Financial Times

New gas player in town
The other orange revolution emerging in Sri Lanka
The colour might be orange, but is there a revolution going on in the gas market? It’s the colour of the cylinders belonging to E-Gas Limited, the latest player to enter Sri Lanka.

The Malaysian company arrived using the softly-softly approach in a bid to ensure that the infrastructure was running smoothly and their strategy set. The reason for such an approach: low prices.

Just last week the Consumer Affairs Authority vetoed price-hike requestss by Shell Gas and Laugfs, whose present price for 12.5 kilogram cylinders is Rs. 960 and Rs. 936 respectively. For E-Gas, they sell for Rs. 920.

How can they sell so low? “It comes down to getting the infrastructure right,” said Azlan Shah Mohamad Shah, CEO E-Gas. With gas prices rising in leaps and bounds; from $519 per tonne in October to $626 in February, such rises are beyond company control, “but if you look to stabilise your business, work efficiently, and create that right infrastructure, then you have the chance to keep prices down”, Mr. Shah said.

One of the problems here though is how much control over the pricing a company gets. When E-Gas looked at the costs it came up with the following analysis: 66.78 percent of price depends on world prices; 21.11 percent was under 3rd-party control; 4.32 percent government and related agencies; leaving only 7.79 percent under the control of E-Gas.

“So to enter, we studied the market in a very quiet but extensive way. This was because we didn’t want to make any rash or false promises that could come back to haunt us,” Mr. Shah said, talking from the company’s office in Colombo 7.

The main saving comes from cutting out the middlemen, where the gas goes from storage to the dealer to the customer. One of the cost-saving exercises is the introduction of ISO portable gas storage tanks that can hold the equivalent of 1,100 household cylinders. These tanks can be delivered to wherever they are needed, anywhere in the country, thus allowing the gas to come to the cylinder, not the other way round. Costs are saved from not having to move vast numbers of cylinders, where transporting the equivalent of 1,100 of them can be a logistic nightmare.

E-Gas has 29 of the 20-foot (6 metres) tanks, with an option for 11 more from the British company TML. To ensure safety, the tanks are checked every one and a half years.

As for the gas, the company buys it from Malaysia’s Petronas and Thailand’s PTT, where Malaysia controls and ensures quality. “When the company was first looking for a country to enter, there were a few to think about, such as Cambodia and Indonesia. But Sri Lanka was decided upon due to the open nature of the market,” said Mr. Shah. Arrival was February 2003, with the signing of a deal with the Sri Lankan Board of Investment later that same year. In 2004 a pilot was set up with seven dealers, upgrading to commercial status in July 2005.

A decision was taken to initially enter the East of the country in a quiet way; to build up the trade and fill the vacuum, with the aim of converting those who normally use wood to cook. “We have no intention of making any sensational moves. We want to compliment the market, not enter as a competitor,” K.M Munavver, the Chief Operating Officer, said. “We have moved West, and Colombo is inevitable, but so far we have left the cities there alone,” Mr. Shah added.

The softly-softly approach has also proved useful to ensure the right dealers are brought onboard. The CEO said those working the dealership side should think of the business as a retirement fund, where the more cylinders in use under that person’s control means a guaranteed rising income. “It’s important to find those people who think positively; who have the right mind set. Not those out there who think they can make a quick buck,” Mr. Shah said. “To be a dealer, the infrastructure has to be in place, as does the finances. One of the problems is spotting those that make promises but then fail to deliver,” he continued. But once the dealers are chosen, depending on their location, they are separated into major and minor enterprises.

Those major dealers initially receive 300 cylinders, while smaller ones will get 100, with access to more. Mr. Shah hopes that the methods utilised in entering the market will end up being a win-win-win scenario.
The extra win? Well, there is the upstream win with the guaranteed gas, the downstream win with the competent dealers, and the last is the customer winning by getting gas at the cheapest price. So maybe it is a revolution after all. The company must think so as its slogan runs “The revolution in LPG”.

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