Skyrocketing increase in urea and DAP prices is leaving almost no option for the farmers. Hence, eventually, the crops grown would be sold at high prices transferring the burden onto consumers. Therefore food inflation would be the product of this vicious cycle.
Gas curtailments are continuing and subsequently fertiliser companies are countering their losses from gas shortages by increasing their per bag fertiliser prices. One company that has very frequently used this policy is Engro Fertiliser which had increased its prices many times in the past to make up for its production loss owing to gas stoppages to its plant Enven.
Govt opposition agitated: ‘Adding fuel to fire’
If fertiliser companies like FFC matches Engro price then it may create further agitation against the government. Pakistan Peoples Party is traditionally a feudal based rural party and continuous increase in fertiliser prices on account of gas curtailments would deteriorate its holding in the rural areas. Therefore, it is very important at this point in time, that in order to save their leadership, government officials make appropriate, well-balanced and effective policies regarding gas supply to the fertiliser plants and the fertiliser prices so that farmers could have some relief from the present government.
Fatima and FFC expected to gain
This increase in prices by Engro might instigate other fertiliser companies such as Fauji Fertiliser (FFC) as well to realise gains on high margins causing their revenue to shoot in CY11 (although it is believed that it may create a lot of upheaval in the farming community since fertiliser agents may play havoc with price mechanism and supply chain).
Earlier for FFC we were expecting an EPS CYE11 of Rs23/sh. But, on the basis of our sensitivity analysis FFC may yield an EPS in the range of Rs27/sh or Rs29/sh with a DCF fair value of around Rs226.44/sh for CYE11 if it increases it prices to Rs2000/50kg bag and the impact of the increase is applied on around 190,000 tonnes of urea dispatches, said Gulshan D. Ferozepurwalla at SCS Trade. The company is already expected to yield high revenue on account of hike in prices and urea shortages resulting in the entire production of the company to be dispatched. Thus if imaginary prices of Rs2000/bag are applied, it would further boost its earnings.
Going forward we expect urea prices to decrease government institutions such as Competition Commission may act to stabilise fertiliser prices, she added. Apart from FFC, a comparatively new company Fatima can also be expected to benefit from high margins. Fatima since the start of its commercial production has been performing quite value, with an edge over Engro owing to no gas stoppages.
Engro gas problems expected to continue
It is believed that increasing prices would not put an end to Engro’s problems; in fact it would just have economic repercussions in the agriculture sector, subsequently affecting our entire economy. Farmers would be further pressurised than they already are resulting in a decrease in productivity of our nation.