Gas price hike: Will you pay more for CNG now?

Be it travel within city for work or a trip out in your swanky car fitted with a CNG kit is likely to get expensive

After a three-year hiatus and stiff opposition from most political parties, the Cabinet Committee for Economic Affairs (CCEA) approved the proposal to hike the prices of natural gas to $8.4 per mmbtu (metric million British thermal units) from April 1, 2014 for a period of five years.

The hike comes three years when in May 2010, the government has hiked the price of administered gas from $1.8 per mBtu to $4.2 per mBtu.

While on one hand the move, along with the rising prices of coal, is likely to see you pay more for the power / electricity you consume, you could also end up paying more for the CNG (compressed natural gas) for your vehicle.

Observe Anil Sharma and Ravi Adukia of Nomura in a report: “APM (administered price mechanism) gas comprises nearly 70% of Indraprastha Gas Limited’s (IGL’s) current CNG supply portfolio. For each $1/mmbtu in APM gas cost increase, we estimate that IGL would need to increase its CNG price by Rs 2.4/kg. Thus, if APM gas prices were to increase to $8.4/mmbtu, IGL would need to increase its CNG price by nearly Rs 10/kg, or 24% of the current price.”

“In our view, city gas distribution companies (CGD) would be able to pass on all the gas price increases by raising end prices. All city gas distribution companies have been able to pass on cost increases thus would not have much worry on this issue. When APM prices were increased by sharp 112% in June 2010, IGL had passed on all of the cost increase by raising its retail CNG price by 26%. Over the past three years, IGL has affected 14 price increases to raise CNG prices by nearly 100%,” they add.

“The increase is negative for city gas distributors such as IGL as at the current exchange rate, CNG prices would need to go up by around Rs 15/kg to maintain margins. IGL has recently hiked prices to Rs 41.9/kg in light of the Rupee depreciation. Though IGL enjoys pricing power in its market, a sharp increase in CNG price and a narrowed gap with alternate fuel petrol (Rs 66/litre) and diesel (Rs 50.25/litre) would likely impact the demand for CNG negatively,” point out Nitin Tiwari and Ballabh Modani of Religare Institutional Research.

Points out Dayanand Mittal, analyst at Ambit Capital: “CGD companies, IGL and Gujarat Gas, will be negatively affected, because their input costs will increase (given that domestic gas accounts for 60-70% of their total gas mix). These companies will have to increase their end-prices by around 25-30% to pass on the hike in input cost.”

“The companies have reasonable pricing power but the extent of increase required (25-30%) is large and if entire increased is pass through then gas would lose its competitive edge over liquid fuels (petrol/diesel for automobile segment and alternative liquid fuels like naphtha/fuel oil for Industrial consumers),” he adds.

So, travel within city for work or a trip out in your swanky car fitted with a CNG kit can get expensive soon!