Increased cost of importing LNG to be passed on. The government increased the retail gas tariff by 22.8% on a weighted average basis to pass on the expenses of imported LNG. July 2019 was the last time when the gas tariff was hiked by 37.5%. Since then the spot price of LNG in the international market increased by c245% (USD 2.37/MMBTU in July 2019 vs USD 8.14/MMBTU in May 2022) forcing the government to hike the tariff. At present, 3,050mcf gas is being distributed daily in Bangladesh. Out of it, 750mcf supply (c25% of total) comes from imported LNG. After the price hike, the total amount of subsidy in this sector is likely to be cUSD1.3bn per annum.
10-16% gas tariff hike for power plants, industries and commercial users. However, 260% tariff increase for fertilizer. Fertilizer production consists of roughly 7% of total gas consumption. The state-owned entities (SOEs) are the major manufacturers of fertilizers. They mostly manufacture Urea, one of the three primary fertilizers required for agricultural production. The domestic production of Urea supplies 40% of the demand. The rest 60% is imported. The cost of imported Urea and the other major fertilizers (Di-ammonium Phosphate, Potash) have increased by 200%-300% from pre-covid time because of price hikes in the international market. So, the subsidy provided by the government for fertilizer is likely to increase from BDT 90bn a year to BDT 280bn a year.
The 260% gas tariff hike will increase fertilizer production costs. If the rising costs are not passed on to the farmers, government subsidies for fertilizer will increase further. On the contrary, if the costs are passed on to the farmers, it will result in higher inflation.
Minimum impact for our pharma and consumer coverage. Our current coverage of manufacturing stocks consists of consumer and pharmaceuticals companies that incur lower utility expenses, comprising of 1.0-3.0% of sales. The majority of their utility costs consist of electricity expenses and are not directly related to the recent gas tariff hike. Should there be any impact, we believe, it is likely to be below 30 bps.
However, constructions and textiles are the most affected sectors. Companies in cement, steel, ceramic and textiles sectors incur high utility expenses, comprising of 5-15% of sales, varying on the nature of the business. Gas costs make up the majority of the utility expenses since these companies often use the gas-based generator and captive power plants to generate electricity. We estimate that the tariff hike may pressurize the margin of steel companies by 80-170 bps, cement companies by 60-110 bps, ceramic companies by 80-100 bps, and textiles by 50-100 bps. The actual impact would depend on by much these companies can raise their product prices. Considering the current inflation and macroeconomic scenario, we think the complete transfer of cost to the consumers will have an adverse impact on the demand of construction products since the product prices are already high because of high global commodity prices and BDT depreciation. Therefore, companies in these sectors are likely to face margin pressure. For the textiles sector, the depreciation of BDT is likely to increase revenue receipts in BDT denomination. The positive impact of currency depreciation is likely to offset the rising costs from gas tariff hike.
Increase in electricity tariff seems a likely consequence. Bangladesh generates c60% of its electricity with gas. A c13% gas tariff hike for power plants suggests that the weighted average cost of electricity production may increase by c9%. Without any electricity tariff hike, Bangladesh Power Development Board (BPDB) has to subsidize the additional costs. Considering governments intention to reduce the subsidy and the energy regulator’s statement in a press conference, an increase in the electricity tariff may happen sooner or later.