Impact of gas price hike on fertiliser

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With bi-annual gas price review on the cards, an important ECC meeting is being held today for final approval of increase in consumer gas prices effective from July 2011, analysts at Topline Securities said. “There are expectations that this time gas prices would be reviewed in accordance with the rising gas shortage in the country”, analysts said. “Gas prices could increase by 10-100 percent for different consumers”, Farhan Mahmood of Topline Securities said.
The analyst said these measures would ensure gas to industrial sector and improve overall productivity.
According to reports the government may approve 10-15 percent increase in gas prices for domestic sector while for industrial sector the price could be jacked up by 15-20 percent.
For fertiliser sector, the government may increase feed stock gas prices by 100 percent. Whereas, 50 percent gas curtailment for IPPs is expected.
For old plants, like FFC, Engro, FFBL, the 100 percent rise in feedstock and 15-20 percent rise in fuel gas will increase cost of production by Rs140-150 per bag. “In light of above measures, we believe, that fertiliser plants will easily pass on the cost impact to the consumer,” he said. He said the urea prices could increase by Rs150-250 per bag thus benefitting companies as they would increase their gross margins.
New plants including Fatima and EngroEnven which have long term fix gas agreements will benefit more. Moreover, these measures are also beneficial for SSGC and SNGPL as their cash flows will improve. However, the 50 percent gas curtailment to IPPs would not be good for their cash flows as their receivables will inflate due to costly diesel usage. This may also apply on Engro Qadirpurgen which runs on gas fuel. The government is expected to improve its revenues by Rs25-30 billion.