LPG saga: where are the margins?

"LPG could become a precious commodity in a few months - as precious and unseen as sugar was a few months back", fears Abdul Hadi Khan, Chairman All Pakistan LPG Distributors Association. The Association denies the accusations of being the beneficiary of higher LPG prices of late stating that they hardly earn a penny out of the chain.
The liquid gas is currently selling at an average rate of Rs95/kg in retail market causing panic among the consumers. Those who can shift to alternative fuels need no second invitation and have already started to switch to cheaper fuel, while others who can - are left with no choice but to face the music.
To put things into context, the LPG sector in Pakistan is officially termed as deregulated but has hardly ever been deregulated in its true spirit. The sector has time and again been intervened by the regulator which happens to be Ogra - thus, violating the very purpose of deregulation mechanism.
What is unfortunate is the yawning difference of not only opinions but even the facts among the producers and distributors. The most obvious is the perceived demand-supply gap which according to the distributors association is as high as 800 ton/day as they believe the producers are producing only 1400 ton/day. Distributors believe that the producers have cut down on production to gain advantage of limited supply as the production last year was as high as 1700 ton/day.
This claim, however, is widely rejected by the largest LPG producer as they deem the shortfall to be not more than 300 ton/day and that the maximum production ever achieved, 1600 ton/day, was three years ago.
It is important to dig out the root cause of such high LPG prices in the country. The sector which operates under the so-called deregulated regime is in fact required to sell the product at
easonable margins - which should not exceed Rs200/cylinder for the producer and Rs65/cylinder for the distributor, irrespective of the production cost.
This very limit imposed in what is supposed to be a deregulation regime needs some serious explanation from Ogra and the related ministry. The distributors accuse the producers of making unreasonably high margins on LPG but their argument seems to lack enough evidence. Them saying that the LPG costs the producers a mere Rs10-12/kg is hilariously unbelievable.
As a matter of fact, most of the LPG producers are public listed companies and thus are required to have their accounts audited and submitted to the regulator, hence reducing the chance of such big frauds. A closer look at the audited accounts of a major LPG producer reveals that LPG in FY09 cost around Rs35/kg, at a time when the retail prices were Rs 37.6/kg - leaving hardly any room for substantial margins.
The question pops out is that who is making all the margins in the supply chain. The answer to it, unfortunately, is not as simple as everyone involved has its own verdict which is at complete odds with that of others.
At current cost of Rs72/kg as per Saudi Aramco contract price, which is the base price used for determining LPG tariffs - the marketing companies pass it on to the distributors at Rs84/kg. Does this mean you have got the trail? Well, actually not. The marketing companies overheads amount to Rs12/kg at present leaving them with no margins to operate with.
Then, there is the distributor who is selling the product to the retailers at Rs88/kg, which leaves them with Rs2/kg in margins after accounting for the overhead expenses. This should however be of important note, that the producers accuse the distributors of pocketing a margin in tune of Rs14/kg - a claim not owned by the distributors.
Then comes the retailer, who is probably earning a margin to the tune of Rs3-4/kg, given his overhead costs around Rs3/kg. So, the chain hardly proves anybody guilty of making substantial profits going by the stakeholders own words.
But certainly, something needs to be done with the pricing mechanism as pegging it with Aramco CP exposes local consumers, who are invariably poor, to the high volatility in the price index. This frustrates consumers and prompts them to shift to alternative fuels, but sadly not everybody can afford to switch given the logistic constraints.
There is another issue in the sector, that of CCPs fine imposed on the producers, but that can be touched upon being a sub judice. More on the pricing issue later.

==============================================

LPG PRICING

==============================================

The Chain                                Rs/kg

==============================================

Producers selling price                    72

Marketing companies overheads              12

Marketing companies selling price          84

Marketing companies margins                 0

Distributors overheads                      2

Distributors selling price                 88

Distributors margins                        2

Retail price                                95

Retailers overheads                         3

Retailers margin                            4

==============================================