Macro Analysis /
Bangladesh

Substantial gas price hike for industries and captive power to increase costs

  • Natural Gas, contributing to c62% of BD’s commercial energy requirement, observed a 100%+ price hike on average

  • Massive price hike for power plants and industries; applicable from the 1st February, 2023

  • Inflationary pressure, margin erosion are likely consequences

Shopnil Paul
Shopnil Paul

Research Associate

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IDLC Securities
19 January 2023
Published byIDLC Securities
  • Natural Gas, which contributes to c62% of BD’s commercial energy requirement, observed a 100%+ price hike on an average. Total energy sources of Bangladesh can be categorized as commercial energy (73% of total) and primary energy or biomass (23% of total). Commercial energy consists of natural gas and LNG (62% of commercial energy), refined and crude petroleum products (21%), coal (11%), and other products (7%). Natural gas is mostly used in govt. power plants (42%), followed by captive power plants (17%), manufacturing companies (18%), and households (13%).

  • Massive price hike for power plants and industries; applicable from the 1st February, 2023. The latest decision suggests - c179% tariff hike for gas-based national grid power plants, c88% for captive power plants, and 150%+ for industries. Please note that the tariff was once increased about six months ago (in June 2022) amid rising LNG prices in the international market. During that time, the weighted average gas tariff increased by c23%.

  • 150%+ tariff hike for industries and c88% tariff hike for captive power will increase costs. Inflationary pressure, margin erosion are likely consequences. High commodity prices, c18% depreciation of BDT against USD in 2022, and c23% gas price hike in June 2022, c44% fuel price hike shifted average inflation upwards to as much as 9.52% in August 2022. It stands at 8.71% in December. Now the gas prices may increase inflation on top of the current level. The hike in gas prices for govt., IPP and rental power plants has almost no impact until the retail tariff of electricity is increased because the power plants pass on the fuel costs to Bangladesh power Development Company (BPDB). But captive power plants are run by private entities that produces for own consumption and therefore bear the fuel costs themselves. So, c88% rise in the cost of gas for this type of power plant will substantially increase their costs. For different industries, gas prices hike range from 150% to 178%. As a result, their production cost will rise substantially. The businesses may try to pass on a portion of the increasing cost to the consumer by raising retail price level. So, hike in gas prices for captive power plant and industries might lead to an increase in the overall price level of the goods, pushing inflation level higher from current level. Otherwise, profitability of energy-dependent businesses will reduce substantially.

  • Low impact on consumer and pharma. Substantial impact on steel, ceramic, cement, textiles and other industrials. In a scenario, when inflation may go up, we think that the buyers are likely to prioritize consumer staple products (food, pharmaceuticals) and adjust with their discretionary expenses. As a result, the sectors depending on discretionary expenditure are likely to face headwinds ahead. This impact on demand may be notable for sectors such as: Consumer durables- Singer, Walton etc., Construction - all cement, steel, ceramic, and other construction sector related companies, Automobiles – IFAD Autos, Runner Automobiles etc. andTextiles.

  • Increase in electricity tariff seems a likely consequence. Bangladesh generates c51% of its electricity with gas. In total, c36% of electricity is generated from gas-based govt. power plants for which gas tariff has increased by c179%. So, it suggests that the weighted average cost of electricity production may increase by c64%. Without any retail electricity tariff hike, Bangladesh Power Development Board (BPDB) has to subsidize the additional costs. Considering governments intention to reduce the subsidy, an increase in the electricity tariff may happen sooner or later. Please note that 5% hike in retail electricity tariff was announced in January 2023, effective immediately.