Gas price hike: ENGRO and FATIMA shall benefit due to 10-year feed-gas subsidy!

100% hike in gas price for fertilizer sector on the cards: According to media reports, 100% increase in gas prices for fertilizer sector is on the cards, where the final approval will be given in the meeting of Economic Coordination Committee of the cabinet today. However, it is yet to be decided whether feed-gas price or fuel-gas price or both will be increased.

PKR246/bag increase in Urea incase feed and fuel gas prices increase: In case feed-gas price is increased by 100% from the current rate of PKR102/mmbtu, Urea price would likely be increased by approximately PKR112/bag. Similarly if fuel-gas price increases by 100% from the current level of PKR382/mmbtu, Urea price shall be adjusted upwards by approximately PKR134/bag. However, if both feed and fuel gas price is hiked by 100%, Urea price may go up by approximately PKR246/bag.

New plants to be the main beneficiaries: According to the Fertilizer policy, new fertilizer plants will get feed-gas subsidy at a fixed rate of USD0.7/mmbtu for a period of 10 years. Given no major devaluation of PKR against USD, the rate will most probably stay at PKR56.7/mmbtu. The only two manufacturers enjoying this subsidy are ENGRO and FATIMA, and shall be the major beneficiaries. We estimate an annualized EPS impact of PKR3.86 on Engro and PKR0.32 for FATIMA incase feed gas prices are increased by 100%.

Potential negative for FFC: The benefit derived from higher margins may partly offset Engro’s losses from gas shutdowns, which may result in little or no Urea price increase in response to gas cuts. This shall be a potential negative for FFC which has been in limelight due to potential gains from future Urea price increases due to higher gas curtailment on Sui network. Moreover, with local DAP priced at international parity, DAP price would not likely be able to adjust upwards in response to gas price hike and may hurt FFBL’s margins though marginally.

100% hike in gas price for fertilizers on the cards

According to media reports, 100% increase in gas prices for fertilizer sector is on the cards, where the final approval will be given in the meeting of Economic Coordination Committee of the cabinet today. However, it is yet to be decided whether it is the feed-gas price or fuel-gas price or both, that will witness the increase. Our industry sources also reveal that feed-gas prices may be increased by 100%, while fuel-gas will witness an increase same as the general industry.

PKR246/bag increase in Urea incase feed and fuel gas prices increase

Given the prevailing difference of landed cost and local cost of Urea, we foresee that the manufacturers will easily be able to transfer the entire burden of gas price increase on to the farmers. In case feed-gas price is increased by 100% from the current rate of PKR102/mmbtu, Urea price may be increased by approximately PKR112/bag. Similarly if fuel-gas price increases by 100% from the current level of PKR382/mmbtu, Urea price may be adjusted upwards by approximately PKR134/bag. However, if both are increased Urea price may go up by approximately PKR246/bag.

New plants to be the main beneficiaries

According to the Fertilizer policy, feed-gas rate has been fixed at USD0.7/mmbtu for a period of 10 years. This rate currently stands at PKR56/mmbtu, which will stay the same (given no major devaluation of PKR against USD), even if the feed gas price for the fertilizer sector is increased. The only two manufacturers enjoying this feed-gas subsidy will be ENGRO and FATIMA. Resultantly, in case feed gas price for the fertilizer industry goes up, Engro and Fatima will likely reap higher margins vis-à-vis other fertilizer players. We estimate an annualized EPS impact of PKR3.86 on Engro and PKR0.32 for FATIMA incase feed gas prices are increased by 100%.

Potential negative for FFC and FFBL

The benefit derived from higher margins may partly offset Engro’s losses from gas shutdowns, which may result in little or no Urea price increase in response to gas cuts. This shall be a potential negative for FFC which has been in limelight due to potential gains from future Urea price increases due to higher gas curtailment on Sui network. Moreover, with DAP being price sensitive, and local DAP prices matching international prices, no room for increase in DAP price exists for FFBL. We thus believe increase in fuel gas price could have a negative impact on FFBL in the shape of lower margins, though marginally.

Economic & Political News

Govt to withhold flood relief fund to support fiscal deficit

The government has decided to hold back release of PKR32bn flood affectees funds till mid July 2011 in order to support the fiscal deficit, a source in the Ministry of Finance said Wednesday.

Private contractors to run Gencos: PPIB

The government has decided to induct private sector operation and maintenance contractors to make the public sector power Generation Companies (Gencos ) run more efficiently. According to an official statement, issued after the meeting, the Board was apprised that after enhancement of Gencos , additional about 2000MW will be made available to the national grid.
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