Why Saudi Aramco's Propane Price Cut May Hit Gujarat Gas Margin

Saudi Aramco's decision to cut the price of propane for the month of June is likely to hit Gujarat Gas Ltd.'s margin from July onwards, as it may have to further slash prices to remain competitive.

The global oil giant was forced to cut propane price by $105 per metric tonne to $450/MT for the month of June, on account of surplus supplies in the Middle East region. Propane prices are at their lowest since 2020.

The prices will be effective in India with a one-month lag, so it will be reflected from July onwards, Sabri Hazarika, oil and gas analyst with Emkay Global Financial Services, told BQ Prime. This will make alternative fuels cheaper in India as compared with industrial piped natural gases, nudging user industries to shift to propane.

Prices had already narrowed in the previous quarters, according to analysts from HDFC Securities, Motilal Oswal and Emkay Global Financial Services.

"There is a likelihood of 17-18% impact on the propane prices in India after the cut by Saudi Aramco," Hazarika said. “Gujarat Gas may have to further cut the price of industrial PNG to remain competitive from July onwards."

The price of propane at present stands at Rs 39 per mmBtu as compared with Gujarat Gas' price of Rs 38.4/mmBtu. This is likely to fall by 17-18% and Gujarat Gas may be forced to cut prices.

Around 85% of industries using industrial piped natural gas to produce ceramics in Morbi region of Gujarat—supplied by Gujarat Gas—have dual fuel compatible furnaces and shift fuel on a regular basis.

Gujarat Gas had already cut prices of natural gas in the March quarter of 2023. That led to an increase in total volume to 8.9 mmscmd, up 22% sequentially.

The CNG volumes to Morbi in Gujarat (ceramic industry) rose on account of higher offtake by industries. However, the company took a hit on margin due to higher natural gas costs.

Apart from Gujarat Gas, there may be a positive impact on OMCs supplying LPG, since it's mostly imported by India. The petrochemicals sector may also benefit as propane is used to manufacture polypropleyne polymer.

Shares of Gujarat Gas fell 3.44% on Thursday as compared with a 0.38% drop in the benchmark Sensex.

Of the 32 analysts tracking the company, 18 maintain a 'buy' rating, seven suggest 'hold' and seven recommend a 'sell' on the stock.