1. 28 Business Today FEBRUARY 2015 www.businesstoday.co.om
INDUSTRY
The recent hike in natural gas prices has been a rude
shock for industry, but observers believe it won't make
much of an impact in the long run
By Maheswaran P
Sharp decline in global crude prices has
put budgetary pressure on every econ-
omy in the Middle East including
Oman. Anticipating that the prices will
remain soft in 2015, the sultanate has
projected a 5.5 per cent decline in oil
revenues in its budget and to mitigate
this loss the country is now looking at
other avenues to increase its revenues.
One such initiative is doubling of the
price of natural gas for industrial estates
and cement companies, which kicked
off on January 1.
The Ministry of Finance in November
last year had sent a letter to the compa-
nies detailing the decision stating that
the prices will be increased from
US$1.50 per million British thermal
units (mmbtu) to US$3/mmbtu. Further
to this, there will be a three per cent
increase every year. Until now natural
gas in Oman was priced almost at par
with the regional economies, but with
the latest development, the companies
are now being charged at a premium
compared to its competitors in the
neighbouring countries.
Natural gas for domestic buyers in
UNWELCOME
Gas price/E1:BusinessToday 1/28/15 3:41 PM Page 1

2. www.businesstoday.co.om FEBRUARY 2015 Business Today 29
Saudi Arabia is the cheapest at
US$0.75/mmbtu followed by
Kuwait at US$0.8/mmbtu, while
the UAE and Qatar charge
US$1/mmbtu. Bahrain, another
economy like the sultanate with
one of the lowest oil reserve
buffers in the GCC, currently
charges US$2.25/mmbtu and is
expected to hike the price from
April 1.
The renewed price in Oman is
closer to that in the international
markets with the average price in
2014 being US$4.26/mmbtu.
Industries worried
The new decision has shocked
most companies as some of them
were expecting a maximum
20 per cent increase per year and
then the three per cent annual
hike after four years. The biggest
impact of this decision will be
seen in gas intensive industries
that represent a broad spectrum
of sectors ranging from FMCGs to
building materials, which includes
cement, tiles and glass manufac-
turing industries. Oman Cement
and Raysut Cement, where gas
remains the major feedstock, are
two of the major listed companies
that will be affected. Majan Glass,
Al Anwar Ceramics and Al Maha
Ceramics will also be impacted
due the price revision.
Both cement companies had
said in a filing to the MSM that
the hike in natural gas price will
increase their cost of production.
Oman Cement said its costs will
increase by RO2.1mn in 2015
and would try to minimise the
impact by improving productivity,
restructuring pricing and reducing
other costs. Raysut Cement said
its costs will rise by three per cent
this year adding that it will try to
offset the impact of higher gas
prices by making cost reductions,
improving efficiency and restruc-
turing the prices.
Arvind Bindra, CEO of Al Maha
Ceramics says the additional cost
of natural gas will impact the pro-
jected net profits of 2015 to an
extent of five per cent. A Suresh,
CFO of Al Anwar Ceramics, says
the hike will lead to a rise in the
company's cost of production by
around RO7,50,000 for the year
2015. Both companies are look-
ing at various cost control meas-
ures and also at rationalising the
prices wherever possible to offset
the increase in cost of production.
Hasty decision
Companies feel that the price
hike should have been done in a
phased manner as they would
SURPRISE
Saudi
UAE
Oman*
Qatar
Kuwait
Bahrain**
$0.75
$1.00
$3.00
$1.00
$0.80
$2.25
GAS
PRICES
INGCC(per mmbtu)
*Recently raised from $1.5
**prices are set to rise from April 1
From Industry Sources
THE ADDITIONAL COST OF NATURAL GAS WILL IMPACT THE PROJECTED
NET PROFITS OF AL MAHA CERAMICS IN 2015 TO AN EXTENT OF 5%,
SAYS ARVIND BINDRA
Gas price/E1:BusinessToday 1/28/15 3:41 PM Page 2

3. have got adequate time to build a
course of action to minimise its
impact on their performance.
A top management official
from one of the affected compa-
nies, who didn't want to be quot-
ed, feels that while the energy
cost world over has decreased,
companies in Oman are being
burdened with higher gas cost.
He adds that they would become
uncompetitive from now on and
it would worsen further in the
long run.
Joice Mathew, head of
research at United Securities
believes that the decision was tak-
en hastily to make up for the lost
revenue from oil price decline.
“The government had an
option to increase the gas price in
a systematic manner as it was
done for the large industrial
establishments a couple of years
ago. Such a move would have
been less shocking to sharehold-
ers and customers and it would
have left more room for compa-
nies to plan for the long term
contracts.”
Bindra also agrees that the
increase of natural gas price in a
phased manner would not have
affected the performance of com-
panies severely and it would have
given them more time to improve
their internal processes and
enhance their efficiency.
He says, “The impact of this
hike would be very severe for
industries whose energy cost is
significant in their overall cost of
production and for companies
which operate with low profit
margins.”
Earnings impact
According to stock market
experts, the total impact of the
price hike on the 2015 earnings
of listed companies is estimated
to be in the region of RO13-
14mn, which is about 0.1 per
cent of the government’s
revenue from the 19 listed indus-
trial establishments.
Kanaga Sundar, head of
research at Gulf Baader Capital
Markets believes going forward,
the hike would remain one of the
major impediments to Oman's
industrial sector in terms of entry
in to export markets and remain-
ing competitive compared to oth-
er regional players.
“Overall we believe this would
have short to medium term nega-
tive impact on the earnings of the
industrial sector companies. We
need to look at how these com-
panies would be able to mitigate
the cost escalation going for-
ward,” he adds.
Mathew says the impact to
industrial sector profitability and
the degree of impact will vary
from company to company.
“Cement companies are the
most affected in terms of absolute
numbers, but there are profit
making companies who are ener-
gy intensive and might end up in
reporting a loss only due to the
increase in gas price. I think there
will be an impact of around
18 per cent to the profits of 19
listed companies who are using
natural gas as feed stock. This will
be close to 2.5 per cent of their
revenues.”
V Sundaresan, director and
CEO of The National Detergent
Company, also believes that the
price hike won’t have a significant
impact in the long run. “Doubling
of gas price will certainly increase
our production cost. But it is not
substantial to cause a crippling
impact to our operations and
profitability in the long run.”
Passing on the cost
Market analysts believe that the
price hike could have a trickle
down impact as these companies
try to pass on the cost to cus-
tomers. They believe that the
competition will be more pro-
nounced for cement companies
who are already facing stiff com-
30 Business Today FEBRUARY 2015 www.businesstoday.co.om
INDUSTRY
DOUBLING OF GAS PRICE WILL CERTAINLY
INCREASE OUR PRODUCTION COST. BUT IT IS
NOT SUBSTANTIAL TO CAUSE A CRIPPLING
IMPACT TO OUR PROFITABILITY IN THE LONG
RUN, SAYS V SUNDARESAN
Gas price/E1:BusinessToday 1/28/15 3:41 PM Page 3

4. www.businesstoday.co.om FEBRUARY 2015 Business Today 31
petition from regional suppliers.
Mathew thinks that most of
these companies will try to pass
on this increase, which may cause
inflationary pressures in the
economy. However, he adds that
cement companies will find it
difficult to pass on the cost
increases to customers due to
competition and take the hit on
their bottomline.
Some companies may also not
be able to pass on the costs to
customers owing to Public
Authority for Consumer Protec-
tion (PACP) regulations. Sundar
says, “The PACP has been
extremely cautious and has not
allowed to pass on the previous
price increase to customers. This
means, any price revision has to
go through a rigorous process
with the PACP.”
Bindra, however, says he is
looking at this option. “We are
working on plans to pass on some
price hike in selected product and
market segments and may be
able to partially pass on the price
hike to some customers in select-
ed geographies.”
Suresh says that the company
would consider rationalising the
prices wherever possible. Howev-
er in the given global and region-
al scenario, he adds that a price
hike will be difficult especially for
products in the markets his com-
pany caters to, due to low cost
imports and increase in capacities
by tile manufacturers in the GCC.
Export issues
The hike in gas prices will also
have a direct impact on exporters
as competitors from other coun-
tries could further reduce their
prices owing to lower gas cost.
Sundar says that the competitive-
ness of certain export oriented
industries would be affected over
the short to medium term, as
other countries in the region
continue to provide subsidies to
their industries.
Bindra says that the profit mar-
gins in exports are expected to
reduce in certain markets which
are more competitive. He hopes
to increase the overall exports
after capacity expansion which
will reduce the overall cost of pro-
duction. However, Mathew
believes it won't have much of an
adverse impact as Oman’s indus-
trial firms enjoy a good reputation
for its high quality products, and
the customers are ready to pay a
premium for them.
Long-term contracts
Another major area of concern
among industries is regarding
long term contracts. Most compa-
nies will have to incur losses if
they continue with the existing
agreements. “As per our under-
standing and also interactions
with the management of listed
companies, the PEIE has increased
the gas price for all the existing
industries operating in the indus-
trial estates. This in turn has
impacted the companies operat-
ing under the existing long term
contracts,” says Sundar.
Mathew on the other hand
believes this won't have much of
an impact on the long term con-
tracts of the companies as there
might be provisions to mitigate
such an impact. He believes that
many of the companies have
already initiated negotiations with
their customers to increase the
price of their products.
Overall the general consensus
is that it would have been better
had the government hiked the
gas prices in a systematic and
phased manner as it would have
given companies some breathing
space. Having said that both
industry and observers strongly
believe that there won't be much
of an impact in the long run as
companies can offset this price
hike by higher operational effi-
ciency and better management. g
I THINK THERE WILL BE AN IMPACT OF AROUND
18% TO THE PROFITS OF 19 LISTED COMPANIES
THAT ARE USING NATURAL GAS AS FEED
STOCK, SAYS JOICE MATHEW
Gas price/E1:BusinessToday 1/28/15 3:41 PM Page 4