Gas cut to fertilizer sector to affect prices

KARACHI - The governments plan to cut 10 to 20 per cent gas to fertilizer sector for 3 months would lead to rise in the import of urea up to 380k tons. Hence, the subsidy burden on imported urea will enhance by Rs3 to 4 billion, while the supply shortfall could adversely affect fertilizer prices. In any case the urea prices will surge rapidly in coming period either due to producers pass on or supply shortfall, as the domestic urea is priced at 40 per cent discount to regional prices and gap effectively enhances producers ability to pass prices on. Thus, the expected price increase by Fauji Fertilizer Company (FFC) of urea is by Rs40/bag from existing Rs780/bag so as to cover the gap of 10 percent gas load shedding. Compared to FFC, ENGRO would increase prices by a higher margin, simply owing to its higher operating and financial leverage. As far as Fauji Fertilizer Bin Qasim Ltd (FFBL) is concerned, it is expected to suffer both on urea and Diammonium Phosphates (DAP) front due to under-utilization of ammonia plant. Hypothetically, in terms of price increment on urea, FFBL will have to increase the price by the highest magnitude to cover up its margin on DAP. Meanwhile, pricing power on DAP is limited since its price is linked with intl prices while its also in deficit. Any shortfall in production of DAP will have negative bearing for FFBL but will be fruitful for importers so as to tap the supply shortfall. Farhan Bashir Khan, a market expert, said 'DAP production is expected to be lower by 35k tons given a scenario of 20 percent curtailment through SSGC. The same has the potential to be tapped by ENGRO. It is pertinent to mention that the matter of gas curtailment to fertilizer sector has certainly aggravated as government is opting to curtail supply from Mari field as well, which supplies gas to two key producers, FFC and ENGRO. However, scope of Mari curtailment could still remain restricted due to its limited utility and below pipeline quality gas. Meanwhile, load shedding to FFBL has already taken place, since it is supplied gas through the SSGC system. The situation is expected to prevail for 2-3 months, and risk remains as the cycle is expected to repeat with heightened potency during the winter shortfall season.