Picking holes in Essar's case against price pooling

Vol 11, PW 7 (09 Aug 07) Midstream & Downstream

Essar Steel’s legal challenge against Delhi’s controversial decision to pool prices of long-term R-LNG has been copied over the past few days by GSPC and a clutch of other Gujarat companies.

But questions are now being asked if Essar’s challenge launched last month is proportionate to the injury it is likely to suffer from paying more for R-LNG from Dahej. Pooling or averaging of R-LNG prices hurts customers who contracted early to buy cheaper long-term R-LNG but benefits those who sign contracts later, when prices are higher.

In our last issue we estimated that Essar Steel would have to pay at least Rs235cr ($58m) more every year for Dahej R-LNG after prices are pooled. But, say government supporters, this is a negligible fraction of the cost of steel that Essar produces.

Essar Steel produces 4.6m tonnes of steel a year and at Rs41/1$, the impact of the gas price rise on each tonne of steel is less than 2%. “Such a marginal impact can be easily absorbed by consumers,â€‌ we are told.

“Essar will anyway be passing on the increase to customers.â€‌ Says another source: “In addition to long-term R-LNG from Dahej at ($4.69/mmbtu), Essar also buys spot R-LNG from Shell and GSPL at an average cost of about $8/mmbtu.

â€‌ Essar, we are reminded, “is not charging higher prices for the quantity of steel produced using costlier spot R-LNG; they are pooling all the gas and passing on the higher costs to customers.â€‌ Moreover, says an analyst, steel is a processing industry.

Steel goes into the manufacture of capital goods or raw materials that are later converted to capital goods or used in building construction. “All of this is a one-time capital cost while costs of power and fertiliser are recurring items which affect us every day.

â€‌ Continues our source: “Not just long-term R-LNG but all the natural gas now being produced in India and sold at various prices should be pooled and sold at a single price.â€‌