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Thursday September 29th, 2022

The management team at Litro Gas resolve the LPG crisis, secures future supplies

Chairman of Litro Gas, Muditha Peiris

The incumbent Chairman of Litro Gas Muditha Peiris and his management team have reversed a severe LPG crisis, restored supplies, and even reduced prices after taking affirmative steps to contain costs and secure supplies to meet the demand for the rest of the year. In this interview with EconomyNext, Peiris shares insights into the timely corrective measures adopted by his team. “We took the approach that Litro had a duty to ensure that people had access to cooked food and industries had enough energy to keep the wheels of the economy turning. We had to fulfil our obligations at any cost,” Peiris said, leading efforts to normalize LPG supply and distribution, having successfully turned Litro profitable in the process.

Can you briefly give us an idea about Litro and its importance to the economy?

As the national LP Gas Provider, Litro has a share of over 90% of the market. Sri Lanka depends on imported Liquefied Petroleum (LPG). Over 95% of the local requirement is imported. Litro has five main products in the market. It supplies four sizes of cylinders, 2.3kg, 5kg, 12.5 kg and 37.5kg and the bulk segment. Currently, over five million cylinders of Litro are in circulation. The industrial sectors which depend on LPG are mainly tiles, confectioneries (biscuits, cakes), rubber, and glass. In addition, the restaurant and hotel industry depends on LPG. Indirectly LPG plays a major role to keep household fires burning and contributes significantly to the above-said industries for both local consumption and exports.

Let me take this moment to share a few milestones in the company’s long journey as a significant economic agent in Sri Lanka.

The journey began 154 years ago when the Colombo Gas and Water Company Ltd was established in the UK in 1868. In 1995, it was privatized with the formation of Shell Gas Lanka Ltd. In November 2010, Sri Lanka Insurance Corporation Ltd (SLIC) bought back Royal Dutch Shell’s stake in the partly-privatized gas company, Shell Gas Lanka Ltd. Following the buyback, Litro Gas Lanka Ltd was formed by Sri Lanka Insurance Corporation Ltd, its majority shareholder. Litro Gas Lanka Ltd has a storage LPG facility of over 450MT in Mabima. In 2010, SLIC also purchased the Shell-owned LP gas storage terminal in Kerawalapitiya. The LP gas storage terminal was re-named Litro Gas Terminal Lanka (Pvt) Ltd and is the sister company of Litro Gas Lanka Ltd. The company has an 8,000MT LPG storage terminal in Kerawalapitiya and a 3,000MT storage facility with a terminal in Hambanthota. Litro Gas Lanka Ltd invested in shares of Canwill Holdings in 2012, and now the company holds a 27% stake in Canwill Holdings, while Sri Lanka Insurance Corporation Ltd holds a 46% stake. The company diversified its business by venturing into Litro Fuels in July 2018, opening two fuel stations in the rest area of the Southern Expressway in Welipanna.

How do you explain the evolution of the crippling LPG shortage in the market?

Litro has been supplying uninterrupted supply to the market till mid-March 2022, after which the company was finding it difficult to source foreign exchange and also generate liquidity to source products. Banks were not willing to lend to the company and we supplied products at less than the direct cost. In 2020, the company had a cash surplus of over Rs9.2 billion but this was fully utilized due to the losses made in 2021 which was Rs10.1 billion before tax. The company which had a cash surplus needed working capital to run its day-to-day operations due to this reason. This resulted in the company having to look for borrowing.

In addition, the Sri Lankan economy was facing a severe shortage of US dollars in reserve and banks were restricted from opening new Stand-By Letters of Credit (SBLC). The supply that Litro could secure for April 2022 became very less. This continued to May 2022, and finally, after a tender was floated, the request by the suppliers who had the best bid was an SBLC which the company was unable to provide due to the economic situation. This delayed the process of ordering fresh supplies. In addition, the competitors in the market also stopped supplying, and Litro was burdened with the supply of their share of the market, which was around 20%.

After April 2022, the inevitable, but avoidable, thing happened. The company was not able to provide uninterrupted supply to the households.

This led to consumers queuing and also the product being sold on the black market at very high prices. Households, unable to source the product, started hoarding the cylinders. Consumers who were used to the convenience of using cooking gas were forced to look for alternative sources of energy. However, Litro continued to supply the product to essential services like hospitals, cemeteries, apartment complexes, and the industrial and export sectors despite the shortage and the difficulties the company faced. As a result, the adverse impact on the industrial sector of the economy was contained to a minimum

Can we explore how the unfolding economic crisis is impacting Litro?

As LPG is imported, the monthly requirement of US dollars ranges from $27.5 million to $30 million. Sourcing this is a challenge. The banking sector is unwilling to open SBLC and suppliers are reluctant to offer credit. Currently, the product is sourced mainly through 100% advance payments. In addition, due to the fuel crisis, operating the plant is a challenge as staff transport has to be managed, and the distribution of cylinders is managed and planned meticulously.

Are you suggesting that the gas shortages could have been avoided?

The LPG shortage could have been mitigated if decisions were made faster by the leadership, and more importantly if the US dollars were allocated firmly for LPG due to it being an essential product. Delayed decision-making due to inconsistent and weak leadership certainly exacerbated the LPG crisis. The liquidity position of the company was adversely impacted because the authorities had not allowed a revision of pricing according to the global market prices.

How did Litro go about fixing the problem and finding a sustainable solution?

We took the approach that Litro had a duty to ensure that people had access to cooked food and industries had enough energy to keep the wheels of the economy turning. We had to fulfil our obligations at any cost.

As soon as I assumed office as Chairman of Litro, the new management team firm action to contain the crisis, secure LPG supplies and resume distribution with the guidance and support from the President’s Office and Treasury. We introduced measures to contain costs and quickly turned Litro into profits by August.

We awarded a short-term tender to a supplier who accepted flexible payment terms. The short-term tender quantity is adequate for approximately 3.5-4 months.

To strengthen the supply, the World Bank funding under the CERC programme has helped the company immensely. The company was able to receive this credit line due to the focus and consistent performance of the team who handled the negotiations led by the Director of Finance.

As the Chairman, I trusted my officers and their performance capabilities and guided and gave them the leadership to do what their best at. Also, I was required to plan the way forward and ensure the product came ASAP to the Sri Lankan shores.

As soon as the supply tender was finalized, I got involved to ensure we get product consistently in July and nominated a quantity of 33,000 MT. We managed to get the first delivery on the 11th of July 2022. Since then, ships have been arriving continuously and we have delivered over 2.2 million cylinders of all sizes in addition to the 4000MT+ delivered to the bulk customers. We implemented a new sales strategy by delivering to a large number of consumers from playgrounds and other sites where over 1,000 customers could gather and purchase the product. By the 1st of August, all queues were addressed and currently, our distributors are filling the interior dealers.

These measures enabled us to reduce prices for domestic LPG products in early August 2022. A 12.5kg canister of LPG was reduced by Rs246, 5kg cylinders were reduced by Rs99 and 2.3kg cylinders by Rs45. This was possible because of the cost-cutting measures we adopted enabling us to reduce prices to reflect the reduction in world gas prices. We managed to convince the authorities to put the current pricing formula in place, and consumers benefited from this.

What Initiatives have you taken to place Litro and domestic LPG supply on a firm footing?

Securing World Bank funding was a breakthrough as I already mentioned. We have secured a short-term LPG contract for 100,000MT and floated a term contract for one year and this is already in the process with bank credit lines secure to service the one-year contract. Also, to ensure adequate liquidity, a pricing formula with a fixed margin is being finalized. We are closely monitoring the Distributor network to ensure products are received by end consumers and we set up a 24 CSC call centre that is well placed to handle product requirements.

What is your outlook for the LPG industry? 

The global LPG market is predicted to develop at a compound yearly growth rate of 4.91%, from $109.5 billion in 2020 to $153.2 billion in 2026. The Covid-19 pandemic has had a negative influence on global demand for LPG, particularly in the commercial sector and hence on its growth rate. Residential demand for personal consumption purposes such as household cooking on the other hand soared. Overall, demand for LPG has been forecasted for healthy growth in the future years. Asia Pacific is expected to be an appealing region for the global LPG market, as the region’s population continues to grow, resulting in increased demand for LPG, particularly in China, India, and Japan. In addition, the cost-effectiveness of investments in industrialization and urbanization in these developing countries is driving the growth of LPG demand in the Asia Pacific region over the projection period.

How can Sri Lanka ensure stable gas supplies? Is there a case for fair competition and fair pricing?

For competition to be fair, the authorities should ensure that LPG businesses should be managed as commercial enterprises. This way the private Company will also be able to do the pricing competitively. When the prices are controlled, and companies are forced to make losses, no individual can take on the burden. Even for Litro, this mechanism applies. Currently, a Pricing formula is in operation this will create fair pricing for both the consumer and the companies.