Falling LNG prices may lift city gas distributor margins by 250-300 bps: CRISIL Research

A 22-25 per cent decline in the prices of liquefied natural gas (LNG) since January this year, and an expected 5-7 per cent increase in consumption of piped natural gas (PNG) and compressed natural gas (CNG) should drive up the operating profit margins of city gas distribution (CGD) companies by 250-300 basis points (bps) in the first half of fiscal 2020, rating agency CRISIL Research said in its latest report.

The agency estimates spot LNG prices to be in the $6.5-7 per mmBtu range in the first half of fiscal 2020.

If the LNG price holds at approximately $7 per mmBtu, it would mean a positive impact on LNG demand, especially from price-sensitive sectors. Also, the National Green Tribunal’s recent decision to shut down coal gassifiers in Morbi and Wankaner ceramic clusters in Gujarat would drive LNG demand in the region. The ban on polluting fuels in northern states, too, would whet appetite for LNG, the report said.

At an average crude price of $64 per barrel, landed cost of fuel oil and liquefied petroleum gas (LPG) would be ~$12.1 per mmBtu and ~$16.9 per mmBtu, respectively. In comparison, industrial PNG would cost ~$11.7 per mmBtu and ~$12.3 at an LNG price of $7 per mmBtu and $7.5 per mmBtu, respectively.

From the perspective of CNG and household PNG, strong demand is expected to continue because of clear cost advantage of these fuels over alternates such as petrol and LPG.

In India, domestic-gas price is revised every six months. The next revision, for April-September, is expected to push up domestic-gas price by 7-9 per cent to $3.62-3.67 per mmBtu compared with $3.36 per mmBtu applicable till March 2019.

This increase is expected to be fully passed on to end consumers, making CNG and household PNG dearer. CNG prices are expected to increase by Rs 1.5-2 per kg in Mumbai and Rs 1.7-2.2 per kg in Gujarat – amounting to a 3-4 per cent increase over current prices. In the household PNG segment, increase of 2-2.5 per cent is expected, the report said.

However, despite this price increase, CNG would be almost 35 per cent cheaper than petrol. And though household PNG could become expensive by Rs 1.5-2 per mmBtu compared with subsidised LPG, it would remain competitive with non-subsidised LPG. Hence, demand volumes in the two segments are expected to sustain despite the price hike, CRISIL said.

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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