ICI: Gas woes erode bottom line
The most brutal gas shortage of Pakistans history made 2011 a nightmare for ICI Pakistan. The chemical maker that already had to face unstable input prices, volatile PSF demand and lower substitute (cotton) prices had to work six months without gas supply.
The latest result posted by the Company for the year ending December 31, 2011, shows a decline of 20 percent in PAT compared to 2010. Despite an increase of 14 percent in the top line, the substantial increase in the production cost trimmed down the Companys profitability in the period under review.
The less energy intensive segments that include chemicals and life sciences experienced double-digit growth. The paints segment too; despite a slow start owed to weaker household income and lower industrial activity was able to grow reasonably.
However, ICIs major business divisions soda ash and polyester staple fiber that constitute roughly 20 percent and 41 percent of the total turnover, and are highly energy intensive, had to bear gas unavailability for 174 and 186 days in 2011.
Gas expenses constitute roughly 30 percent of the cost of production of soda ash. In the absence of gas the Company had to use furnace oil; a thermal unit of which costs 4 times the cost of the same generated through natural gas.
The financial impact of using an alternative fuel was roughly Rs.825 million. When taken into account it shows that the Company would have easily surpassed its 2010 (record high PAT) had there been better energy situation.
The gas shortage was a double whammy for ICI as it also resulted in a weaker demand from the textile units (the main consumers of Polyester) especially the ones located in Punjab. In addition, the lower cotton prices and sluggish demand from the US and Europe; the major export markets of Pakistans textiles also kept downward pressure on the prices.
The soda ash segment had to face downwards price pressure because of the global over supply especially from China. The board has approved Rs.2 billion for a coal-fired boiler project to improve the energy situation of its soda ash business.
On the bright side, the Company managed to reduce its financial and other operating expenses; however, the massive increase in the administrative and general expenses combined with the higher cost of sales resulted in a lower bottom line.
The outlook for sales is stable; however, the gas crisis would definitely continue to eat up the profitability of the Company in times to come.
Source: KSE notice