When Bashundhara LP Gas Limited pioneered as the country's first private investor to bottle and market liquefied petroleum gas (LPG) in 1999, the prospect of the business looked very bright as most of the country's population did not have access to modern cooking fuel.
Today, 54 companies have obtained licenses – out of which two dozen are in operation. They have pumped $1.17 billion into the country's LPG sector.
While this investment should be rewarding – the reality is just the opposite.
The LPG investors are struggling to keep their nose above the water due to an unhealthy competition among the companies in a market that is yet to be ready to switch from traditional cooking fuel.
Due to this competition, the companies are selling a 12kg LPG cylinder for a price of around Tk2,000, which includes Tk400-700 for each cylinder that can be reused for three to five years.
But the cost of an imported cylinder itself is between Tk2,000 and Tk2,500 – a price that is being subsidised by the companies to attract consumers. In addition, the LPG companies also pay a 5 percent VAT on each sale.
Besides, the companies presently pay a 35 percent import duty on the cylinders that used to be only 10 percent.
Some buyers are selling off the cylinders to scrap shops and going back to LPG shops to buy a new one for just Tk400, according to the owner of an LPG company.
"New companies have come up with investments in an unplanned way without assessing the actual market demand. Hence, their business capacities have remained unutilised," said Shamsul Haque Ahmed, chief executive officer of Omera LPG.
Investors are now swallowing losses with the hope that one day they would turn around.
"The only way to turn around the business is to take it to the grassroots. Around 95 percent of the rural households are still using wood and straw for cooking," Shamsul said.
Jakaria Jalal, Bashundhara LP Gas Limited's head of sales, said there should be some strict rules regarding the licencing of new companies.
He said, "In our neighbouring country India, only three to four companies are running this business. But in Bangladesh, the authorities have issued licences to about 54 companies who have come into operation all of a sudden."
However, the authorities believe high competition is necessary for the benefit of consumers.
"We keep the market open for all to ensure competitiveness and benefit consumers," said Abu Hena Md Rahmatul Muneem, senior secretary to the Energy Division of the Ministry of Power, Energy and Mineral Resources.
LPG expert Mohammed Saidul Islam told The Business Standard that the LPG sector had turned into a death trap.
"If a company invests a little, it cannot survive. However, if it invests a lot, it will not be able to make profits. A company makes at most Tk150-200 from each cylinder, but the money is spent on different costs, such as utility, administration, maintenance and distribution," he added.
The LPG market grew significantly since 2009 after the government stopped providing pipeline gas connections to households. Annual LPG consumption shot up to 7 lakh tonnes as of now from a paltry 45,000 tonnes in 2009, according to the Energy Division's latest annual report.
The total number of users has increased up to 38 lakh. The sector has built a capacity of supplying 2 million tonnes annually.
Of the total capacity, Bashundhara leads the market with a 24 percent share, followed by Omera and Jamuna with 20 percent and 17 percent respectively.
The rate of LPG usage as a source of cooking fuel has risen from 2.4 percent in 1997 to 19.6 percent in 2017.
Why is the sector struggling?
To promote the use of LPG, the government is providing favourable policies and incentives. There is a tax exemption for the import of LPG, and the previously imposed 15 percent duty on the import of LPG cylinders was also waived in 2017.
But these facilities are not enough for a sustainable business.
According to the companies, more than 95 percent of the LPG demand is met through imports from various countries such as Singapore, Malaysia, Saudi Arabia, Abu Dhabi and Kuwait.
Most of the companies' mother storage is at Mongla port area where they cannot bring the large LPG-carrying vessels due to the low depth of the port. To cover this shortcoming, the importers use twice the number of ships.
"Compared to that of India, our per tonne LPG import cost is higher as we cannot import it in large vessels. Nevertheless, we have to sell at a rate which is not profitable. Thus, we are counting losses," said Jakaria Jalal.
The cost of cylinders is the main reason for the losses. When there was not much competition, the companies used to sell cylinders at net prices. But now the price is being subsidised heavily.
"Now the companies are selling cylinders at well below manufacturing costs amid high competition. We consider the remaining money as an investment because if we do not sell cylinders, we cannot sell gas," said Jakaria.
JMI Cylinder Ltd, a sister concern of JMI Group, entered the sector in last August. The company also echoed the same sentiment.
"We started at a time when there were already many companies in the market. Now there is no alternative but profit minimisation in order to grab the market," Md Mohiuddin Ahmed, executive director (financial management) of JMI Group, said.
The way for a brighter future
The potential market for LPG remains in rural areas where biomass and firewood are the main source of cooking fuel.
According to BBS (Bangladesh Bureau of Statistics) data, the overall use of gas as fuel in 2018 was 24.3 percent against 23.1 percent in 2017.
In urban areas, a little more than 46.5 percent of the households have access to either pipelined or bottled gas whereas only 5.8 percent of the households have this facility in rural areas.
Still, 75.6 percent of the households across the country depend on straw, leaf, husk and kerosene for cooking, which means the LPG investors still have a huge business scope.
The LPG use can go beyond cooking. Autogas, a form of vehicle fuel made from LPG is cleaner than carbon fuel like petrol which is very popular in India and some first-world countries.
"LPG business opportunity has become smaller due to the arrival of LNG as industries have supplied LNG gas at a cheaper rate," said Jakaria.
As the LPG demand and its business area have become limited due to LNG import, industrialists are now thinking about the diversification of its usage, like using it as a transport fuel.
In the future, when gas reserves will be restricted more, CNG-run vehicles will be converted to LPG-run or autogas-run ones.
Bashundhara Group, Jamuna Group and BM Energy Limited have taken permits for LPG conversion centres and LPG pump stations.