specific proposal giving details of the agreement with a hedge provider which is likely to be an international bank with right expertise.
Meanwhile the Central Bank in a press release said that if international oil prices were to increase to (say) US dollars 100 per barrel, Sri Lanka’s oil import bill would reach around US dollars 3,000 million, causing severe macroeconomic imbalances through the deterioration of the Balance of Payments, thereby destabilising the exchange market and depleting country’s foreign reserves.
It should be noted that oil prices have risen with high demand from China, India and USA, capacity limitations in refineries, supply disruptions in some oil exporting countries and general geopolitical unrest, the Central Bank news release pointed out.
With the easing of certain pockets of geopolitical unrest, oil prices seem to have declined but several other factors, which could raise oil prices, are still present.
In that background, it would be prudent for Sri Lanka to contract for oil at a reasonable price with a protection from future increases, as that would lead to greater economic stability.
Earlier UNP MP Bandula Gunawardena criticized the Central Bank’s making a proposal to the Cabinet as being contrary to the usual practice and said that world oil prices are expected to reach a low of US$ 40 within the next twelve months.
However analysts pointed out that hedging is a standard practice profitably used by many countries and companies in the airline industry and Sri Lanka should gradually get into using modern market mechanisms such as forward contracts to protect itself from fluctuating future oil prices.
Meanwhile LIOC CEO K. Ramakrishnan said that his company is studying the proposal made by the Central Bank and would certainly be going for hedging if it is commercially viable at this stage.
He said that LIOC will be drawing from the experience of its parent company IOC which is already using hedging in a limited way.

***

Sharp increase in revenue from liquor, tobacco

By Nandana Talagune
The revenue generation from excise duty on alcohol has shown a sharp increase with department of excise collecting over Rs.13 billion from liquor manufactures up to August this year with Distilleries Company of Sri Lanka and Lion Brewery contributing nearly Rs.10 billion.
The Commissioner General of Excise Parakrama Ekanayake Bandara told The Nation Economist that this year’s total revenue from alcohol is estimated to be over Rs. 21 billion representing a sharp increase from last year’s revenue of Rs.16 billion.
Of the 21 licensed companies engaged in hard liquor manufacturing nearly 75 per cent of industry is controlled by the Distilleries Company of Sri Lanka Limited (DCSL) which has paid Rs.8.5 billion on 21 billion litres of liquor it manufactured from January to August this year, the statistics of the Excise Department revealed. Meanwhile Periceyl (Pvt) Ltd, a subsidiary of DCSL engaged primarily in import and distribution of liquor has paid about Rs. 260 million during this period.
Commissioner General said that the Department collects only the production tax as revenue from the local manufactures of both hard and soft liquor and over the years they have been able to increase the collection remarkably
The annual production of hard liquor has recorded 26 billion litres under different brands while the production of soft liquor during this period has recoded over 31 billion litres. Soft liqour industry has already brought a revenue of over 1.5 billion from the three companies presently in operation - Lion Beer Company, United Beer Company and McCallum Breweries Ceylon Ltd.
The Lion Brewery has an 80 per cent share of the market with a production of over 27 billion litres over the eight month period of the year and has so far paid Rs 1.2 billion as taxes out of the total Rs 13.3 billion collected as production tax.
In addition to this the Department of Customs also collects revenue under excise duty on sales of foreign liquor and tobacco/cigarettes. In 2005 the Government though this earned over Rs.40 billion and the government may collect more than Rs 50 billion by end of the year. However this goes direct to the Treasury and thus not part of the revenue collection of the Department of Excise, he added.
Ceylon Tobacco Company (CTC)is the only licensed manufacturer of cigarettes in Sri Lanka The tax paid to the government by the tobacco industry over the years has increased and the Department of Excise has collected Rs 23 million up to August this year. The production tax is Rs 10 per kilo of tobacco.
This is due to illicit cigarettes in the black market of the country which are low priced. The lack of taxes is the main reason behind the low price range.

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Ceylon Glass awards Rs. 1 b Horana factory contract to Maga

 By Ravi Ladduwahetty
Ceylon Glass Co. Ltd on Wednesday awarded the Rs. 1 billion civil contract for the construction of its new Horana factory to Maga Engineering Co. Ltd.
Maga Engineering Company, one of the best in the construction industry, won the civil contract for this project worth over Rs. 1 billion against all odds after competing with several local and international civil contractors Ceylon Glass Chairman Vijay Shah told ‘The Nation Economist’ after exchanging the Memorandum of Understanding with Maga Engineering Chairman Capt M.G. Kularatne at the Cinnamon Grand.
The company proposes to build a state-of-the-art Glass Plant by doubling its present capacity to 205 Metric tonnes of glass per day. Ceylon Glass company recently gained BoI status under the President’s 300 factory Program.
The Horana factory will be housed on a 26 acre block of land and the production area will cover 60% of the extent, Ceylon Glass Co. Ltd President/CEO Sanjay Tiwari said. He said that the company would be shifting all three production lines at Ratmalana to Horana while purchasing the fourth from a European manufacturer.
Maga Engineering is a highly reputed Engineering company in Sri Lanka and has been rated amongst the top 50 highly respected companies in the country. They were the only Construction company to be selected in this category.
Capt. M G Kularatne, thanked the management of Ceylon Glass and said that the construction work would start with immediate effect and also assured that they would complete the project of building a state-of-the-art glass plant at Horana within stipulated agreed time frame. The ceremony of awarding the contract was concluded in the presence of the consortium of bankers participating in the funding, BoI Chairman Lakshman Watawala and the Directors of Ceylon Glass.