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GAIL-Five forces analysis
Sep 18, 2007

In the previous article, we made a SWOT analysis of GAIL. In this article, we use the five-forces framework (Suppliers, Customers, Substitutes, Rivals and New entrants) to analyze the competitive position of the company. Suppliers: The cost, quality and quantity of natural gas, LPG and petrochemical products supplied in India have a direct impact on the competitive standing of the company.

Around 84% of the natural gas transmitted by the company is purchased from ONGC, the rest comes from Oil India Ltd., Ravva joint venture, Tapti joint venture and the Panna-Mukta-joint venture. The concentration of supply weakens the company’s bargaining power in sourcing its inputs. However, it must be noted that the company has transmission rights to 100% of the Petronet LNG’s gas and a take-or-pay commitment to market 60% of the gas for 22 years.

GAIL supplies natural gas feedstock to its own LPG and petrochemical segments. Hence, ironically, any gains from price hikes for the natural gas transmission and trading segment would negatively impact earnings from its LPG and petrochemicals business. Although the price for natural gas is generally a pass-through cost for the company’s natural gas transmission and trading business, any such price increase will also have a negative impact on its cost structure because it also uses natural gas to power various elements of its pipeline system.

Customers: The general economic conditions in India and world affect the demand for natural gas. The government also keenly monitors the market price as it affects several politically sensitive industries.

GAIL supplies natural gas to over 400 customers. Government-controlled entities are usually its biggest customers. The Ministry of Petroleum and Natural Gas, based on the recommendations of the Gas Linkage Committee determines the major customers, as well as the quantity of gas to be supplied to each such customer. Gas is supplied to such customers pursuant to contracts generally for a period of up to 5 years. The concentration of buyers and the company’s lack of choice over them weaken its competitive position.

Petrochemical products have typically been influenced by the general economic environment and by industry capacity and supply. They have shown a historical pattern of price cycles, which are also affected by announcements of new capacity. Polymer prices began increasing in April 2003 but mapping out the future course of movements remains difficult.

Substitutes: GAIL’s largest segment, natural gas transmission and trading, competes with coal for power generation, petroleum for transportation and naphtha as feedstock for the fertilizer industry. It fares well against the substitutes because natural gas burns cleanly without emissions and is comparatively cheaper. Further, the company’s second most important segment, petrochemical products, which too has gas as feedstock competes with naphtha as an alternative feedstock and here too, comes up trumps on the cost front.

Competitive rivalry: Several regulations restrict the company from bracing itself for the competitive onslaught. Disputes between GAIL and GoI departments must be referred to a Committee of Secretaries of the government before any legal action may be commenced. Disputes between government enterprises on the other hand, must be referred to the Bureau of Public Enterprises (a department of the GoI).

The Indian petrochemicals industry has historically been protected from international competition through high customs duties on petrochemical imports. However, import duties on polymer products have been reduced in recent years. To the extent reductions in duties are made, GAIL will face greater competition from international petrochemical producers, including large multinational companies that have significantly greater financial and other resources than the company. It also faces competition from nearby polymer producing countries, including countries in the Middle East, Saudi Arabia, Korea and Malaysia. On the domestic front, the company faces significant competition from RIL and Haldia Petrochemicals Ltd. (HPL).

As part of its decision to dismantle the Administered Price Mechanism, the GoI introduced a subsidy on domestic LPG on a flat rate basis, which severely affects the bottomline of company.

New entrants: Regulatory environment and political conditions are of great significance for the fortunes of the company. The draft policy for development of gas pipelines network proposes a regulator responsible for approving the level of transmission charges and authorizing the construction of new pipelines. The draft policy calls for application of the common carrier principles. Moreover, any company will be able to apply for approval to construct a pipeline. The proposed regulator could also reset transmission tariffs. There is also the issue of unbundling wherein it may be necessary for GAIL to separate its gas transmission business from its gas marketing business to reduce any perceived or actual conflicts.

However, it must be noted that fresh upstarts don’t pose a threat as natural gas transmission enjoys significant barriers to entry.

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