INDUSTRY UPDATES - 01/08/2013

Power, fertilizer ministries may oppose increase in gas price





The government may not be able to raise the prices of natural gas as much as it wants to because the fertilizer and power ministries have reservations on the recommended pricing formula.The proposed freeing of gas prices and a resultant increase will directly benefit local producers such as Mukesh Ambani-led Reliance Industries Ltd and state-owned Oil and Natural Gas Corp. Ltd and Oil India Ltd.



A panel led by C. Rangarajan, the Prime Minister’s economic adviser, in December suggested a system that would price the fuel at $8-8.5 per million metric British thermal units (mmBtu). This compares with the current domestic prices that range between $3.5 and $5.73 per mmBtu. Imported natural gas costs around $14.17 per mmBtu.Finance minister P. Chidambaram said in his budget presentation on 28 February that the government will review its pricing policy on natural gas and remove uncertainties in this regard.



The fertilizer ministry may object to the Rangarajan formula and instead suggest the fuel be priced at around
$6 mmBtu, according to three ministry officials who spoke on condition of anonymity. A final view, however, has not yet been taken, they said.

“We are yet to respond to the note (on the Rangarajan formula that has been circulated among the relevant ministries). High gas prices would have to be passed on to consumers, in this case state electricity boards, who are already finding it difficult to purchase power,” a power ministry official said. “We are not in favour of high prices and will respond accordingly.”

Another official in the power ministry also expressed reservations over the recommended pricing mechanism. Both officials declined to be named.



The views of these two ministries are important because the sectors they oversee are the largest consumers of natural gas in the country. The fertilizer ministry’s likely view will be more representative of global prices than what has been suggested by the Rangarajan panel, according to Dipesh Dipu, a partner at Jenissi Management Consultants, a Hyderabad-based resources-focused consultancy.



“However, it will definitively have a negative impact on the future profitability of gas suppliers,” Dipu said.

Sudhir Vasudeva, chairman and managing director of ONGC, and S.K. Srivastava, chairman and managing director of Oil India, did not respond to phone calls or messages sent to their mobile phones. Queries emailed on Monday to a Reliance Industries spokesperson remained unanswered.The Rangarajan panel had, in its December report, indexed the price of domestically produced gas to prices prevailing in the international market, effectively recommending the freeing of gas prices in India and scrapping the administered pricing mechanism (APM).



It suggested a formula in which the final base price was arrived at by the simple average of the respective weighted averages of the prices of imported gas across sectors over a 12-month period and that of prices in the three major international gas trading hubs. These are the US Henry hub, the UK National Balancing Point and Japan’s custom-cleared rate.The cost of imported gas was calculated on the basis of the so-called netback mechanism, in which transport and liquefaction costs are subtracted from the landed price of gas to arrive at the implied base price.



The fertilizer ministry is of the opinion that instead of a simple average, the final price should be arrived at by a weighted average of the two respective weighted averages themselves.“Since domestic gas is the country’s natural resource, with a social objective, its price cannot be indexed to external prices. Domestic gas prices in various countries including the Middle East and Africa are extremely economical even today,” said one of the fertilizer ministry officials cited earlier. “But, if the government does want to index it to global prices, the formula suggested by the fertilizer industry is better as it keeps the final base price in check.”



The matter of natural gas from domestic sources priced in dollars and not rupees has also been raised in the parliamentary standing committee on fertilizers, Mint reported on 12 December.There are four major pricing regimes for domestic gas in India—under APM, non-APM, pre-new exploration licensing policy (Nelp) and Nelp. The government allocates rights to explore fields through bidding under Nelp, which started in January 1999.



Currently, APM and Nelp gas are priced at $4.2 per mmBtu, with gas from pre-Nelp blocks costing between $3.5 and $5.73 per mmBtu. The prevailing basic price of imported gas is around $14.17 per mmBtu. The price of gas produced at Reliance Industries’ deepwater KG-D6 field off the east coast has been fixed at $4.2 per mmBtu till 2014.

India’s power and fertilizer sectors have a demand of 135 million standard cu. m per day (mscmd) and 62 mscmd, respectively. This is expected to reach 171 mscmd and 113 mscmd, respectively, in 2014-15, according to the petroleum ministry.



Festival demand may sweeten sugar



Sugar prices on the Vashi wholesale market gained Rs 12 a quintal for some variety of S-grade, while M-grade was unchanged on Wednesday. Naka rates were steady.

Mill tender rates were discounted by Rs 20 for M-grade in absence of demand.

Producers sold sugar in local market as upcountry buying was still lacking.

A Vashi-based wholesaler told Business Line: “Sugar prices across the country ruled steady on need-based demand and ample supply with Rs 20-30 volatility. August and September futures dropped by Rs 40-60 on higher selling pressure. But now festival demand may support market sentiment. Prices may show positive sign. Enough inventory stocks at market and producing level will still weigh on morale.”

Arrivals in the market continued to be a level of 62-63 truckloads (of 100 bags each), while local dispatches remain routine at 61-62 loads.

On Tuesday evening, about 11-12 mills offered tenders and sold about 43,000-45,000 bags at Rs 2,900-70 (Rs 2,900-70) for S-grade and Rs 2,980-3,120 (Rs 2,980- 3,140) for M-grade.

The Bombay Sugar Merchants Association's spot rates : S-grade Rs 3,052-3,132 (Rs 3,040-3,132) and M-grade Rs 3,160-3,311 (Rs 3,160-3,311).

Naka delivery rates : S-grade Rs 3,000-50 (Rs 3,000-50) and M-grade Rs 3,080-3,190 (Rs 3,080-3,190).

Coal block auction: Floor price to be linked to global index



The Coal Ministry proposes to link the floor price of coal blocks to be put on offer for private companies to global index.

Simply put, it will mean the floor price of a particular mine would be at 10-15 per cent discount of the freight-on-board (FoB) price of imported coal of the same quality. The FoB price may be taken as average of coal procured from Indonesia, Australia and South Africa, the three countries from where India imports the fuel.

This is the first time the Government is auctioning coal blocks. On offer will be four blocks with more than 2,000 million tonnes of estimated reserves. The Coal Ministry has circulated an inter-ministerial note to discuss modalities for these bids.

The issue would be taken up by the Cabinet Committee on Economic Affairs this month, a senior Coal Ministry official told Business Line.

At the same time, the Coal and Power Ministries have mooted discount on floor price for blocks bagged by power producers to facilitate electricity generation at cheaper rates. However, it is to be seen if the Finance Ministry agrees to the proposal.

“There may be different pricing for different sectors. The CCEA would decide on this,” the official said.

In addition, the blocks would be offered on a revenue sharing model. This would mean that the miner would have to share a percentage of revenue generated from selling coal with the State Government.

The revenue shared would be linked to wholesale price index (WPI) and would rise with incremental production.

The Government is also taking preventive measures by putting a clause that no mine owner would be allowed to sell the block or dilute equity till production commences. Moreover, any change in ownership of the company that owns a block has to be approved by the Coal Ministry.

The Ministry is cautious of awarding blocks to non-serious players. The investigations in the alleged coal allocation scam by Central Bureau of Investigation brought to limelight that ownership of companies have changed soon after mines were allocated by the Government.

On July 3, the Government allocated 14 blocks with geological reserves of 8,311 million tonnes to cater to about 31,800 MW power generation capacity. These mines were given to public sector power companies based on application procedure and not bidding.

The companies were not charged reserve price for the 14 blocks because the mines are not explored and the estimated reserves in them are not known.

India mines ministry seeks cut in iron ore export duty

Reuters reported that India's mines ministry is seeking a cut in the iron ore export duty after a sharp fall in overseas shipments days after the prime minister spoke about increasing exports to tame the country's current account deficit.



India was once the third largest exporter of the steelmaking raw material, but shipments plunged more than 80% in 3 years to hit 18 million tonnes last fiscal year. The lower exports have helped cushion global iron ore prices.



Mr Dinsha Patel mines minister of India said that "I have written to the finance and commerce ministries to consider a cut in the duty, at least on low grade fines.”



Mr Patel said that his ministry would make all possible efforts to resolve problems related to the iron ore industry in Goa, India's top iron ore exporting state where mining has been banned since last year following allegations of irregularities. I am convinced that the problem of Goa will be resolved soon.



Mr HC Daga president of the Federation of Indian Mineral Industries said that “Lower production due to a clamp down in illegal mining, an export tax of 30% and higher railway freight rates are the main reasons for the slump.”



Mr Daga said that "With the withdrawal of about 100 million tonnes (of Indian iron ore) from the world market, iron ore prices that were in a declining trend suddenly firmed up, benefiting (foreign) private companies at the cost of India and its exporters."



Mr Manmohan Singh PM of India said earlier this month that the government was trying to remove constraints in the export of iron and other ores.

JSW Steel to commission electrical grade steel facility next fiscal

Business Standard reported that JSW Steel Limited will commission the new plant to manufacture non grain oriented grade electrical steel with a capacity of 200,000 tonne per annum at Vijayanagar steel complex in Bellary district during the next financial year.



Mr Sajjan Jindal CMD of JSW Steel said that "We have already placed orders for major equipment and expect to commission the facility by FY2015.”



Addressing the shareholders at the 19th annual general meeting of the company on Tuesday, he said, the company would commission the new facility in collaboration with JFE Steel Corp of Japan.



He said that "Our strategic collaboration with JFE Steel Corp, especially in technological know-how, is helping us in enriching our product mix, and will enable us to produce very high grades of steel, which are currently not manufactured by Indian steel players.”



In addition to a new 2.3 million tonne per annum cold rolling mill, which will focus on automotive and appliance grade steel, the company has signed various agreements with JFE Steel in November 2012 to collaborate for the manufacturing of electrical steel, the first such venture in India.

Chinese domestic steel prices to remain at low levels in H2

According to a report issued by China's Ministry of Industry and Information Technology, in the current year, the Chinese domestic steel sector has continued to struggle against a background of increasing steel outputs of mills, high finished inventory levels at mills and traders, low steel prices, the imbalance between supply and demand, reduced profits of steel enterprises and the weak macroeconomic environment.



As of July 26, the composite steel price index for the Chinese domestic market issued by the China Iron and Steel Association was at 100.48 points, down 6.6 points compared to the beginning of this year. As of July 26, the average decrease in prices of the main steel products in the Chinese domestic market was 5.7% compared to the beginning of this year. In particular, as of July 26 compared to the beginning of this year, the prices of wire rod, rebar, steel plate and hot rolled coil in China were down 4.9%, 6.7%, 5.7% and 9.7% respectively.



According to China's National Bureau of Statistics, in the first half of the current year the aggregate gross profit of the ferrous metal smelting and processing industry in China was RMB 45.44 billion (USD 7.4 billion), increasing by 22.7% year on year. In each of the first five months of this year, the gross profits of large and medium-sized steel enterprises in China declined on month on month basis. In the January to May period, although the overall gross profit of the companies in question indicated a 34% year on year increase, the aggregate increase amounted to only RMB 2.8 billion (USD 4.5 billion). The gross profit to sales ratio of the companies in the given period was just 0.19%. In May alone, the overall gross profit of 86 large and medium-sized steel enterprises in China amounted to RMB 150 million (USD 24 million). 34 of the 86 companies in question posted net losses in May.



The MIIT predicts that the Chinese domestic steel sector is unlikely to see an improvement in the short term due to the seasonal lull in July and August, the slowdown of the Chinese economy, decreases in demand and in exports, fluctuations in financial markets, and tighter liquidity for investments in real estate and infrastructure. Overcapacity is still a big problem due to the failure to cut outputs. In the second half of the current year, steel prices in the Chinese domestic market are expected to remain at low levels due to higher production and low demand.

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