LPG: Squeeze on distribution margins

As the crude oil prices go up, the LPG prices as determined by the regulator have also continued to inch up. For March 2021, the Ogra determined LPG maximum selling price at Rs1,885 per cylinder - highest in at least over four years. This is higher by a massive 23 percent year-on-year – the single largest monthly increase in 15 months.

Now, the liquified hydrocarbons have a higher share in the national consumption basket than that of natural gas – but the price changes hardly ever attract the same level of interest. The rural consumption is entirely dependent on LPG for most of the heating requirements, with a weight of 0.99 in total consumption, whereas the urban consumption weight stands at 0.5. Combined, the LPG consumption weight nears 0.70 of the national consumption basket compared to 0.65 for natural gas.

What has transpired over the past few months is interesting. The retail LPG price has been substantially lower than the maximum prescribed price since May 2020. The February retail price was lower by 19 percent from the Ogra prescribed maximum selling price. The weekly SPI number for early March suggests that trend is continuing with the retail price not moving up, despite increase in Ogra prices.

There have been instances of LPG being sold over the maximum prescribed price – but that never lasted long. The latest differential of 19 percent between retail and Ogra price is the highest in at least three years – and shows the fruits of competition. The entire supply chain seems to be sharing the hit on margins – which have remained unchanged for nearly four years at Rs413/cylinder.

For a partially regulated industry, the distribution margins have stayed static for far too long at Rs35 per kg, which includes marketing, transportation, and distribution margins, of which marketing constitutes half. General inflation in the last four years has obviously increased, which shows the supply chain is significantly worse off than it was all those years ago. This also underlines that the distributors still have ample room to wiggle in times of high retail prices. To let go as much as 85 percent of the distribution margins is no small deal.