India's largest gas distributor may not gain even as Asia spot prices of liquefied natural gas drop to their lowest-ever level. But its buyers may benefit.
GAIL (India) Ltd. buys LNG at contracted prices in the international market and sells them at prevailing rates in the domestic and international markets—a business that generates 70-75 percent of its revenue. While selling prices have tumbled, the drop in buying prices has been lower.
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GAIL India has three active long-term LNG contracts to buy gas—two with the U.S. and one with Russia. The landed cost of U.S. LNG, which contributes more than 69 percent of its import volumes, is at a 103 percent premium to the Asia spot LNG price, according to data compiled by BloombergQuint.
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The Japan-Korea-Marker price, assessed by S&P Global Platts, slipped below the $3 per mmBtu (million British thermal unit) mark for the first time in Singapore. That came on the back of collapsing demand, a supply glut and demand concerns linked to the coronavirus outbreak.
Lower differential between buying and selling prices helped revive GAIL India's earnings from its gas trading business in the quarter ended December. But with the sharp fall in prices, earnings are likely to take a hit in the March quarter.
Who Benefits?
However, lower gas prices augur well for other city gas distributors as that could not only lead to higher demand but also higher margin.
Indian city gas distributors are mandated to supply domestically produced gas for household and transportation and imported gas for industrial and commercial use. Prices of domestically produced gas are administered and change only twice a year, while those of imported gas are market-linked.
Thus, lower spot LNG prices are expected to benefit Gujarat Gas Ltd. more than Indraprastha Gas Ltd. and Mahanagar Gas Ltd. In the past too, Gujarat Gas' unit margins have averaged higher whenever gas prices have fallen.
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