Here’s why natural gas growth will get stumped this year

Natural gas

Commodities
by 5paisa Research Team Last Updated: 2022-10-10T10:37:05+05:30

India’s city gas consumption volume was projected to grow at a robust pace of 20-25% this year but this estimate has been more than halved after another price hike executed two weeks back as industrial users are expected to switch to alternative fuels.

Two weeks ago, the Ministry of Petroleum and Natural Gas hiked the price of natural gas by 40% to an all-time high, following an even sharper increase in the first half of the current fiscal year.

The price has been raised to $8.57/mmbtu (metric million British thermal unit) for the second half of the current fiscal year, based on the administered pricing formula (APM).

This followed a 110% increase already applicable for the first half (April-September 2022). The APM gas is supplied largely to compressed natural gas (CNG) and domestic piped natural gas (PNG) consumers, who contribute 50% and 10% of city gas volume, respectively.

The price for the balance 40% of city gas volume - supplied to industries - has also surged and remains elevated given the protracted Russia-Ukraine conflict. 

Over the past 12 months, the average price of liquefied natural gas (LNG) contracts, benchmarked against crude oil prices, rose around 45% to $14.5-15 per mmbtu, while spot LNG prices have surged around 150% to $38-40 per mmbtu.

According to credit rating and research agency CRISIL, elevated gas price is likely to reduce demand for industrial PNG by 10-12% this fiscal, as price-sensitive industrial consumers switch to alternative fuels such as propane and fuel oil.

Demand for residential PNG, although more resilient to higher prices, may also grow a modest 2-5% as employees return to office with the Covid-19 pandemic subsiding. CNG demand is still expected to rise 25-30% on the back of an expanding network of CNG stations to new geographic areas and higher sales of factory-fitted CNG cars, despite narrowing price differential with competing petrol and diesel.

CRISIL expects the full-year demand to moderate to 8-10% this fiscal amidst a surge in gas prices.

To counter, city gas distributors have been taking successive price hikes since April 2021 to manage their cost pressures. For example, CNG prices have increased by a massive 75% as prices of competing crude oil-linked petrol and diesel have also increased.

But city gas players may now face margin headwinds as they balance between protecting margins and driving volume growth. Margins are expected to moderate from the levels of Rs 8.82 per scm (standard cubic meter) seen in the first quarter of this fiscal to around Rs 8 per scm for the full year. This would make it almost flat compared to the previous year but around 12% higher than the average for the last five years.

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