High LNG prices lead to massive cost to industries; will impact consumers

Industries which use natural gas as fuel or feedstock are bearing the brunt of record high spot market rates of liquefied natural gas (LNG) in the global markets. The city-gas marketing companies are under severe margin pressure.

Most of these firms have already or will soon raise the prices of the goods they sell, leading to a spiralling of prices of items ranging from urea to ceramics and food supplied by hotels and restaurants.

Among the industries that consume natural gas, many don’t have access to cheaper domestic gas. For some extremely price sensitive user industries like the power sector, landed price of more than $6-8 per million British thermal units (mbtu) makes it unsustainable to continue operations.

Asian spot LNG rates had climbed from $6.9/ mbtu at the beginning of the fiscal year to $17.7/mbtu at August end. Prices have crossed $33/mbtu in early October amid low stocks, high demand and limited supply of the fuel.

Since most of the LNG imports are carried out under long-term contracts at predetermined prices, the surge in end-prices in the country are much lower than the rise recorded in global spot prices.

The city gas distribution (CGD) sector — the second largest natural gas consumer in the country — gets cheaper domestic gas under administered price mechanism (APM) for the domestic piped natural gas (PNG) and compressed natural gas (CNG) categories. However, they have to import some LNG at spot price to meet the industrial and commercial PNG demand.

The Union government recently raised the price of domestically produced gas under APM by 62% to $2.9/mbtu, effective for six months starting October 1. The CGD sector is also the largest consumer of domestic APM gas, which used 2,543 million standard cubic meters (mscm) of domestic gas and 1,855 mscm of imported LNG in the April-August period, recording 86% and 90% annual increase, respectively. After the government’s APM price revision, CNG prices have been raised to the current levels of Rs 49.76/kg in Delhi and Rs 57.54/kg in Mumbai from Rs 45.2/kg and Rs 51.98/kg in these respective cities in August.

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