LPG: Fact vs Fiction. FICTION LPG Marketing companies are responsible for the escalating prices in the domestic market. LPG Marketing companies are responsible.

LPG: Fact vs FictionLPG: Fact vs Fiction

FICTIONFICTION

“ “ LPG Marketing companies are LPG Marketing companies are responsible for the escalating prices responsible for the escalating prices in the domestic market.”in the domestic market.”

“ “ LPG Marketing companies are LPG Marketing companies are continuously earning windfall profits continuously earning windfall profits at the expense of consumers.”at the expense of consumers.”

Fact: Policy BackgroundFact: Policy Background

JAN 2007: The government linked the local producer JAN 2007: The government linked the local producer base-stock price with the International Saudi base-stock price with the International Saudi Aramco Contract Price.Aramco Contract Price.

The government believed that the import parity The government believed that the import parity price will result in increased supplies through price will result in increased supplies through imports which shall exert a downward pressure imports which shall exert a downward pressure on the retail prices.on the retail prices.

However, this act of miscalculation ushered the LPG However, this act of miscalculation ushered the LPG industry in an era of upward producer prices industry in an era of upward producer prices thereby increasing price at every level through thereby increasing price at every level through out the LPG supply chain. out the LPG supply chain.

FACT (Cont)FACT (Cont)

Prior to the GOP’s decision to link the local Prior to the GOP’s decision to link the local prices with the Saudi CP, the local producer prices with the Saudi CP, the local producer prices were on average $170/ MT below the prices were on average $170/ MT below the international prices, thereby providinginternational prices, thereby providing

a)a) an inbuilt subsidy to the local Consumeran inbuilt subsidy to the local Consumer

b)b) a level playing field to the LPG with respect a level playing field to the LPG with respect to the highly subsidized alternative fuels to the highly subsidized alternative fuels such as Diesel, Kerosene. such as Diesel, Kerosene.

Local Producer Price vs. Saudi CP before Jan 2007

200

250

300

350

400

450

500

550

600

650

Month

US

D p

er M

T

Saudi CP Producer base price

Saudi CP vs. Local Producer Base Price AFTER JAN 2007

300

400

500

600

700

800

900

1000

Month

US

D p

er M

T

Saudi CP Local Producer Base Price

Contrary to the common belief, LPG Contrary to the common belief, LPG marketing companies endured losses in marketing companies endured losses in the period of skyrocketing producer the period of skyrocketing producer prices.prices.

The LPG industry which had witnessed an The LPG industry which had witnessed an investment of over $200 MM between investment of over $200 MM between 2001-2006 suffered a major set back 2001-2006 suffered a major set back resulting in an investment pull back.resulting in an investment pull back.

Local Producer Price – Gross Local Producer Price – Gross Margin RelationshipMargin Relationship

There exists a negative relationship There exists a negative relationship between the Local Producer Prices and the between the Local Producer Prices and the average Gross Margin attributed to LPG average Gross Margin attributed to LPG marketing companies.marketing companies.

Historically, the LPG marketing companies Historically, the LPG marketing companies can only pass on 60% of the price increase can only pass on 60% of the price increase to the distributors.to the distributors.

The higher the Producer price the lower The higher the Producer price the lower then GMs earned; the lower the producer then GMs earned; the lower the producer price the more beneficial for the LPG price the more beneficial for the LPG supply chain and the consumer.supply chain and the consumer.

Negative Relationship b/w Negative Relationship b/w Producer Prices (Left Axis) & Avg Producer Prices (Left Axis) & Avg

Gross Margins (Right Axis)Gross Margins (Right Axis)

-

10,000

20,000

30,000

40,000

50,000

Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

10,000

Local Producer Price (Rs/ MT) Gross Margin (Rs/ MT)

FictionFiction

According to another such fictious allegation According to another such fictious allegation which was widely propagated by one of the which was widely propagated by one of the Government watchdog agency, the LPG Government watchdog agency, the LPG marketing companies earned Rs. 498 per 11.8 marketing companies earned Rs. 498 per 11.8 KG domestic cylinder in Jan 2009.KG domestic cylinder in Jan 2009.

The said allegation implicitly assumed that theThe said allegation implicitly assumed that the

LPG marketing company earnings = LPG marketing company earnings =

Retail price/ MT – Producer base stock price/ MTRetail price/ MT – Producer base stock price/ MT

LPG Supply chain PlayersLPG Supply chain Players

LPG LPG ProducerProducer

LPG Marketing CompanyLPG Marketing Company

DistributorDistributor

Sub- DistributorsSub- Distributors

ConsumerConsumer

FACTFACT

The allegation ignores the fact that the LPG marketing The allegation ignores the fact that the LPG marketing companies do not market LPG directly to the consumer and companies do not market LPG directly to the consumer and therefore the retail prices do not represent the Revenue for therefore the retail prices do not represent the Revenue for the marketing company. There are other commercial the marketing company. There are other commercial players in the LPG supply chain between the Marketing players in the LPG supply chain between the Marketing company and the consumer.company and the consumer.

The allegations also ignores the basic fact that Producer The allegations also ignores the basic fact that Producer Base – Stock price is EXCLUSIVE of the 16% General Sales Base – Stock price is EXCLUSIVE of the 16% General Sales Tax (GST) and other mandatory duties payable to the Tax (GST) and other mandatory duties payable to the Government of Pakistan (GOP). Similar, it also ignores the Government of Pakistan (GOP). Similar, it also ignores the GST paid to GOP by the Marketing companies.GST paid to GOP by the Marketing companies.

Further, the allegation fails to distinguish between the Further, the allegation fails to distinguish between the meaning of financial terms namely “Gross Margin” and “Net meaning of financial terms namely “Gross Margin” and “Net Income.” Gross Margin does NOT mean Profits earned.Income.” Gross Margin does NOT mean Profits earned.

FICTIONFICTION

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

FACTFACT The demand for LPG exhibits seasonality, The demand for LPG exhibits seasonality,

peaking in winters and shrinking in peaking in winters and shrinking in Summers.Summers.

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

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

Quantity Imported via Taftan & Turbet

-

500

1,000

1,500

2,000

2,500

3,000

Oct,09 Nov,09 Dec,09 Jan,10 Feb,10 Mar,10

Month

Qua

ntity

(MT)

Total Via Turbet (MT) Via Taftan (MT)

Challenges Posed by Substandard Challenges Posed by Substandard and/or Smuggled LPGand/or Smuggled LPG

While some of the importer are conscious of the While some of the importer are conscious of the quality, health and safety standards of the LPG, quality, health and safety standards of the LPG, other importers are bringing in SUBSTANDARD other importers are bringing in SUBSTANDARD LPG containing high Sulphur and Ammonia LPG containing high Sulphur and Ammonia contents along with a Pungent Smell.contents along with a Pungent Smell.

Further, some of the importers are:Further, some of the importers are:A) regularly under invoicing the LPG A) regularly under invoicing the LPG B) Declaring lesser than actual quantityB) Declaring lesser than actual quantityC) completing waiving off the GST by SMUGGLING C) completing waiving off the GST by SMUGGLING

the LPG.the LPG.

Evidence of Under InvoicingEvidence of Under Invoicing

Invoice Month = June 2009Invoice Month = June 2009 Declared Price = $340/ MTDeclared Price = $340/ MT Actual CP June =$431/ MTActual CP June =$431/ MT

Unfair under Invoicing Margin = $91/ Unfair under Invoicing Margin = $91/ MT MT

These practices allow such importers to These practices allow such importers to significantly under cut the market and significantly under cut the market and offer the sub standard LPG at cheaper offer the sub standard LPG at cheaper rates to the consumers.rates to the consumers.

Most of the consumers are unaware of the Most of the consumers are unaware of the damage that the sub standard LPG poses damage that the sub standard LPG poses to their Health & Safety in general and to to their Health & Safety in general and to the efficiency of the vehicles when used as the efficiency of the vehicles when used as an auto fuel.an auto fuel.

The Current Market ScenarioThe Current Market Scenario

Since the end of the most recent winter Since the end of the most recent winter season, the LPG industry is experiencing a season, the LPG industry is experiencing a massive eradication of demand.massive eradication of demand.

This is mainly because of the :This is mainly because of the : a) record high Producer Prices un witnessed a) record high Producer Prices un witnessed

in any Summer season before.in any Summer season before. b) Availability of under invoiced/ smuggled b) Availability of under invoiced/ smuggled

& Sub standard LPG& Sub standard LPG c) Massive Cross fillingc) Massive Cross filling

Current Market ScenarioCurrent Market Scenario

The Producers are topped up with the stocks The Producers are topped up with the stocks of the LPG. One of the big local producers of the LPG. One of the big local producers had to flare up gas, thereby creating a dead had to flare up gas, thereby creating a dead weight loss to the entire supply chain. This weight loss to the entire supply chain. This LPG could have been sold in the market at LPG could have been sold in the market at appropriate market clearing prices.appropriate market clearing prices.

The local producers should lower the prices The local producers should lower the prices in view of the present market situation and in view of the present market situation and save the industry from permanent demand save the industry from permanent demand destruction.destruction.

OGRA Required to play its roleOGRA Required to play its role OGRA needs to step in and control the imports of OGRA needs to step in and control the imports of

the SUBSTANDARD LPG; which along with health & the SUBSTANDARD LPG; which along with health & Safety standards poses a threat to use of LPG as Safety standards poses a threat to use of LPG as autogas.autogas.

OGRA in collaboration with GOP needs to set up a OGRA in collaboration with GOP needs to set up a mechanism to monitor the imports of LPG via land mechanism to monitor the imports of LPG via land and ensure correct price/ quantity declaration in and ensure correct price/ quantity declaration in order provide a level playing field to all the LPG order provide a level playing field to all the LPG Marketing companies. Marketing companies.

OGRA needs to monitor and take stern action OGRA needs to monitor and take stern action against the increasing practice of cross filling of against the increasing practice of cross filling of cylinders which is a violation of all trademark rules. cylinders which is a violation of all trademark rules. Cross filling deters investment in the marketing Cross filling deters investment in the marketing infrastructure.infrastructure.