As per management sources, Engro has announced Rs100 per bag price hike of urea. The new price of urea is Rs1,580 per bag. Fauji Fertiliser Company and Fatima Fertiliser would be the prime beneficiaries of this latest increment.
On the other hand, FFC’s Goth Machi Plant II encountered a technical glitch which caused the plant to shut down. The estimated maintenance time stands at eight day and it has an annual capacity of 635k tonnes. Furthermore, due to winter gas curtailment, FFBL’s urea plant will be shutting down until further notice. With management anticipating a complete shutdown during January and February 2012, it is unlikely that the plant will resume operations anytime before the year end.
Impact on key sectors: According to news reports, the government has issued a gazette notification to increase gas prices for all sectors including fertiliser, industrial, commercial and domestic consumers, with effect from January 1, 2012. The gas prices are likely to be increased by Rs197/mmbtu for fertiliser sector (in the form of Gas Infrastructure Development Cess (GIDC)) and Rs13/mmbtu for industrial consumers. It is believed that the increase in the gas prices will put downward pressure on the margins of fertilisers, cements and textiles; if not passed through.
Fertiliser: On account of GIDC, the government has decided to increase fertiliser feedstock gas prices by 193 per cent to Rs299/mmbtu from Rs102/mmbtu. It is likely to impact old urea plants only, while Engro’s Enven and F will remain immune to the changes due to their Gas Supply Agreement with the government. Therefore, the incremental cost impact on Engro due to GIDC will be 50 per cent compared to FFC. To recall, FFC and FFBL have been gainers of previous urea price hikes by Engro. However, in this situation we believe Engro will only raise urea prices to cover its incremental cost impact which will see FFC and FFBL taking a brunt on their respective earnings due to a pass through of only 50 per cent of the incremental cost.
Cement: Cost of gas constitutes approximately around 20 per cent of the total energy costs in the sector. Assuming a 14 per cent rise in gas prices with the incremental rise in costs per bag to be roughly around Rs5. However, in view of the pricing power, the cement industry has enjoyed recently. It is believed that the industry is likely to pass on the cost increase immediately. Thus, cement prices may increase to Rs425-430 per bag from current levels of Rs415-420 per bag.
Textile: Already being faced with gas supply issues and lower cotton prices (Rs4,900 per maund, down 62 per cent from its peak), the textile sector is now set to feel the brunt of increased gas prices from January 1, 2012. The increase in gas prices is likely to bode negative for textile sector, in general, affecting the margins of the manufacturers. Usually, the manufacturers are able to pass through the incremental cost impact by increasing the end product prices, however, as believed, small textile units which enjoyed wind falls, gained last year to come under immense pressure given the current scenario. Nonetheless, big composite units like Nishat Mills Limited (NML), which have established efficient captive cogeneration power plants to run on alternative fuels, will remain immune to such cost hikes.
IPPs: The cost of gas supplies to IPPs (running on gas) are also expected to be increased by Rs70/mmbtu. However, this is not expected to impact the earnings of IPPs because of their fuel cost pass through agreement with the government. Although, it may result in heightened circular debt concerns if the power consumer tariff is not increased accordingly.
