High Spot Prices To Dent India’s LNG Imports. Here's Who May Feel The Pinch.

Rising prices of liquefied national gas are expected to prompt India to lower imports of the industrial fuel. Petronet LNG Ltd., India's largest gas importer, may feel the impact, apart from two consuming industries, fertiliser and power.Robust gas demand from China and Europe, inadequate supply from exporters like Russia, Australia, and the U.S. have driven up prices of LNG. And they're expected to remain elevated as spot buying will increase in the next few months amid the winter in the northern hemisphere.Japan Korea Marker—the spot gas benchmark—has jumped more than 2.6 times in the ongoing financial year from $6.92 a metric million British thermal unit to $17.77 a unit as on Aug. 27, according to the Bloomberg data. The prices have retreated from the seven-month high of $17.99 a unit in mid-August.An S&P Global Platts report expects the prices to ease only after December or January.LNG imports met 75% of the demand from the industry and fertiliser producers in 2020. Natural gas is the key input for fertilisers and urea producers, and accounts for 80% of the cost, according to a CARE Ratings report. It's used in 28 out of 31 urea plants in India.Higher prices mean the cost of production will increase for the makers of fertilisers. But as retail prices are regulated or government-controlled, their margins will be protected.But higher gas prices can have a short-term impact by increasing working capital as the government releases subsidies with a lag.Natural gas is also used in power, refining, and petrochemicals sectors. Since these companies don't get any subsidies, higher input prices will put pressure on margins.The impact, however, will be limited that they buy gas both in the spot market and long-term contracts.Fuel SubstitutionConsuming industries also have another option. According to the report by S&P Global Platts, they can switch to another fuel.“Indian buyers have generally refrained from spot LNG purchases at high prices given the availability of alternative energy sources like coal,” S&P Global Platts said. "Demand elasticity among Indian importers is around the $10 a unit, where LNG can be replaced by any petroleum fuel, be it furnace oil or naphtha, at a cheaper level.”Fertiliser makers, however, won't require that since their margins are protected.NTPC Ltd., Indian Oil Corp., and Chambal Fertilisers & Chemicals Ltd. have yet to respond to BloombergQuint's emailed queries.Imports Likely To FallLNG consumption so far this fiscal is almost back at pre-pandemic levels—at 94% in the April-July 2019, according to data from Petroleum Planning and Analysis Cell. Imports also rose 5.8% sequentially in July due to demand from fertiliser and chemical makers.Yet, prices are expected to dent future demand, especially spot buying, bringing down imports.High LNG spot prices are a spoiler and are impacting consumption in India, said VK Mishra, director-finance, Petronet LNG, said in a first-quarter analyst Aug. 16 call. Additional volumes, usually spurred by low spot prices, are decelerating, he said.“Rising global spot prices are making LNG uncompetitive in the power sector, painting a more bearish picture for Indian LNG demand over the next few years,” said a report by energy consultant Wood Mackenzie.Bloomberg NEF forecasts suggest India's LNG imports in 2021 may fall for the first time since 2013. Inbound shipments of 25.8 million tonnes are expected during the calendar year, 3% lower than 2020.Rising Domestic OutputAnother factor that could dampen LNG imports is an increase in domestic supply.Reliance Industries Ltd. and BP Plc.’s deepwater KG-D6 fields are expected to provide over a quarter of India’s total gas output by 2025, according to Wood Mackenzie. The fields will provide over 900 million cubic feet of gas per day into the market from its three phases combined, the report said. Supply from Oil and Natural Gas Corp. and Vedanta Ltd. will also come onstream soon, it said.Wood Mackenzie, however, doesn’t see the surge in local supply as sustainable. “Beyond those projects now onstream and under-development, India’s pipeline of pre-FID (final investment decision) domestic gas supply is perilously thin,” it said. "Huge challenges" remain for both sub-surface and above-ground projects, and India's increasing demand will be met through LNG, the report said.Still, high spot prices and lower will impact the short to medium-term prospects of Petronet LNG, India’s largest LNG importer.Centrum Broking and ICICI Securities cited higher spot LNG prices, Covid-related shutdowns and an increase in the supply of domestic gas from the KG-D6 basin as headwinds for Petronet LNG.CentrumCore business remains solid and profitable but there are limited growth triggers in the near term. The brokerage expects adjusted EPS for FY22 to decline by 4.7% year-on-year. Rates Petronet 'Add' with a target price of Rs 245, implying an upside potential of 7.4%.ICICI SecuritiesExpects spot LNG to surge to $15.8-17.9 a mmBtu in from second till fourth quarter ending March. Management is confident of strong volumes due to the long-term contracts. Expects estimated earnings per share for FY22 to decline 7.1% year-on-year.Upgrade the stock to 'Hold' from 'Reduce' with a target price of Rs 215. The stock is trading 6% above the target.

High Spot Prices To Dent India’s LNG Imports. Here's Who May Feel The Pinch.

Rising prices of LNG are expected to prompt India to lower imports of the industrial fuel even as demand grows.

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