The Bangladesh government raised retail gas prices by 37.5% on a weighted average basis to pass on the expenses of imported LNG, which costs roughly five times the price of domestic natural gas. Without the hike, the government would need to subsidise cUS$2.5bn in the gas sector. Post-hike, the amount of subsidy is likely to be cUS$1.12bn.
The most affected sectors are textiles and construction. Companies in these sectors incur high utility expenses, comprising 3%-7% of sales. Gas costs make up the majority of the utility expenses since these companies often use gas-based generators and captive power plants to generate electricity. We estimate that the tariff hike will increase the manufacturing costs of textile companies by 1.5%-2.0% and production costs of construction companies by 1.5%-3.0%. Therefore, the textiles industry is likely to face margin pressure and challenges in export competitiveness. Ceramic manufacturers in the construction sector will lose competitiveness in imports. Based on our previous observation, we believe that construction companies will pass on half of the additional costs to customers immediately and the rest in the next two-to-three quarters. Therefore, we expect a dent in the margin for these companies in the coming quarters.
Minimum impact for the manufacturing stocks that we cover. Our current coverage of manufacturing stocks consists of consumer and pharmaceuticals companies that incur lower utility expenses, comprising c1.0% and c2.5% of sales, respectively on an average. A majority of their utility costs consist of electricity expenses and are not directly related to the recent gas price hike. We believe that an impact, if any, will be insignificant and can be passed on to the end consumers without any pressure in demand.
Increase in electricity tariff seems a likely consequence. Bangladesh generates c60% of its electricity with gas. A 41% gas tariff hike in power plants suggests that the costs of electricity production will increase by c24%. Without a hike in electricity prices, the Bangladesh Power Development Board (BPDB) has to subsidise the additional costs. Considering the government's intention to reduce the subsidy, we think that an increase in electricity tariff is also on the cards.
Keeping inflation in the target level will be a challenge. The c64% increase in gas tariff for fertiliser production alone is likely to increase inflation by an additional c40bps, over the current inflation rate of 5.6%. A gas tariff hike for industries and captive power plants will also increase inflation. Therefore, we expect an inflation level of c6% compared with the target level of 5.5%. We also note that the hike in electricity prices may further escalate the inflation level over 6%.