HOME         WEBSITE         SUBSCRIBE           E-GREETINGS   
                               

Wednesday, October 29, 2014

Ind-Ra: Gas Price Hike Negative for Key User Industries

The gas price hike by the Cabinet Committee on Economic Affairs (CCEA) could adversely affect the economics of the key user industries including power and fertiliser amid continued supply constraints, opines India Ratings & Research (Ind-Ra). Higher gas prices could increase input costs for both the sectors though gas supplies are unlikely to improve in the short-to-medium term. Gas-based power plants (GBPPs) have been suffering from low plant load factor (PLF) due to the non-availability of domestic fuel and unviable operations on imported LNG. Similarly, fertiliser plants have also seen gas supply constraints from domestic sources. 

Gas Price Hike Basis Modified: CCEA's approval on raising natural gas prices to USD5.61/mmbtu from USD4.2/mmbtu effective 1 November 2014 is lower than the price proposed on the basis of the formula outlined by the Rangarajan Committee. CCEA has modified the formula proposed by the Committee by removal of Japanese and Indian LNG import components in the formula which have led to the reduction in gas prices. On an adjusted gross calorific value basis, the gas prices have been increased 47% to USD6.17/mmbtu. However, they still remain lower than the USD8.4/mmbtu mark earlier sought by the government. 

Electricity Generation Cost to Increase: The fuel cost for GBPPs is likely to increase 43% yoy as the gas price hike will lead to a rise in per unit fuel cost by around INR0.85/kwh. This could lower the competitiveness of GBPPs in relation to coal-based power plants. However, as GBPPs contributed a mere 4.4% to the overall generation in FY14 (FY13: 7.1%), its impact on the pan-India cost of generation is likely to be only around 4 paisa/kwh. 

If the domestic prices, according to the revised formula, were to trend upwards due to the semi-annual revisions allowed, the operations of GBPPs could suffer as they would rank lower in the merit order dispatch schedule compared with coal-based power plants. In that case, the government could look at subsidising the cost of gas being paid by GBPPs. GBPPs with merchant capacities or selling power under fixed short-term arrangements are likely to be more impacted in terms of profitability as gas costs are not a pass through in tariff. 

However, given that the power sector ranks high in the gas priority allocation, increased domestic gas output over the long term could improve the PLF of stressed GBPPs. 

Offshore Gas Could Cost Higher: Post the CCEA's decision, for discoveries in ultra-deep water areas, deep water areas and high pressure-high temperature areas, a premium would be paid on the gas price which will be determined according to the prescribed procedure. 

This could further increase input costs for power and fertiliser plants. 

Fertiliser Sector Profitability to Decline: Higher domestic gas prices would have a three-fold impact on fertiliser manufacturers. First, the per unit subsidy on urea will increase leading to higher working capital requirements as subsidy dues are usually paid with a lag. The interest costs on higher working capital requirement will have to be borne by fertiliser manufacturers. Secondly, the profitability of urea manufacturers selling above 110% of the re-assessed capacity will be lower as the sale price is linked to import parity price but the costs are not pass through. Finally, non-urea manufacturers will also have to either bear the higher gas prices or pass them on to the consumers. 

Blog Archive

____________________________________________________________________________________________

Disclaimer - All investments in Mutual Funds and securities are subject to market risks and uncertainty of dividend distributions and the NAV of schemes may go up or down depending upon factors and forces affecting securities markets generally. The past performance of the schemes is not necessarily indicative of the future performance and may not necessarily provide a basis for comparison with other investments. Investors are advised to go through the respective offer documents before making any investment decisions. Prospective client(s) are advised to go through all comparable products in offer before taking any investment decisions. Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the fund will be achieved. Information gathered & material used in this document is believed to be from reliable sources. Decisions based on the information provided on this newsletter/document are for your own account and risk.


In the preparation of the material contained in this document, Varun Vaid has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the Varun Vaid and which may have been made available to Varun Vaid. Information gathered & material used in this document is believed to be from reliable sources. Varun Vaid however does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material no such party will assume any liability for the same. Varun Vaid does not in any way through this material solicit any offer for purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material. All recipients of this material should before dealing and or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice.


Varun Vaid, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/are liable for any decision taken on the basis of this material. All recipients of this material should before dealing and/or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice. The investments discussed in this material may not be suitable for all investors. Any person subscribing to or investigating in any product/financial instruments should do soon the basis of and after verifying the terms attached to such product/financial instrument. Financial products and instruments are subject to market risks and yields may fluctuate depending on various factors affecting capital/debt markets. Please note that past performance of the financial products and instruments does not necessarily indicate the future prospects and performance there of. Such past performance may or may not be sustained in future. Varun Vaid, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation in the financial instruments/products/commodities discussed here in or act as advisor or lender / borrower in respect of such securities/financial instruments/products/commodities or have other potential conflict of interest with respect to any recommendation and related information and opinions. The said person may have acted upon and/or in a manner contradictory with the information contained here. No part of this material may be duplicated in whole or in part in any form and or redistributed without the prior written consent of Varun Vaid. This material is strictly confidential to the recipient and should not be reproduced or disseminated to anyone else.


Varun Vaid also does not take any responsibility for the contents of the advertisements published. Readers are advised to verify the contents on their own before acting there upon.


Published Credits goes to following sources & all the mentioned sources as footer below the published material- Bloomberg, Valueresearch Online, Capital Market, Navindia, Franklin Templeton, Kitco, SBI AMC, LIC AMC, JM Financial AMC, HDFC AMC, The Hindu, Business Line, Personal FN, Economic Times, Reuters, Outlook Money, Business Standard, Times of India etc.