India’s LPG imports for public and private sector demand are projected to jump to more than 8 million mt in fiscal 2014-2015 (April-March) from 6.3 million mt in 2013/14, after the government raised the number of subsidized cylinders early this year, India-based traders said Wednesday.

The government early last year bowed to political pressure and increased the subsidy cap to nine after it was set at six cylinders in September 2012.

This was followed by the Cabinet Committee on Political Affairs’ approval January 30 to further raise it to 12 subsidized cylinders a household can receive.

Compared to negative demand growth in the first quarter of the last fiscal year, growth this year is forecast at double digits, traders said. Official data showed a 12.3% jump in Q1 demand to 4.03 million mt versus 3.59 million mt during the same period of the last fiscal year.

“If this momentum continues due to the relaxation of restrictions on subsidized cylinders, demand for LPG from public sector undertakings is likely to touch nearly 18 million mt/year,” one source said, calculating this based on H2 sales being normally higher than in H1 by nearly 10%.

Demand for the rest of the year is projected to expand well above 15%, he added.

“As local production capacity is likely to stay stagnant at around 10 million mt, the imports by PSUs will touch 8 million mt and the private sector would probably bring in another 0.5 million mt, taking the total import to well above the 8 million mt mark,” he said.

In June, LPG sales rose 11.5% year on year to 1.32 million mt versus 1.18 million mt in June 2013, but were down 5.6% from May, official data showed.

An Indian Oil Corp. executive recently said Indian LPG imports will continue to grow even if the new Bharatiya Janata Party government proceeds with plans to reduce subsidies for consumers.

LPG imports are projected to rise to 9.2 million mt by 2019/20, or a compound annual growth rate of 18% from 2013-14, without taking into account the impact of subsidy cuts, and if the government cuts subsidies, imports are estimated at 8 million mt, the executive said.

The trade source said long-term import projections would depend on how much indigenous production is being added. “We do not see too much additional refining capacity coming up, as there is excess capacity already,” he said.

SUBSIDY BURDEN

The only uncertainty affecting imports would be state refiner MRPL ramping up LPG production, as it has a swing capacity of 700,000 mt/year recently added to its refinery, he said.

“If the current rate of demand expansion continues, then the figure of 9 million mt/year could be breached in the next couple of years itself, as all incremental demand would have to be met through imports,” the source said, adding that LPG demand in India is price inelastic due to the heavy subsidies.

“The federal government did not make any announcement in the budget about controlling the runaway LPG growth by curbing subsidized cylinders owing to elections in some important states which are slated towards the end of the year,” he said.

“It seems to be a repeat performance of the previous Congress Government which kept delaying the decision because of some election or the other and got into a fine mess. The only reassuring point for the government is the stable prices as otherwise the impact could be hurtful to its finances.”

Sources said recent record high VLGC freight rates around $140/mt would not have an impact on Indian imports, as Indian oil firms have time-chartered vessels. Rates have eased back towards $120/mt this week.

“In fact India is one of the reasons for the tightness in shipping, as ships are waiting indefinitely at the harbors for discharging,” one source said, referring to congestion at Indian ports which crimp up vessel supply.

Healthy Indian imports, of which butane makes up 60% and propane 40%, as well as North Asian petrochemical demand, are among the factors keeping Asian prices above $900/mt since April.

However, in recent days prices have dipped below $900/mt, as Japanese utilities demand has waned during summer, while supplies were abundant with expected flows from the US, West and North West Africa as well as cargoes being resold by Chinese and Japanese importers, traders said.

ICRA Research, an associate of Moody’s Investors Service, said in a recent report high LPG subsidies would continue to be a major issue even after diesel price deregulation.

While diesel under-recoveries should decrease by around 60% year on year to Rupee 260 billion ($4.31 billion) in fiscal 2015, LPG under-recoveries are expected to rise by 54.2% year on year to Rupees 324 billion in H2 of fiscal 2014, from Rupees 210 billion in H2 of fiscal 2013.

“LPG demand growth is expected to remain high due to increased cap of subsidized cylinders, which tend to encourage the diversion of domestic LPG for auto-LPG and commercial LPG purposes (where prices are deregulated and almost double that of subsidized domestic LPG),” it said.

The under-recovery on domestic LPG has more than doubled to Rupee 465 billion in fiscal 2014 from Rupee 195 billion in fiscal 2011, following robust demand growth of 5-9% during the three years, except for 1.6% growth in fiscal 2013, along with non-revision of domestic LPG prices.

ICRA said it expects the share of domestic LPG in total under-recovery to increase from 25% in fiscal 2013 and 33% in fiscal 2014 to around 46% in fiscal 2015 due to an increase in the subsidy on domestic LPG.

Source: Platts