The prevailing gas shortage and subsequent curtailment to industries in Pakistan may be a headache for a large majority of the industrial sector; but the fertiliser companies do not mind one bit of it. The performance of the listed fertiliser firms at the local bourse yesterday was an indicator that the extended gas curtailment is beneficial for the fertiliser manufacturers.
The government seems to have notified the companies that fertiliser plants receiving gas from the Sui network would now remain closed for 45 days beginning January 2011. This is in addition to the gas outages which are now planned to continue throughout 2011 with increased rates of 20 percent and 12 percent for Sui and Mari gas networks respectively.
This has led Engro to announce a massive Rs190/bag increase for urea, which would mean a 22 percent sudden hike in the product price, something which is unprecedented in the history. And, as has been the case always, the peer companies will surely follow suit and match Engros price.
But Engro has obvious reasons for it as its new plant is supposed to receive gas supply from the Sui network, which will remain suspended for an extended period and will also face longer scheduled outages than the ones receiving from the Mari network.
It is the market dominance of the local players and their competitive pricing in comparison to imported urea that allows them to pass on an increase as hefty as this one without even a second thought of any repercussion.
Even post price increase, locally manufactured urea would be available at a 30 percent discount to the local farmer, who has no option but to continue buying it.
"Even if the government eliminates the feedstock subsidy, the price would touch Rs1,400/bag, which would still be at a steep discount to the international price which hovers around Rs2,000/bag", said Ruhail Muhammad, Engros CFO, told BR Research.
Analysts following the listed fertiliser companies believe that Engros move will be more beneficial for the market leader FFC as it will reap more fruits without much sweat. FFCs plants receive feedstock gas from the Mari field which is not expected to go under extended curtailment and the planned outages are also lesser than that of the Sui network.
Moreover, Engro seems to have incorporated its highly leveraged balance sheet and the cost overruns arising from the delay in plant commissioning into the price hike, whereas FFC faces no such issues, so the latter will be a net beneficiary and the analyst community foresees a massive 40 percent improvement in the bottom line for CY11 alone.
Bear in mind, there might be another round of upward revision in urea prices once Ogra announces new feedstock prices for the manufacturers come January. Another factor that plays in the companies favour is that the first quarter of a calendar year is traditionally a low-off take period, therefore it would not result in panic reaction and the market would settle down on the increased price.
The only worry for the farmers and FBBL to some extent should be the DAP prices and off-take respectively, as farmers will pay lesser attention to DAP now, especially when they will be buying urea at nearly Rs1,050/bag as DAP prices have already crossed Rs3,000/bag and nearing the all-time high.