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LPG pricing: An impact analysis… - Views on News from Equitymaster
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  • Nov 18, 2004

    LPG pricing: An impact analysis…

    The recent government decisions regarding the hike in petroleum product prices have resulted in a strong belief that the energy sector is on the right path. Let us analyse the impact of the recent price hike in case of LPG of Rs 20 per cylinder and also the decision to increase the per cylinder prices by Rs 5 per month. We have assumed that the price hike of Rs 5 per cylinder stays for only a month on a conservative basis.

    Current scenario:

    The recent spike in crude oil prices backed up by a strong surge in petroleum products demand, led to refineries making most of the scenario while oil-marketing companies witnessed under-recoveries on LPG. While the country witnessed a rise of nearly 9% in LPG demand, costs at the refinery gate (import parity prices) reached record levels of US$ 558 per tonne resulting in higher under-recoveries. Adding to this, at the current duty rates, the loss per cylinder accounts for Rs 139.

    Duty structure
    Customs duty old (%) new (%)
    crude oil 10 10
    petrol 20 15
    diesel 20 15
    LPG 10 5
    Kerosene 10 5

    What the government did?

    Although the government announced a spate of duty cuts on various petroleum products including LPG, little changed for the oil companies, as government’s share in the subsidies also declined adding to the already vulnerable situation. The recent move to hike LPG prices by Rs 20 per cylinder in the current month and Rs 5 per cylinder every month has brought some relief for the oil marketing companies. As per our estimates, under-recoveries on LPG were estimated to be nearly Rs 101 bn for FY05. Having said that, we have factored in only a hike of Rs 5 per cylinder for FY05 and the likely impact on the oil marketing companies.

    Government: Hands-off…
    Year Subsidies
    (Rs) LPG/cylinder Kerosene/litre
    2002-03 67.75 2.45
    2003-04 45.17 1.63
    2004-05 22.85 0.81
    Source: Oil companies

    The likely impact on under-recoveries:

    The price hike is likely to result in reducing under-recoveries to the tune of nearly 18% to Rs 114 per cylinder. At this rate, the reduction in under-recoveries for the companies is likely to be nearly Rs 18 bn.

    Note: We have maintained LPG prices at the refinery gate at the current levels while factoring in the price hike. Any fall in LPG prices, would help the oil companies further reduce under-recoveries as the government has stated that the Rs 5 per cylinder hike per month would prevail until it evens out with the actual costs, thereby eliminating the under-recoveries.

    The key beneficiaries are likely to be BPCL, HPCL, IOC, GAIL and ONGC.



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