- Indirect impact on food and fertiliser could further edge up inflation in the country: AKD Securities
The government’s decision to hike gas prices, in its bid to appease the International Monetary Fund (IMF), will bode well for the country’s E&P (Exploration & production) sector but will adversely impact steel, chemical and textile, say market experts. They also expect the inflation rate to go up.
In line with the IMF’s recommendation, the Economic Coordination Committee (ECC) of the Federal Cabinet on Monday decided on an increase of up to 124% in gas prices for domestic consumers from January 1, 2023. The goal is to generate a revenue of Rs310 billion from consumers in the next six months (January-June 2023) to curtail the circular debt in the gas sector.
“As per our estimates, weighted average cost of gas will effectively go up by 43% to Rs885/mmbtu (Rs 620/mmbtu earlier),” said Arif Habib Limited.
“Although this jump will not wipe out the outstanding receivables balance of the gas sector (since 2014 to Jun’22 at PKR 577bn), it will ensure current half-year shortfall is eliminated,” it added.
The brokerage house was of the view that this will help grip the circular debt accumulation of domestic gas utilities (SNGP, SSGC) for the remaining part of the ongoing year.
“Moreover, it will aid E&P companies, that have been circular debt-stricken for a long time. Pertinently, 3-year average gas revenue of OGDC and PPL has a respective 44% and 65% contribution to the total revenue. Thus, a hike in gas prices will be positive for these companies,” it said.
As for the fertiliser sector, feed and fuel stock prices are expected to increase by 69% and 47% to Rs510/mmbtu (current Rs302/mmbtu) and Rs1,500/mmbtu (current Rs1,023/mmbtu), respectively.
AHL also said that the increase in gas prices will “negatively impact chemical companies as it fulfills the energy requirements through the gas-based captive power plant.”
Furthermore, the country’s steel industry will be one of the most adversely impacted sectors.
Meanwhile AKD Securities said in its report: “With gas hard to come by for captive power generators, fuel and power costs have been cutting through gross margins of players in our universe, with average grid costs during 1HFY23 ranging between Rs35-47/kwh (up ~80% YoY) amid rising base tariffs and hefty FCAs during the period.”
“With an overall weaker demand outlook, we expect players in the sector to hold onto retail prices at present levels as both graded long/flat steel prices have increased significantly across the board by ~45-50% (from average 206k/ton in Dec’22 to ~Rs300/ton presently) amid prevailing raw material shortages and sharp rupee devaluations,” it added.
Coming to the crucial textile sector, AKD believes the increase in gas prices will negatively impact south-based textile players, as the units utilize the fuel for captive power generation.
“North-based players would be somewhat shielded from the increase as they utilize RLNG for their power generation needs,” added the brokerage house.
Moreover, inflationary pressures are expected to build amid the consequences of the latest decision.
“An increase in gas tariffs does not have a major direct impact on the CPI (Consumer Price Index) reading. According to our calculations, a 10% increase in gas tariffs would have a 6bps impact on the inflation readings. However, an indirect impact on the food and fertilizer side could be seen, which would further edge up the inflation in the country.
“Our base estimate for Feb’23 inflation stands at 30.1%,” AKD said, adding that the interest rate in the country may be increased.