Fertiliser Sector: Gas issues threaten demand dynamics | Pakistan Today

Fertiliser Sector: Gas issues threaten demand dynamics

Fertiliser sector’s rocky relationship with gas supplies is about to take a new twist as the sector is set to face further curtailment along with a gas tariff hike, which is likely to trigger another round of urea price hikes and potentially threaten the industry’s demand dynamics.
In a revised proposal over the weekend to the Economic Coordination Committee (ECC), the Ministry of Petroleum and Natural Resources (MPNR) has once again put forth the issue of raising natural gas prices to the fertiliser sector. The initial proposal, which was submitted in June 2011, was withdrawn due to stiff resistance from several government officials and local bodies, particularly the all Pakistan CNG association. Although the initial proposal was tentatively approved by the ECC, the MPNR was asked to reconsider some of its proposals. The new proposal, among other recommendations, seeks to enhance feed-gas rates to old fertiliser plants by 96.06 per cent and 13.55 per cent for fuel stock purposes. The feed-gas tariff hike would not apply to new fertiliser plants i.e. Fatima and Engro’s EnVen plant.
Despite the purported price hike, local manufacturers will continue to enjoy a comfortable cushion against imported urea, which is estimated to cost Rs2,745/bag (incl. GST). With their feedstock prices fixed at $0.70/MMBTU for ten years under Fertiliser Policy 2001, Engro’s EnVen plant and FATIMA stand to benefit the most from this proposal’s implementation, said Senior Investment Analyst at HMFS, Ali Hussain. In addition to its proposal to raise the gas tariff, the MNPR has also issued a notice to manufacturers on the SNGPL network advising them of its decision to restrict gas supply to 15-days a month from August 1, 2011 in addition to the existing curtailment and 45 days shutdown for winter gas load shedding. With ammonia plants requiring a 3-4 day time frame to be fully operational after a cold start, their production capability would in actuality be restricted to 11-12 days a month. Engro management have confirmed that although their EnVen plant has been receiving gas as of July 28, 2011, they are expecting the gas supply to be cutoff once again in 15 days. With the directive’s scope restricted to the SNGPL network, we see Mari based producers (FFC, FATIMA, and Engro’s Base Plant) reaping the benefits of a potential price hike initiating from SNGPL based manufacturers who will surely try to recuperate the costs incurred due to lost productivity. A minimum price hike of Rs400/bag is estimated as a consequence of this directive.
Urea off-take has witnessed a 3.2 per cent CAGR between 2005 and 2010 despite prices rising 64 per cent in the period, implying a high level of price inelasticity. However, in 2011 alone, urea prices have catapulted 37 per cent, and if the recent gas proposals are implemented, that number would rise to a staggering 92 per cent. Historically there has never been such a sharp price in urea prices within such a short time span of time and raises questions as to how long demand can sustain this pricing pressure. Let’s not forget that each price hike continues to narrow the gap between local and imported urea prices and that window has the potential to become even narrower in the event of international urea price decline.



Related posts

Top