With growing gas shortage in the country, the Ministry of Petroleum has proposed gas load shedding 15 days a month for fertiliser plants. Under this plan SNGPL would supply gas to the industry every other day. “The worst part is that this will be over and above the gas curtailment plan (20 percent Sui & 12 percent Mari) introduced in 1H2010,” said Farhan Mehmood, an analyst at Topline Securities. This, he said, will again cause the urea price to increase. It is expected that the plants operating on the Sui Nothern network will see a price increase of Rs400-450 per bag in the next three to four months. As a result of this fertiliser plants on SSGC and Mari networks will benefit.
According to Engro’s Chief Asad Umar urea price may reach Rs2000 per bag if this crisis continues.
The country’s current urea manufacturing capacity is around 6.5 million tonnes of which approx 2.3 million tonnes is manufactured on Sui Northern Gas network (SNGPL).
These plants include Engro Enven (1.3 million tonnes), Agritech (0.46 million tonnes), Dawoood Hercules (0.44 million tonnes) and Pak Arab (0.1 million tonnes). After adjusting for the gas curtailment of 20 percent agreed last year, the annualized effective capacity of plants on SNGPL network would be around 1.8 million tonnes. With the additional gas shortage of 15 days a month, local urea production would decline by round 0.9 million tonnes (without adjusting for start-up delays). To compensate for production losses the government will have to import an additional 0.9 million tonnes of urea. According to estimates the total urea shortfall could increase to 2.3-2.5 million tonnes. This might also create a delay in supply could further force dealers to sell urea at more than the official price. Given such a scenario the largest plant on Sui Northern network, Engro Enven, will be affected most.
However, this will be a straight gain to fertiliser plants operating on Mari (specially FFC and Fatima) and on SSGC network (FFBL). FFC’s annualized earnings will increase by Rs13-14 per share while that of FFBL’s will increase by Rs2.8-2.9 per share, other factors remaining constant.
This imbalance in production costs for the fertiliser sector is not likely to last long as government bureaucracy will eliminate this inequality. Moreover, the government will have to intervene to reduce farmers’ cost of production.
