LPG: Fact vs Fiction

1. LPG: Fact vs Fiction

2. FICTION • “ LPG Marketing companies are responsible for the escalating prices in the domestic market.” • “ LPG Marketing companies are continuously earning windfall profits at the expense of consumers.”

3. Fact: Policy Background JAN 2007: The government linked the local producer base-stock price with the International Saudi Aramco Contract Price. The government believed that the import parity price will result in increased supplies through imports which shall exert a downward pressure on the retail prices. However, this act of miscalculation ushered the LPG industry in an era of upward producer prices thereby increasing price at every level through out the LPG supply chain.

4. FACT (Cont) Prior to the GOP’s decision to link the local prices with the Saudi CP, the local producer prices were on average $170/ MT below the international prices, thereby providing • an inbuilt subsidy to the local Consumer • a level playing field to the LPG with respect to the highly subsidized alternative fuels such as Diesel, Kerosene.

7. Contrary to the common belief, LPG marketing companies endured losses in the period of skyrocketing producer prices. • The LPG industry which had witnessed an investment of over $200 MM between 2001-2006 suffered a major set back resulting in an investment pull back.

8. Local Producer Price – Gross Margin Relationship • There exists a negative relationship between the Local Producer Prices and the average Gross Margin attributed to LPG marketing companies. • Historically, the LPG marketing companies can only pass on 60% of the price increase to the distributors. • The higher the Producer price the lower then GMs earned; the lower the producer price the more beneficial for the LPG supply chain and the consumer.

9. Negative Relationship b/w Producer Prices (Left Axis) & Avg Gross Margins (Right Axis)

10. Fiction • According to another such fictious allegation which was widely propagated by one of the Government watchdog agency, the LPG marketing companies earned Rs. 498 per 11.8 KG domestic cylinder in Jan 2009. • The said allegation implicitly assumed that the LPG marketing company earnings = Retail price/ MT – Producer base stock price/ MT

11. LPG Supply chain Players

12. FACT • The allegation ignores the fact that the LPG marketing companies do not market LPG directly to the consumer and therefore the retail prices do not represent the Revenue for the marketing company. There are other commercial players in the LPG supply chain between the Marketing company and the consumer. • The allegations also ignores the basic fact that Producer Base – Stock price is EXCLUSIVE of the 16% General Sales Tax (GST) and other mandatory duties payable to the Government of Pakistan (GOP). Similar, it also ignores the GST paid to GOP by the Marketing companies. • Further, the allegation fails to distinguish between the meaning of financial terms namely “Gross Margin” and “Net Income.” Gross Margin does NOT mean Profits earned.

13. FICTION “ LPG is a commodity characterized by an inelastic demand….”

14. FACT • The demand for LPG exhibits seasonality, peaking in winters and shrinking in Summers. • The demand for LPG is price sensitive and the consumer switch to other available fuels when the LPG prices exceeds the fuel parity. For example, Auto sector which accounts for 50% of the country’s LPG demand has witnessed conversion to Petrol/ CNG in face of uncompetitive prices.

15. Since October 2009, high volumes of LPG imported via Turbet and Taftan.

16. Challenges Posed by Substandard and/or Smuggled LPG • While some of the importer are conscious of the quality, health and safety standards of the LPG, other importers are bringing in SUBSTANDARD LPG containing high Sulphur and Ammonia contents along with a Pungent Smell. • Further, some of the importers are: A) regularly under invoicing the LPG B) Declaring lesser than actual quantity C) completing waiving off the GST by SMUGGLING the LPG.

18. Evidence of Under Invoicing • Invoice Month = June 2009 • Declared Price = $340/ MT • Actual CP June =$431/ MT Unfair under Invoicing Margin = $91/ MT

19. These practices allow such importers to significantly under cut the market and offer the sub standard LPG at cheaper rates to the consumers. • Most of the consumers are unaware of the damage that the sub standard LPG poses to their Health & Safety in general and to the efficiency of the vehicles when used as an auto fuel.

20. The Current Market Scenario • Since the end of the most recent winter season, the LPG industry is experiencing a massive eradication of demand. • This is mainly because of the : a) record high Producer Prices un witnessed in any Summer season before. b) Availability of under invoiced/ smuggled & Sub standard LPG c) Massive Cross filling

21. Current Market Scenario • The Producers are topped up with the stocks of the LPG. One of the big local producers had to flare up gas, thereby creating a dead weight loss to the entire supply chain. This LPG could have been sold in the market at appropriate market clearing prices. • The local producers should lower the prices in view of the present market situation and save the industry from permanent demand destruction.

22. OGRA Required to play its role • OGRA needs to step in and control the imports of the SUBSTANDARD LPG; which along with health & Safety standards poses a threat to use of LPG as autogas. • OGRA in collaboration with GOP needs to set up a mechanism to monitor the imports of LPG via land and ensure correct price/ quantity declaration in order provide a level playing field to all the LPG Marketing companies. • OGRA needs to monitor and take stern action against the increasing practice of cross filling of cylinders which is a violation of all trademark rules. Cross filling deters investment in the marketing infrastructure.