LPG industry’s survival game gets tougher

The latest government move to set the price of Liquefied Petroleum Gas (LPG) is bound to have a drastic impact on an industry that has been struggling in the game of survival.

For the first time ever, the Bangladesh Energy Regulatory Commission (BERC) has taken away the power of setting LPG prices from the private sector through an order, saying it will adjust these rates from now on.

As per the BERC order issued last week, the retail price of a 12kg LPG cylinder sold by a private operator has been set at Tk975, while each 12.5kg LPG cylinder sold by the state-owned LP Gas Ltd will cost Tk591.

The regulatory body also fixed the price of LPG sold under different cylinder sizes by setting the rate at Tk81.30 per kg of the gas.

But LPG investors and operators consider the pricing order an unexpected shock for the industry as they have been selling per kg LPG at Tk87.5-Tk91.66.

Besides, the BERC also did not include the cost of cylinders, operator charges and supply cost in its pricing order, said industry insiders, adding that they are concerned about further operational losses – which they have been already incurring because of too many players in the market.

This pricing model will force some companies to fold their businesses, or merge with each other, for survival, they told The Business Standard.

A number of LPG operators also pointed out that they are facing a loss of Tk100 for each 12kg LPG cylinder sold at the rate set by the BERC, and they had already been selling those at a loss of Tk25-Tk50 before the regulator's order came along.

Despite suffering losses, many operators managed to continue their business as they are owned by larger parent companies. However, if a company tries to survive in this market through the sole business of selling LPG in cylinders, it would shut down very quickly, stakeholders have said.

"Apart from four to five operators, most are running their businesses at a loss. Following the pricing order, the situation will become even more problematic for the industry," said Azam J Chowdhury, president of the LPG Operators Association of Bangladesh.

Azam, who is also the chairman of East Coast Group that owns Omera LPG, added that Saudi Aramco's contract price (CP) rate is okay, but the BERC did not consider some important factors in the pricing order, such as cylinder cost.

Why are operators incurring losses?

Fifty-four companies, having obtained licences in the last two decades, invested around Tk32,000 crore in the country's LPG sector. Among these licensees, 28 operators are currently active in the market with a capacity of providing more than 2 million tonnes of LPG annually. 

But the current annual demand is 1.2 million tonnes, according to BERC and industry data. 

The demand for this fuel has been increasing with an annual growth of 10% due to its multiple uses, from domestic to transport sectors. While investment in the LPG should be rewarding, the reality is precisely the opposite.

LPG investors are struggling to keep their nose above the water due to an unhealthy competition among companies in a ruthlessly competitive market that has a lot of prospects, as many people in both urban and rural regions are yet to switch from traditional cooking fuel such as firewood.

Industry insiders say the sector has around 50% more supply capacity compared to current demand. Therefore, new companies offer LPG at a cheaper price to get easier access into the market. 

For example, the cost of an empty cylinder is Tk2,200-Tk2,400. Operators used to charge their customers the full price of a cylinder and the gas at the time of first sale. But now operators charge a minimum price of Tk700 for a cylinder as security deposit, while the remaining amount is considered as investment. 

Newer operators initially began this practice, and later established operators also started to provide cylinders to their customers at a minimum rate, which are factors causing these companies to suffer losses.

What do private LPG operators say?

JMI LPG is one of the new investors that started its journey in August 2018, and it has been running its business at a loss since its inception.

"All new operators like us are running at a loss. A cylinder costs Tk2200, but we are getting only Tk700 from consumers. We are subsidising the remaining Tk1,500. So,we are incurring losses," JMI LPG's Deputy General Manager Sarder Jahangir said.

He added that taxation in production, distribution and retail levels also remains a cause behind the LPG operators' losses.

Engineer Zakaria Jalal, head of sales at Bashundhara LP Gas Ltd, said the pricing order was prepared without considering any benefits for investors. 

In the order, BERC considered eight factors in setting the retail price of LPG at the consumer level. The factors are low material cost, premium charge for ships and traders, import parity charge, storage and bottling costs, VAT, distribution charge, retailer charge and other charges.

Operators said the cost of cylinders is the big financial factor that is missing in the regulatory commission's pricing. 

"Other factors such as operators' charge and cylinder supply cost are missing in the BERC order," said LPG Operators Association of Bangladesh President Azam J Chowdhury.

Yeasin Arafat, director of Jamuna LPG, said many financial factors are involved in the LPG business. 

"It is not only the gas price. The price of cylinders, delivery cost and operator charge must be included in the pricing model. Moreover, most companies are subsidising cylinder price to stay afloat in the competitive market," he pointed out.

BERC has not considered the cylinder cost in its order, Arafat said. He noted that if the order is not revised, some companies will have to think about merger and acquisition.