Auto manufacturers have hinted at increase in prices of locally manufactured cars owing to unprecedented depreciation in Pak rupee value against US dollar and Japanese yen and increase in petroleum and utility prices, Profit learnt on Monday.
Auto industry sources indicated that petroleum products prices had witnessed an increase of nine to 16 per cent during the last six months (Jul-Dec 2011) that had badly affected the cost of production. A steep increase in energy cost, including utilities, had already increased auto vendors’ cost of manufacturing by 4.7 to five per cent and the recent increase of Rs5-6 per litre had in prices of petroleum products would add further fuel to the fire.
They pointed out that depreciation in Pakistani rupee value had increased the prices of complete knocked down (CKD) kits by three per cent during the recent quarter. Auto industry estimated that the Pakistani rupee disparity against US dollar and Japanese yen had been hovering 2.5 to five per cent, respectively, during the last three months.
Similarly, they pointed out that the prices of raw materials, including plastic, paints and light engineering products, had also witnessed a steep increase. The cost of transportation was inevitable to go up for supplies of these raw materials to automobile makers, they maintained.
In addition, the industry was forced to use expensive diesel for power generation in the absence of electricity and natural gas. Government had already announced a three per cent increase in electricity tariff in the past couple of months, which was also adding up to the woes of industry. Sources in the sector said that the automobile makers had already absorbed the increase in aggregated production cost through localisation; otherwise, the cost would have increased more on different brands of cars.
Evaluating the current scenario, they underscored that almost all car manufacturers were seriously considering to pass on some of the impact of rising cost of production to consumers in the prices of cars and light commercial vehicles.
Two developments, the analysts believe, may cause urea fertilizer prices of local producers to come down in coming the weeks. “Though this fall in urea prices, if materialize, will be short lived due to higher than last year gas curtailment in 2012,” viewed Farhan Mahmood of Topline Research.
The important question is why urea prices will come down when it is short in Pakistan and government provides huge subsidy by selling imported urea at close to local prices, which are at discount of 25 per cent to global prices due to low cost gas.
There is speculation that government may provide gas by Feb end or Mar beginning to Engro’s 1.3mn ton new plant. And if that happen Engro may slash urea price by Rs100 per bag in line with what they did in Nov 2011. Though we believe there is lower probability of this happening due to winter season that will extend till March according to forecast thereby making difficult for Sui North to shift gas from domestic sector to Engro.
This is a very unique situation where government imported urea is available at Rs100-150 per bag lower than branded urea of Fauji, Engro etc. Besides adding to government subsidy and fiscal deficit, this is putting pressure on local producers to either restrict their sales or eventually reduce price also. We may see local producers in order to get rid of their inventory (if they have) may reduce price by Rs100 per bag for a few weeks time because this situation of imported being sold at this discount will not sustain. According to our sources in industry, approximately 200-250k tons urea is available with TCP (Trading Corporation of Pakistan) which is now being sold at discounted prices.
In case this happen, as explained, we may see 1Q2012 earnings of local fertilizer producers to be lower than expected. However as we mentioned that this will be for few weeks and there will be no major impact on full year basis. We maintain our Buy stance on FFC and Engro and Hold on FFBL. Both FFC and Engro is on our Top Pick list of 2012 and these stocks have rallied by 22 per cent and 33 per cent respectively since the release of our Strategy note on December 19, 2011.