The price differential between diesel and gas, to be borne by the fertiliser sector, would be Rs 1.6 billion for 30 days. It is estimated that the industry would have to sell 746,000 tonnes of urea, at the proposed increase of Rs 105 per bag, to meet this one time expenditure.
Currently Fauji Fertiliser Company (FFC), Engro and Fatima are the only source of production, where the latter is yet to announce the COD of its plant. Consequently, major brunt of this rise is expected to be met by Fauji (61 percent) followed by Engro (23 percent), based on their respective market shares.
Major beneficiaries of this rise will be Dawood Hercules Chemicals, in addition to other plants on the SNGPL network. Asad Siddiqui at Investcapital said that market players would have to sell between 512,000 and 871,000 tonnes of urea (based on the respective price increase range of Rs 90 and Rs 135 per bag). If prices are not reverted back to prior levels once the differential has been totally met, FFC can gain from this scenario, he added.
Currently, FFC enjoys superior margins on urea in comparison to its peers. Any further increase in price (post complete differential payment) will provide an increased strength to FFC’s primary margins. The fertiliser sector, unfortunately, has been a victim of unannounced gas load-shedding which has dented production of the entire sector. Meanwhile, the situation is worse for players receiving gas from the Sui network.
In a recent instance, 40mmcfd of gas was cut on SNGL network to fertiliser producers (players on that network) and diverted to IPPs. To resolve this issue, the industry did put forth a proposal to ECC, in which it stated that the same gas should be re-routed to fertiliser players and replaced with diesel for IPPs, while the cost differential will be borne by the fertiliser industry. It was further proposed that the industry would bear two-thirds of the cost, while the residual one-third would be paid by the government.
The proposal will be valid till June 30, 2011, after which term of the government’s agreement to the IPPs will reach its conclusion. Asad Siddique observed that the proposal seems complex and lacks practicality as an absence of any firm groundwork, rules and regulations is visible. In addition, he said that the unusual nature of this transaction was the major hurdle.
