Industry Research LPG Wholesaler. Price Controls Support LPG Fuel Consumption. Executive Summary. Industry Outlook: Stable

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1 LPG Wholesaler Price Controls Support LPG Fuel Consumption Industry Outlook: Stable Executive Summary 3 November 212 Ruangwud Jarurungsipong ruangwud@trisrating.com Nopalak Rakthum nopalak@trisrating.com The consumption of liquefied petroleum gas (LPG) is driven by economic growth and price controls. LPG is not only a product necessary for cooking, but government price controls have made it a cheap energy source in Thailand. LPG consumption remained strong in 211, in spite of the severe flooding in the fourth quarter of the year. Consumption of LPG fuel rose by 1.3% to 4.29 million tonnes in 211. LPG is also increasingly used as automotive fuel, whenever oil prices rise. In 211, rising oil prices made LPG sales in the automotive segment surge to a record high of 92 thousand tonnes. Since 21, competition among LPG traders has been more intense, especially in the automotive segment. More newcomers have entered the automotive segment and now fight for market share. The new competitors are drawn by the segment s bright prospects and few barriers to entry. In the first six months of 212, Siam Gas (SGP) held the largest market share in the automotive segment, with 24.3% of LPG sales, followed by World Gas (23.7%), and PTT (11.5%). LPG price controls have encouraged Thai people to consume LPG and have distorted fuel use in Thailand. Recently, the government partly liberalized LPG retail prices in the industrial and automotive segments. However, LPG in the cooking segment remains under price controls. LPG consumption will be significantly reduced if the government allows the retail prices of LPG in all segments to rise to market price levels.

2 Sources and uses of LPG LPG is a hydrocarbon product, which mainly consists of propane (C 3 H 8 ) or butane (C 4 H 1 ) or a combination of the two. Because of its heating value, purity, and clean combustion, LPG is used as a cooking fuel for households, as fuel gas in industrial production processes, as vehicle fuel for the transportation sector, and as a feedstock for the petrochemical industry. LPG can be produced domestically from natural gas processing and petroleum refining. However, due to a huge increase in demand for LPG in recent years, Thailand has needed to import LPG, bringing in around million tonnes in , up from 753 thousand tonnes in 29. Chart 1: LPG Consumption in Thailand by End-use Segment million kilogram 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, Automobile Industry Cooking Source: Energy Policy and Planning Office (EPPO) LPG consumption is affected by economic growth and price controls Among the uses of LPG as a fuel gas, LPG in Thailand is consumed mainly by households for cooking. In 211, LPG used for cooking accounted for 61.9% of total consumption, followed by LPG consumed as a fuel in the automotive segment (21.4%), and as a fuel in the industrial segment (16.7%). In 211, consumption of LPG fuel rose by 1.3% to 4.29 million tonnes, mainly due to the continuous growth in consumption in the cooking segment. LPG is not only a product necessary for cooking but it is also a cheap energy source in Thailand. LPG consumption remained strong in 211, in spite of the severe flooding in the fourth quarter of the year. During 211, the quantities of LPG used in the cooking and automotive segments increased by 9.1% and 35.3%, respectively. However, in 211, LPG used by manufacturers for industrial production contracted by 7.8%. The reason for the decline was because the retail price of LPG in this segment began to gradually float in July 211. TRIS Rating 2 3 November 212

3 Demand for LPG fuel, especially a cooking fuel, is correlated with income growth and population growth. Along with Thailand s economic expansion, per capita LPG consumption in the fuel segment has grown continually, rising from 29 kilograms (kg.)/person/year in 2 to 67 kg./person/year in 211. In the long term, the demand for LPG will increase as incomes rise and the population grows. Chart 2: LPG Demand Growth and Income Growth % M LPG Consumption Growth GDP Growth Sources: 1) EPPO 2) National Economic and Social Development Board (NESDB) LPG is increasingly used as automotive fuel LPG is a substitute for gasoline. As such, demand for LPG in the automotive segment has increased every year since 25, except in 29. The annual growth rates in the automotive segment have been quite high, an averaging 24.2% growth per year over the past seven years. The reason for the rapid growth is because the price of LPG is maintained at a relatively low level by the government. In 211, rising oil prices made LPG sales in the automotive segment surge to a record high of 92 thousand tonnes, eclipsing the previous peak of 776 thousand tonnes in 28. The increasing use of LPG as an automotive fuel is evidenced by the increases in the numbers of LPG fuel stations across the country. In 211, there were 1,37 LPG fuel stations, up 18.% from 879 stations in 21. The number of stations increased to 1,72 in the first half of 212. TRIS Rating 3 3 November 212

4 LPG demand is expected to grow in 212 and 213 For the first six months of 212, demand for LPG fuel increased 9.8% year on year (y o y). In addition, LPG consumption in the automotive and cooking segments increased 24.9% y o y and 14.5% y o y, respectively, whereas consumption in the industrial segment dropped 21.9% y o y. The changes in consumption were mainly due to the economic recovery after last year s flood, rising oil prices, and the price deregulation in the industrial and automotive segments. In the first half of 212, gross domestic product (GDP) grew 2.2% y o y while the Dubai crude oil price increased 5.4% y o y. The Bank of Thailand (BOT) expects the Dubai crude oil price in 212 to average US$18 per barrel, up from an average price of US$16.3 per barrel in 211. Also, the BOT forecasted that the GDP growth rate will be 5.7% in 212 and slow to 4.6% in 213. We thus expect demand for LPG in 212 to continue increasing. LPG consumption in 213 may grow, but at a slower rate. Big three wholesalers dominate the market amid intense competition Currently, there are three major LPG wholesalers in Thailand. LPG brands are created to differentiate the products and represent the wholesalers. There are barriers for new entrants, such as strict regulations to control product quality and safety, and economies of scale. The strong established distribution networks of the existing wholesalers, which include long term relationships with filling stations and retailers, also serve as a barrier to entry. In the first six months of 212, PTT had the biggest market share with 38.9% of LPG sales. Other wholesalers include SGP (the owner of the Siam Gas and Unique Gas brands with 26.7% market share), World Gas (18.7%), and others (15.7%). These wholesalers compete in three key market segments: the cooking, automotive, and industrial segments. In the cooking segment, PTT is the market leader, commanding 44.9% market share, followed by SGP and World Gas. SGP is the leader in the automotive segment with a 24.3% share, while PTT is the leader in the industrial segment, holding a 57.% market share. Since 21, competition in the automotive segment has been more intense because newcomers are fighting for market share. More newcomers have entered this market segment, drawn by the segment s bright prospects and few barriers to entry. Low distribution costs and economies of scale are the key success factors for LPG distributors. Good service records and product reliability are also important in order for a distributor to maintain its market share. Furthermore, there is a certain degree of substitution from alternative fuel sources, such as oil, electricity, and natural gas. In the automotive segment, competition from natural gas for vehicles (NGV) may intensify in the medium term, due to government s efforts to support NGV users. TRIS Rating 4 3 November 212

5 Table 1: LPG Market Share by Wholesalers and by End-use Segment in Jan-Jun 212 Unit: % Operator Cooking LPG Automotive LPG Industrial LPG Total LPG PTT SGP World Gas Others Total Source: EPPO Chart 3: LPG Saudi Aramco Contract Price and Dubai Crude Oil Price 1,25 1,21 2 US$ per metric ton 1, US$ per barrel Jan 4 Jul 4 Jan 5 Jul 5 Jan 6 Jul 6 Jan 7 Jul 7 Jan 8 Jul 8 Jan 9 Jul 9 Jan 1 Jul 1 Jan 11 Jul 11 Jan 12 Jul 12 LPG (US$/metric ton) Dubai Crude Oil (US$/barrel) Sources: 1) LPG Australia 2) Energy Information Administration (EIA) 3) Thaioil PLC LPG industry is regulated through price controls The LPG industry is strictly regulated by the government. LPG equipment and cylinders must comply with safety guidelines set by the Department of Energy Business (DOEB). LPG wholesalers are required to be oil traders licensed under Section 7 of the Oil Fuel Trading Act B.E (A.D. 2). To get a license as a Section 7 oil trader, wholesalers must meet many qualifications, such as having at least Bt5 million in registered capital and Bt1 million in working capital, having domestic sales volume of at least 5, tonnes per year, owning a gas storage facility, and supplying more than one million cylinders for circulation in the market. TRIS Rating 5 3 November 212

6 Moreover, to protect consumers rights, the Department of Internal Trade monitors the marketing margin and the retail price of cooking LPG. World LPG prices generally move in line with crude oil prices. The Saudi Aramco Contract Price for LPG (CP) is widely used as a reference price upon which producers and wholesalers base negotiations. However, to manage domestic LPG prices, the Thai government has determined marketing margins for retailers in the cooking segment and has subsidized LPG wholesale prices at PTT s storage terminals. Since March 28, the wholesale price of LPG has been fixed at Bt13.69 per kg. The price originated directly from fixing the domestic ex refinery price at US$333 per tonne. This policy, however, has distorted demand for fuel in Thailand. Domestic LPG consumption rose abnormally fast despite higher fuel costs in the global market. Since April 28, the Energy Ministry has imported LPG through PTT to ease a supply shortage. In January 211, the Energy Policy Administration Committee raised the domestic ex refinery price for refineries to be in line with global prices. The price rise was intended to encourage domestic refineries to supply more LPG and cut down on imported gas. Therefore, a new LPG price formula was established to set the ex refinery price. The formula is based on a weighted average of the capped LPG price (24% weighting) and the monthly CP (76% weighting). The capped LPG price is currently US$333 per tonne, while the CP floats according to worldwide demand and supply. To fix all domestic LPG prices as before, the Oil Fund is used to subsidize the refineries for the price difference between the new pricing formula and the old pricing formula. The government has planned to float the LPG wholesale price since 24. However, the plan has been continually delayed. On 3 September 211, the National Energy Policy Council (NEPC) fixed the retail price of LPG in the cooking segment at Bt18.13 per kg., and extended the expiration of the fixed price regime until the end of 212. In 211, the NEPC also set new plans to gradually raise the retail prices of LPG in the industrial and automotive segments. Since June 212, the retail price in the industrial segment has been partially floated and it now matches worldwide prices, as long as the price does not exceed Bt3.13 per kg. For the automotive segment, the government has been gradually deregulating the retail price starting from January 212. At the end of August 212, the price was Bt21.38 per kg., having risen by Bt3.25 since the beginning of the year. LPG wholesalers rated by TRIS Rating (as of Nov 212) Company Rating Outlook Siamgas and Petrochemicals PLC (SGP) BBB+ Stable TRIS Rating 6 3 November 212

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