Rising gas prices hurting Essar Steel, Torrent Power margins

The global rise in natural gas prices, coupled with a bullish outlook for the commodity, is causing worry among select domestic steel and gas-based power units, with capacity utilisation dropping.

Most steel producers are at 100 per cent capacity utilisation. The Ruias-owned Essar Steel is seeing dwindling utilisation amid rising gas prices. The company has a 10 million tonne annual capacity, of which 70 percent is gas-based; it relies largely on imported gas, whose landed cost for Essar has risen to $10.16 per mBtu, from $7.4 per mBtu in June. “This three-dollar rise translates into an additional cost of Rs 2,500 a tonne of steel making,” a source told Business Standard.

While company officials declined to comment, they said volatility in gas prices was a challenge. All of Essar Steel's peers such as Tata Steel, Sajjan Jindal-led JSW Steel, Jindal Steel & Power and Steel Authority of India (SAIL) use coking coal as their feedstock fuel.

Globally, natural gas prices have been on a rise due to coming winter demand amid a 5.5 percent drop in US natural gas inventories over last year. Experts say after exceptionally low average prices in 2015 and 2016, these are likely to rise both in 2017 and 2018.

The price in the US market is currently $3.09 per mBtu, up almost 20 per cent from $2.56 per mBtu in February, after a peak of $3.44 per mBtu in May.

Apart from steel, about 25,000 Mw of gas-based power plants are stranded. State-owned NTPC, with close to 2,400 Mw of gas-based capacity, is running at 50 per cent utilisation due to supply shortage. Among listed companies, Torrent Power also relies on imported gas to run its plant in Gujarat. NTPC officials said they source gas from GAIL.

 

According to a CARE Ratings report, gas-based thermal power plants are a tenth of all thermal power capacity and would continue to see capacity utilisation of only 22-25 per cent on the back of rising global gas prices. 

Of the 24,150 Mw of gas grid-connected power generation capacity, 14,305 Mw is gas starved at present. On this front, an investment of about Rs 60,000 crore is at the threshold of becoming a non-performing asset. The remaining capacity (9,845 Mw), involving an investment of about Rs 40,000 crore, is working at a sub-optimal level.