Skyrocketing LNG prices inflate industrial costs, consumers to bear the brunt

In the corresponding timeline in 2019, before the impact of the coronavirus, LNG import was 13,618 mscm and the value of the import was $3.9 billion.

Sections of the industry that use natural gas as fuel or feedstock and the city-gas marketing companies are bearing the brunt of record high spot market rates of liquefied natural gas (LNG) in the global markets.

Related posts

EXCLUSIVE – Crypto giant Binance controlled ‘independent’ US affiliate’s bank accounts

June 5, 2023

Why investing just to save tax may be bad for you

June 5, 2023

With their margins coming under severe pressure, 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.

Thankfully, the rise in international LNG prices coincided with substantial jump in domestic gas production, helping in cutting import dependency of natural gas from 54% in April-August, 2020 to 49% in the corresponding period this year.

The impact of higher LNG prices are being felt disproportionately among users depending on factors such as access to cheaper domestic gas and government subsidies.

Also, 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.

“Majority of India’s LNG imports are done through long-term contracts, which are insulated from the current rise in spot market rates,” Debashish Mishra, leader of energy, resources and industrial products at Deloitte India told FE, adding that “most of LNG imports are linked to crude oil rates, and even though crude is currently trading at high prices, the surge is significantly lower than the rate hikes seen in Asian spot LNG or coal”. “No sector in India has the ability to buy LNG at $30/mbtu,” Mishra added.

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.

Gujarat Gas has the highest exposure to industrial demand among CGD entities, and the company had increased industrial PNG rates in August by 13% and by another 20% earlier this month. Ceramic manufacturers in Morbi, Gujarat — its largest customers — “have no option but to pass through the costs to the end consumers,” Nilesh Jetpariya, president of Morbi Ceramic Association, told FE.

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. However, analysts at Edelweiss Securities pointed out that even if domestic “gas prices soar to $7.2/mbtu, CNG shall remain 35% cheaper than (the current Delhi rates of) diesel and half that of petrol”.

Natural gas consumption by the fertiliser sector — the largest user of the fuel — inched up 2% annually to 7,556 mscm in April-August with domestic gas usage falling 10.9% (to 2,700 mscm) and imported LNG consumption increasing 11.2% annually (to 4,856 mscm) in the same period. Out of 32 urea plants in India, 30 use natural gas as a feedstock and according to CARE Ratings, gas constitutes about 80% of the raw material cost for urea manufacturing.

The government controls price of urea and its retail price is capped at Rs 5,360/tonne; manufacturers are compensated through subsidies for the market prices unrealised. The fertilizer subsidy for FY22 was initially fixed at Rs 79,530 crore out of which Rs 58,767 crore was earmarked as the urea subsidy. On June 16, the Centre had announced Rs 14,775-crore additional subsidy over and above the budget estimate as it increased the subsidy on non-urea fertilizer diammonium phosphate (DAP). Last week, the government approved an additional fertiliser subsidy of over Rs 28,000 crore, making the total estimated outgo on fertiliser subsidies in FY22 to Rs 1.23 lakh crore.

The country’s gas output in April-August increased 21% to 13,627 mscm with production ramping up at the difficult fields of Reliance Industries and BP’s KG-D6 Block and ONGC’s KG-DWN 98/2 block off the east coast. Though the ceiling price for gas to be produced from these difficult fields was also raised by 69% to $6.13/mbtu, it remains much lower than imported LNG rates.

In April-August, LNG import volumes had inched up 0.7% on a year-on-year (y-o-y) basis to 13,033 mscm. However, the value of imports in the same timeframe had increased 68% y-o-y to $4.2 billion. Domestic natural gas consumption had increased 10.1% y-o-y to 26,660 mscm in the same period. In the corresponding timeline in 2019, before the impact of the coronavirus, LNG import was 13,618 mscm and the value of the import was $3.9 billion.