Minor impact from gas price hike expected

PETALING JAYA: The 2.3% increase in natural gas tariff for the non-power sector effective Nov 1, 2014 will have minimal impact on the steel and rubber glove industries, said Hong Leong Investment Bank Research.
Its analyst Mohd Fadzrul Mohd Salman said while the natural gas tariff hike announcement will have an impact on the local steel producers' production cost and as well as earnings, he believed that the higher energy cost will unlikely be passed through entirely therefore having minimal impact on the steel industry.
Maintaining a "neutral" call on the sector, he estimated that the natural gas hike will reduce FY15 net profit forecasts for the steel players under HLIB's coverage by less than 1% of their bottom lines.
This, he said, is assuming that the natural gas tariff will be raised by 2.34% across the board (ie users consume more than 750,000 million metric British thermal units (mmbtu) per year), and the higher energy cost is absorbed by the players.
HLIB also noted that the increase in gas price will have an insignificant impact on the rubber sector as natural gas makes up about 6% of rubber glove players' overall cost base.
"Based on natural gas contribution of 6% to total cost, the increase in cost of production caused by the slight revision will be very minimal at less than 0.5%.
"Hence, we believe that the impact will be insignificant," HLIB analyst Tan Sing Zou said in a separate report yesterday. Tan maintained a "neutral" call on the rubber glove sector as well.
On Wednesday, Gas Malaysia Bhd announced that the Government will raise natural gas tariffs for non-power sector in Peninsular Malaysia by 2.3% to RM19.65-RM20.11 per mmbtu depending on usage.
At the same time, Gas Malaysia also mentioned that the gas purchase price from Petroliam Nasional Bhd (Petronas) will be adjusted upwards accordingly, which shall take into account the prices of domestic (regulated) natural gas and the liquefied natural gas (LNG).
However, it did not mention the new purchase price.
Kenanga Research analyst Teh Kian Yeong said the tariff revision was on schedule for the first time since the Government set a timeframe for a half-yearly tariff revision in May 2011.
Since then, the first and only revision was implemented in May 2014. With this revision, Teh said, it highlighted the government's commitment to its subsidy rationalisation program.
"Although there is no mention of a new purchase price, we believe Gas Malaysia would still make the same profit margin spread as before.
"As such, this tariff revision is likely to have no impact to its bottom-line except resulting in higher revenue," Teh said.
Pointing to the May 2014 revision, he said, Gas Malaysia's margin spread was reduced slightly to RM2.01/mmbtu from RM2.02/mmbtu previously.
"Nonetheless, margin spread could be reduced further should the blended mix for LNG increase from 6% in the previous reference for purchase price of RM17.31/mmbtu.
"As such, we maintain our opinion that the utilisation rate could be a key determining factor to margin spread as it will affect the usage of LNG since the regulated gas supply is fixed at 382 million standard cubic feet per day (mmscfd)," Teh said.
Teh kept FY14-FY15 estimates for Gas Malaysia unchanged with "market perform" and targer price at RM3.54.