In a bid to reduce its spending on urea imports, the government in principle has decided to end gas outages for the fertiliser sector. The gas curtailment for plants on the SNGPL network is now expected to remain at 20 per cent while the same is expected to stand at 12 per cent for plants at Mari network.
Further, the government has also taken a decision to increase feedstock gas prices by 100 per cent (a complete transfer of burden to the consumers), for all the old fertilizer plants, however, Engro and Fatima Fertilizer will be exceptions due to fixed feedstock prices for a period of ten years. Materialisation of this plan will be beneficial for the fertiliser manufacturers in our view, as it ensures an uninterrupted gas supply to the plants – consequently lowering production losses.
Gas outages to halt
To recall, enhanced gas load management and increased gas outages at SNGPL network had hindered the production of the fertiliser plants. The gas curtailment at SNGPL network had peaked at 36 per cent per plant (compared to 20 per cent announced by the government) forcing plant shutdowns. Due to these gas outages urea production in 1H2011 has declined by 7 per cent YoY. In order to bridge the demand supply gap, the government had to import 1.7million tonnes of urea every year (total cost of US$927mn). To avoid expensive imports, the government in principle has decided to provide uninterrupted gas supply to fertiliser manufacturers with a gas curtailment of 20 per cent at SNGPL and 12 per cent at Mari network. The government expects increase in gas exploration in some fields, while may increase gas outages for CNG stations and the general industry. Furthermore, gas supply to fertiliser plants would be suspended for 45 days in winter, in addition to the suspension of gas during the annual maintenance period of a month.
Feedstock gas prices to increase by 100 pc
Furthermore, the government has decided to increase the feedstock gas for the old plants prices by 100 per cent to Rs204 per mmbtu, which is believed to be a complete transfer of burden to the consumers. Assuming a 100 per cent pass through, we foresee a further price hike of Rs115 per bag taking the ex-factory urea prices to Rs1,285 per bag, said Bilal Qamar at JS, adding that Engro’s new plant and Fatima Fertilizer are to be the main beneficiaries of this increase in urea prices as their feedstock prices are fixed at US$0.7 per mmbtu (Rs59.5 per mmbtu) for a period of 10 years.
