State-owned Litro Gas says price hike was necessary

Litro Gas Lanka Ltd recently announced the price hike of a Litro gas cylinder (12.5kg) by Rs.245, following the approval from the Consumer Affairs Authority (CAA).
“The price increase was a necessity and a long overdue step that the company was compelled to take, owing to the volatile nature of the industry prices, which is largely determined by two key variables, namely the Saudi Armco contract price (CP) (announced on a monthly basis) as well as the country’s currency exchange rate,” Litro Gas said in a statement. 

The world gas prices went down by US $ 41.5 (approximately to 8 percent) during March 2018 and rose again marginally by US $ 2 in April 2018. However, the gas prices recorded a drastic increase of US $ 32 in May 2018. Experts predict that the May price hike signals a potential trend of continuously high prices.
In addition to this, the long-term volatility of the world prices combined with the fact that the Sri Lankan liquefied petroleum gas (LPG) companies were unable to implement a reciprocal price increase resulted in the requisite price increase of Rs.245 per cylinder. 

In 2012, the CP decreased by US $ 570, creating an opportune situation for the LPG industry players. Litro Gas took the step to pass on this benefit to consumers by reducing the price of a 12.5kg refill cylinder price by total of Rs.1,075 (from October 2014 to November 2016), which was a 55  percent reduction. Hence, the consumers enjoyed the benefits of the price reduction for two long years. 

However, from 2016 to 2017, the CP price increased by 42 percent and the company was unable to concurrently increase the price apart from a nominal increase of Rs.110 per cylinder. The world gas prices have been on a steady rise from October 2016. This resulted in negatively affecting the company’s ability to operate as a profitable state-owned company to contribute to the country’s economy. “Based on the Litro Gas price application made available to the CAA in February 2017, in line with the existing formula, the required price increase was Rs.219. At the time, the CAA allowed companies to increase the price of a 12.5kg gas cylinder by Rs.110, which only came into effect on September 26, 2017.

As a result of not being able to introduce the correct price adjustment, Litro Gas ended the financial year by recording a loss of approximately Rs.1.7 billion in the LPG-packed segment. The nominal increase of Rs.110 could not meet the required price increase, given the length of time that the industry was compelled to endure the rise of world prices,” Litro Gas said.

Since October 2017, until February 2018, the average CP hovered around US $ 564. Litro Gas took the initiative to submit a request for gas price increase to counter the difference based on the existing price formula calculated with ‘import data’ from November to December 2017. The company forwarded a further request based on the CP and import data from January to February 2018.

Following thorough consideration by the CAA as well as the Cabinet-appointed committee for Cost-of-Living, the company received the approval for an increase of Rs.245. However, this increase falls short of the requested increase of Rs.285 based on the existing price formula. 

“We have well-envisioned plans to expand our operations and increase profitability not only to maintain the profitability of the company but also to enhance our contribution to the country’s economy. As such, we will need to adopt a fair price formula to ensure the long-term stability of the company and simultaneously transfer any benefits of world gas price reductions to consumers in a timely manner. 

We are in constant dialogue with the CAA, Public Enterprises Ministry as well as the Treasury to adopt a well-defined strategy to successfully manage the current situation,” commented Litro Gas Lanka Limited/Litro Gas Terminal Lanka Limited Managing Director Muditha Peiris. 

Litro Gas is one of the biggest state entities that contributes to the national economy. Litro Gas contributed a hefty sum of Rs.8.43 billion to the Treasury last year alone. Apart from the sum invested in business expansion, the company’s profits are made available for nation building efforts.

The highest ever retail price for 12.5kg refill cylinder was recorded from January 2013 to October 2014 at Rs.2,396. The current price of a 12.5kg refill cylinder is Rs.1,676, which is still less than Rs.720, when compared to the highest ever retail price. 

“The most recent price increase of US $ 32 in May 2018 indicates the volatility of the world LP gas prices.  Hence, a long-term solution is required to adjust the local prices in line with the fluctuations in order to maintain the operational stability of LP gas companies. This further calls for a fair increase of gas prices as well as a feasible future strategy to decide gas prices such as the industry-based price formula, which has been proposed by the industry,” said Litro Gas Lanka Limited Director Sales and Marketing/Corporate Affairs Chaminda Ediriwickrama.

The gas price revision was a critical necessity, given the above facts and further measures are needed to maintain the profitability of the LPG companies in Sri Lanka while remaining fair to the consumers.