Sri Lanka’s Laugfs Gas pin hopes on new formula to end LPG price controls
ECONOMYNEXT – Sri Lanka’s Laugfs Gas Plc is expecting a new price formula to end price controls that has left the sector is large losses, whenever global prices rise or the rupee collapses, though global prices are moving down.
Benchmark prices for propane and butane, the key ingredients of liquefied petroleum gas, has fallen from the third quarter of 2018.
Sri Lanka’s economy has been characterized by monetary instability and price controls for many years, which are key constraints for living standards and growth.
"..[W]e will continue to engage with the Consumer Affairs Authority to exercise the price formula in a consistent manner the new pricing formula expected to bring in shortly," Laugfs Chairman W.K.H. Wegapitiya told shareholders in the annual report.
"Price regulation of LPG in the local market remained a key consideration as it did not move with global markets which moved up sharply during the year, resulting in decreasing operating margins.
"LPG price have declined since reaching a peak in September 2018 although the lag effects of price changes are evident in the financial performance of the Group."
Due to price controls the firm says it has been cautious about growing the Sri Lanka market.
"In Sri Lanka, low penetration levels presented an opportunity while the price ceiling deterred growth," Wagapitiya said.
"We have carefully managed to increase our penetration into the market by targeting appropriate customer segments that supported increased penetration while enabling us to manage profitability.
"This has been a key challenge during the year as we needed more flexibility to accommodate fluctuations in LPG prices in global markets."
Laugfs said it is looking for ways to cut debt including through strategic partnership. The firm had borrowed and invested in infrastructure.
Laugfs also has operations in Bangladesh.
The falling prices had allowed the energy sector to post profits of 47 million rupees in the year to March from 769 million rupees last year.
The Saudi Aramco contract price for propane hit 655 dollars a tonne in October 2018 amid rising oil prices, and fell to 445 by December.
The Butane price which also hit 655 fell to 415 rupees by December. In August 2019, propane was 370 US dollars a tonne and Butane 360 dollars a tonne.
But Sri Lanka will not fully benefit from the price falls due to monetary instability from a money printing central bank which has depreciated the currency.
There have been calls to reform the central bank to reduce its room to generate monetary instability through a highly unstable soft-peg which is called a ‘flexible exchange rate’, with multiple convertibility undertakings. (Colombo/Aug06/2019)