High spot prices are hurting LNG imports from India. Here’s who can feel the pinch

Rising national liquefied gas prices should prompt India to reduce imports of industrial fuel. Petronet LNG Ltd., India’s largest gas importer, could feel the impact, aside from two consuming industries, fertilizer and electricity.

Strong demand for gas from China and Europe, insufficient supply from exporters like Russia, Australia and the United States have pushed up LNG prices. And they are expected to remain high as spot purchases will increase over the next few months in the middle of winter in the northern hemisphere.

Japan Korea Marker – the spot gas benchmark – has jumped more than 2.6 times in the current fiscal year, from $ 6.92 per UK thermal unit to $ 17.77 per unit at 27 August, according to Bloomberg data. Prices retreated from a seven-month high of $ 17.99 per unit in mid-August.

An S&P Global Platts report expects prices not to drop until after December or January.

LNG imports satisfied 75% of the demand of industry and fertilizer producers in 2020. Natural gas is the main input for fertilizer and urea producers, and accounts for 80% of the cost, according to a CARE Ratings report. It is used in 28 of the 31 urea plants in India.

Higher prices mean that the cost of production will increase for fertilizer manufacturers. But since retail prices are regulated or controlled by the government, their margins will be protected.

But rising gas prices can have a short-term impact by increasing working capital as the government releases subsidies with a lag.

Natural gas is also used in the electricity, refining and petrochemical sectors. Since these companies do not receive any subsidies, higher input prices will put pressure on margins.

The impact, however, will be limited as they buy gas both on the spot market and on long-term contracts.

Fuel replacement

Consumer industries also have another option. According to the S&P Global Platts report, they may switch to another fuel.

“Indian buyers have generally refrained from buying high-priced spot LNG given the availability of alternative energy sources such as coal,” said S&P Global Platts. “The elasticity of demand among Indian importers is around $ 10 per unit, where LNG can be replaced by any petroleum fuel, be it fuel oil or naphtha, at a cheaper level. “

Fertilizer manufacturers, however, will not require this since their margins are protected.

NTPC Ltd., Indian Oil Corp. and Chambal Fertilizers & Chemicals Ltd. have not yet responded to questions emailed to BloombergQuint.

Imports likely to fall

LNG consumption so far this fiscal year has almost returned to pre-pandemic levels – to 94% in April-July 2019, according to data from Petroleum Planning and Analysis Cell. Imports also increased 5.8% sequentially in July on demand from manufacturers of fertilizers and chemicals.

Still, prices are expected to weigh on future demand, especially spot purchases, leading to lower imports.

High LNG spot prices are a spoiler and impact consumption in India, said VK Mishra, chief financial officer of Petronet LNG, in a conference call with a Q1 analyst on August 16. Additional volumes, usually boosted by low spot prices, are slowing, he said.

“Rising global spot prices make LNG uncompetitive in the electricity sector, painting a more bearish picture of India’s demand for LNG in the coming years,” said a report by energy consultant Wood Mackenzie.

Bloomberg NEF forecasts suggest that India’s LNG imports in 2021 could drop for the first time since 2013. Inbound shipments of 25.8 million tonnes are expected in the calendar year, 3% below in 2020.

Increase in domestic production

Another factor that could hold back LNG imports is the increase in domestic supply.

The KG-D6 deepwater fields of Reliance Industries Ltd. and BP Plc. are expected to supply more than a quarter of India’s total gas production by 2025, according to Wood Mackenzie. The fields will deliver more than 900 million cubic feet of gas per day to the market from its three phases combined, according to the report. The supply of Oil and Natural Gas Corp. and Vedanta Ltd. will also be available soon, he said.

Wood Mackenzie, however, does not view the increase in local supply as sustainable. “Beyond these projects currently underway and under development, India’s pre-FID (final investment decision) domestic gas supply pipeline is dangerously thin,” he said. “Huge challenges” remain for underground and overhead projects, and India’s growing demand will be met through LNG, according to the report.

Nonetheless, high and lower spot prices will impact the short to medium term outlook for Petronet LNG, India’s largest LNG importer.

Centrum Broking and ICICI Securities cited higher LNG spot prices, Covid-related shutdowns and an increase in domestic gas supply to the KG-D6 basin as headwinds for Petronet LNG.

Center

  • The core business remains strong and profitable, but short-term growth triggers are limited.

  • The brokerage expects adjusted EPS for FY22 to decline 4.7% year-on-year.

  • Petronet ‘Add’ rate with a target price of Rs 245, implying a potential upside of 7.4%.

ICICI titles

  • Spot LNG is expected to hit $ 15.8-17.9 per mmBtu from the second to fourth quarter ending in March.

  • Management is confident of strong volumes due to long term contracts.

  • He expects estimated FY22 earnings per share to decline 7.1% year-on-year.

  • Upgrade the stock to “Hold” from “Reduce” with a target price of Rs 215. The stock is trading 6% above the target.


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