Gas price

28 Business Today FEBRUARY 2015 www.businesstoday.co.om

I N D U S T R Y

The recent hike in natural gas prices has been a rudeshock for industry, but observers believe it won't makemuch of an impact in the long run

By Maheswaran P

Sharp decline in global crude prices has

put budgetary pressure on every econ-

omy in the Middle East including

Oman. Anticipating that the prices will

remain soft in 2015, the sultanate has

projected a 5.5 per cent decline in oil

revenues in its budget and to mitigate

this loss the country is now looking at

other avenues to increase its revenues.

One such initiative is doubling of the

price of natural gas for industrial estates

and cement companies, which kicked

off on January 1.

The Ministry of Finance in November

last year had sent a letter to the compa-

nies detailing the decision stating that

the prices will be increased from

US$1.50 per million British thermal

units (mmbtu) to US$3/mmbtu. Further

to this, there will be a three per cent

increase every year. Until now natural

gas in Oman was priced almost at par

with the regional economies, but with

the latest development, the companies

are now being charged at a premium

compared to its competitors in the

neighbouring countries.

Natural gas for domestic buyers in

UNWELCOME

Gas price/E1:BusinessToday 1/28/15 3:41 PM Page 1

www.businesstoday.co.om FEBRUARY 2015 Business Today 29

Saudi Arabia is the cheapest at

US$0.75/mmbtu followed by

Kuwait at US$0.8/mmbtu, while

the UAE and Qatar charge

US$1/mmbtu. Bahrain, another

economy like the sultanate with

one of the lowest oil reserve

buffers in the GCC, currently

charges US$2.25/mmbtu and is

expected to hike the price from

April 1.

The renewed price in Oman is

closer to that in the international

markets with the average price in

2014 being US$4.26/mmbtu.

Industries worriedThe new decision has shocked

most companies as some of them

were expecting a maximum

20 per cent increase per year and

then the three per cent annual

hike after four years. The biggest

impact of this decision will be

seen in gas intensive industries

that represent a broad spectrum

of sectors ranging from FMCGs to

building materials, which includes

cement, tiles and glass manufac-

turing industries. Oman Cement

and Raysut Cement, where gas

remains the major feedstock, are

two of the major listed companies

that will be affected. Majan Glass,

Al Anwar Ceramics and Al Maha

Ceramics will also be impacted

due the price revision.

Both cement companies had

said in a filing to the MSM that

the hike in natural gas price will

increase their cost of production.

Oman Cement said its costs will

increase by RO2.1mn in 2015

and would try to minimise the

impact by improving productivity,

restructuring pricing and reducing

other costs. Raysut Cement said

its costs will rise by three per cent

this year adding that it will try to

offset the impact of higher gas

prices by making cost reductions,

improving efficiency and restruc-

turing the prices.

Arvind Bindra, CEO of Al Maha

Ceramics says the additional cost

of natural gas will impact the pro-

jected net profits of 2015 to an

extent of five per cent. A Suresh,

CFO of Al Anwar Ceramics, says

the hike will lead to a rise in the

company's cost of production by

around RO7,50,000 for the year

2015. Both companies are look-

ing at various cost control meas-

ures and also at rationalising the

prices wherever possible to offset

the increase in cost of production.

Hasty decisionCompanies feel that the price

hike should have been done in a

phased manner as they would

SURPRISESaudi

UAE

Oman*

Qatar

Kuwait

Bahrain**

$0.75

$1.00

$3.00

$1.00

$0.80

$2.25

GASPRICESIN GCC(per mmbtu)

*Recently raised from $1.5 **prices are set to rise from April 1

From Industry Sources

THE ADDITIONAL COST OF NATURAL GAS WILL IMPACT THE PROJECTED NET PROFITS OF AL MAHA CERAMICS IN 2015 TO AN EXTENT OF 5%, SAYS ARVIND BINDRA


have got adequate time to build a

course of action to minimise its

impact on their performance.

A top management official

from one of the affected compa-

nies, who didn't want to be quot-

ed, feels that while the energy

cost world over has decreased,

companies in Oman are being

burdened with higher gas cost.

He adds that they would become

uncompetitive from now on and

it would worsen further in the

long run.

Joice Mathew, head of

research at United Securities

believes that the decision was tak-

en hastily to make up for the lost

revenue from oil price decline.

“The government had an

option to increase the gas price in

a systematic manner as it was

done for the large industrial

establishments a couple of years

ago. Such a move would have

been less shocking to sharehold-

ers and customers and it would

have left more room for compa-

nies to plan for the long term

contracts.”

Bindra also agrees that the

increase of natural gas price in a

phased manner would not have

affected the performance of com-

panies severely and it would have

given them more time to improve

their internal processes and

enhance their efficiency.

He says, “The impact of this

hike would be very severe for

industries whose energy cost is

significant in their overall cost of

production and for companies

which operate with low profit

margins.”

Earnings impactAccording to stock market

experts, the total impact of the

price hike on the 2015 earnings

of listed companies is estimated

to be in the region of RO13-

14mn, which is about 0.1 per

cent of the government’s

revenue from the 19 listed indus-

trial establishments.

Kanaga Sundar, head of

research at Gulf Baader Capital

Markets believes going forward,

the hike would remain one of the

major impediments to Oman's

industrial sector in terms of entry

in to export markets and remain-

ing competitive compared to oth-

er regional players.

“Overall we believe this would

have short to medium term nega-

tive impact on the earnings of the

industrial sector companies. We

need to look at how these com-

panies would be able to mitigate

the cost escalation going for-

ward,” he adds.

Mathew says the impact to

industrial sector profitability and

the degree of impact will vary

from company to company.

“Cement companies are the

most affected in terms of absolute

numbers, but there are profit

making companies who are ener-

gy intensive and might end up in

reporting a loss only due to the

increase in gas price. I think there

will be an impact of around

18 per cent to the profits of 19

listed companies who are using

natural gas as feed stock. This will

be close to 2.5 per cent of their

revenues.”

V Sundaresan, director and

CEO of The National Detergent

Company, also believes that the

price hike won’t have a significant

impact in the long run. “Doubling

of gas price will certainly increase

our production cost. But it is not

substantial to cause a crippling

impact to our operations and

profitability in the long run.”

Passing on the cost Market analysts believe that the

price hike could have a trickle

down impact as these companies

try to pass on the cost to cus-

tomers. They believe that the

competition will be more pro-

nounced for cement companies

who are already facing stiff com-

30 Business Today FEBRUARY 2015 www.businesstoday.co.om

I N D U S T R Y

DOUBLING OF GAS PRICE WILL CERTAINLYINCREASE OUR PRODUCTION COST. BUT IT ISNOT SUBSTANTIAL TO CAUSE A CRIPPLINGIMPACT TO OUR PROFITABILITY IN THE LONGRUN, SAYS V SUNDARESAN


www.businesstoday.co.om FEBRUARY 2015 Business Today 31

petition from regional suppliers.

Mathew thinks that most of

these companies will try to pass

on this increase, which may cause

inflationary pressures in the

economy. However, he adds that

cement companies will find it

difficult to pass on the cost

increases to customers due to

competition and take the hit on

their bottomline.

Some companies may also not

be able to pass on the costs to

customers owing to Public

Authority for Consumer Protec-

tion (PACP) regulations. Sundar

says, “The PACP has been

extremely cautious and has not

allowed to pass on the previous

price increase to customers. This

means, any price revision has to

go through a rigorous process

with the PACP.”

Bindra, however, says he is

looking at this option. “We are

working on plans to pass on some

price hike in selected product and

market segments and may be

able to partially pass on the price

hike to some customers in select-

ed geographies.”

Suresh says that the company

would consider rationalising the

prices wherever possible. Howev-

er in the given global and region-

al scenario, he adds that a price

hike will be difficult especially for

products in the markets his com-

pany caters to, due to low cost

imports and increase in capacities

by tile manufacturers in the GCC.

Export issuesThe hike in gas prices will also

have a direct impact on exporters

as competitors from other coun-

tries could further reduce their

prices owing to lower gas cost.

Sundar says that the competitive-

ness of certain export oriented

industries would be affected over

the short to medium term, as

other countries in the region

continue to provide subsidies to

their industries.

Bindra says that the profit mar-

gins in exports are expected to

reduce in certain markets which

are more competitive. He hopes

to increase the overall exports

after capacity expansion which

will reduce the overall cost of pro-

duction. However, Mathew

believes it won't have much of an

adverse impact as Oman’s indus-

trial firms enjoy a good reputation

for its high quality products, and

the customers are ready to pay a

premium for them.

Long-term contractsAnother major area of concern

among industries is regarding

long term contracts. Most compa-

nies will have to incur losses if

they continue with the existing

agreements. “As per our under-

standing and also interactions

with the management of listed

companies, the PEIE has increased

the gas price for all the existing

industries operating in the indus-

trial estates. This in turn has

impacted the companies operat-

ing under the existing long term

contracts,” says Sundar.

Mathew on the other hand

believes this won't have much of

an impact on the long term con-

tracts of the companies as there

might be provisions to mitigate

such an impact. He believes that

many of the companies have

already initiated negotiations with

their customers to increase the

price of their products.

Overall the general consensus

is that it would have been better

had the government hiked the

gas prices in a systematic and

phased manner as it would have

given companies some breathing

space. Having said that both

industry and observers strongly

believe that there won't be much

of an impact in the long run as

companies can offset this price

hike by higher operational effi-

ciency and better management. g

I THINK THERE WILL BE AN IMPACT OF AROUND18% TO THE PROFITS OF 19 LISTED COMPANIESTHAT ARE USING NATURAL GAS AS FEEDSTOCK, SAYS JOICE MATHEW


Documents

Gas price