Fair Practices, Fair Prices

March 20, 2012

Tan Duc

The gas retail price has surged by up to 44% since last February. Meanwhile, the import price has only inched up by 28%, and the dong-dollar exchange rate in this period has not changed much. Therefore, it cannot be confirmed that the gas price increase is inevitable as price authorities asserted on March 1.

The gas retail price has surged by up to 44% since last February. Meanwhile, the import price has only inched up by 28%, and the dong-dollar exchange rate in this period has not changed much. Therefore, it cannot be confirmed that the gas price increase is inevitable as price authorities asserted on March 1.

The liquefied petroleum gas (LPG) early this month soared strongly to VND477,000-490,000 per 12-kilogram cylinder, marking the third rise since the year’s beginning. According to gas suppliers, they have no choice but to increase the gas price as the global price from this month has gone up by US$180 per ton to US$1,205. After the Ministry of Finance cut the gas import tax from 5% to 0%, gas price went down by VND16,000 per cylinder. But the question is why the local retail price goes up immediately right after the global price hike while other products do not.

Who benefits from the price rise?

Vietnam consumed over 1.3 million tons of gas last year, with 745,490 tons imported and the rest of nearly 600,000 tons produced at Dinh Co and Dung Quat plants.

PetroVietnam Gas Corporation (PV Gas) is currently holding the distribution right of all gas produced domestically. In addition to its advantage of possessing a storage and tanker system, PV Gas is the largest gas importer of Vietnam with a market share of up to 70-80%.

According to statistics from the General Department of Customs, the monthly gas import volume was around 60,000 tons in the second half of last year. Together with the domestically-produced volume, Vietnam still has an ample gas stockpile for the demand in at least one month. Meanwhile, it is noticeable that the import volume in last year’s fourth quarter shrank considerably to a monthly average of 42,476 tons. This figure is understandable due to a decline in building material production, one of the industries using a large volume of gas.

However, the gas import has increased again since early this year. According to the General Department of Customs, the volume imported in January amounted to 72,421 tons, up nearly 29% from the same month last year. Besides, the General Statistics Office estimates the volume in February to reach some 72,000 tons.

Perhaps it is because the global prices has been forecast to go up, prompting enterprises to purchase more.
The contract price of gas import is set on global prices plus premium. The premium consisting of transport fees, insurance fees and interests for suppliers currently ranges from US$75 to US$100 per ton. According to the General Statistics Office, the average price of imported gas inclusive of premium was US$921 per ton in January and US$1,075 in the first two weeks of February.

That local gas traders took the global price which has inched up to US$1,205 per ton since early this month as an excuse for the instant retail price rise is unconvincing. Moreover, any batches of gas purchased from March 1 at the new global price cannot appear on the local market when the retail price increased. It is obvious that the retail price adjustment has brought in for gas traders a considerable profit.

Of course, it is clear that the local price has to depend on the market. Besides, there are no enterprises wanting to take high risks caused by the price volatility. However, gas traders often increase the local price in line with the global price rise, but they always hesitate to lower the selling price when the input price drops. Some years ago, when the global price fell strongly, gas trading firms still did not want to revise down the selling price but took large stockpiles which had been bought at a high price as an excuse for the slow price adjustment. There is no doubt that these firms hold the initiative while their kings, the customers, are always at a disadvantage.

Is the gas market manipulated?

In the U.S. dollar, the current retail price in Vietnam is around US$1,850 per ton. However, the point lies in whether this price accurately reflects the real costs of enterprises or not. So far, production costs of gas trading firms have yet to be made clear, except for input prices.

The import price, or the domestic buying price, has reached US$1,205 per ton, and if inclusive of the value-added tax, it will amount to US$1,325. Therefore, the gap between the retail and input prices is over US$525 dollar, or nearly VND11 million. This figure is quite remarkable compared to the discrepancy between the production cost and the profit of VND900 per liter of oil set by the Ministry of Finance. In maybe in congruous to compare gas with oil as the selling volume and model of these two products are not identical. However, this issue is in need of an answer from the Ministry of Finance to ensure transparency.
Although gas is included in the State’s list for price management, increasing or declining gas prices are totally at the disposal of trading firms. This is different from oil, electricity or many other items as the price adjustment of such products is set by the ministries of finance, and industry and trade, or based on evaluations of the Price Management Department.

One strange thing is that the gas price adjustment is always made at the same time as if trading firms have reached a unanimous agreement. This poses big questions which are whether gas trading firms are really competing with each other, and whether they have any tacit agreements to manipulate and set prices or not.
Another illogical point is the price calculation for gas produced domestically. Each ton of gas sold by PV Gas will bear the transport, insurance fees and premiums for sellers and import tax. The specific premium level depends on the bidding prices which normally range from US$75 to US$100 offered by firms participating in the bid to purchase gas. PV Gas has for many times explained that the addition of the transport, insurance fees and premiums to the domestic price is aimed at creating a common ground for domestic and global price, ensuring fairness for other gas importers. However, can such way of calculation ensure fairness for consumers? Why aren’t such fees used to set up a price stabilization fund which benefits both traders and their customers?

The Government’s role in managing the gas price is very faint. The retail price has soared by 44% from February last year while the import price has only risen by 28% and the foreign exchange rate between Vietnam dong and U.S. dollar has changed little. The Price Management Department should have scrutinized all these issues instead of saying that “the gas price rise is inevitable!”