Govt Urged to Address Gas Price Disparity in Fertilizer Sector

According to a report by Topline Securities, in order to stabilize urea prices and increase government revenue, measures should be taken to address the persistent pricing discrepancy among fertilizer manufacturers.

Topline stated that in order to keep costs low, the government spends about Rs. 200 billion a year on fertilizer subsidies, citing the Pakistan Institute of Development Economics (PIDE).However, the government has increased gas costs for fertilizer companies that use gas from the SSGC and SNGP networks, impacting 60% of the industry’s output capacity. The fertilizer industry is now experiencing an anomaly as a result.

However, the gas rate for fertilizer businesses who get their gas from MARI is still the same.

The feed gas tariff on the MARI network remains at Rs. 580/mmbtu, but the revised rate for SNGP and SSGC is Rs. 1,597/mmbtu (US$5.7/mmbtu) instead of Rs. 580/mmbtu (US$2/mmbtu).

The SNGP and SSGC networks are home to Engro Fertilizers (EFERT), Fauji Fertilizer Bin Qasim (FFBL), and Agritech (AGL), whilst the Mari Network is home to Fauji Fertilizer Company (FFC) and Fatima Fertilizer (FATIMA).

The price of urea has increased by Rs. 1,260 per bag to Rs. 5,331 per bag at FFBL due to the recent increase in gas prices. The corporation still has a few days to disclose its new urea costs, though, as the new gas price for EFERT will take effect on March 1.

Channel checks show that urea prices are currently 30% less than FFB, at Rs. 3,767/bag for both EFERT and FFC. Nonetheless, the market price of urea is approximately Rs. 5,000 per bag, which is more than EFERT and FFC’s pricing. Dealers and middlemen are pocketing the surplus money.

If the gas rates for MARI-based clients stay the same, FFC will benefit because its gas costs will stay lower than those of other industry players, and it will probably raise its urea prices in line with other players. If the difference keeps happening, FFC will make an additional Rs. 38 billion in profit each year (or Rs. 30 EPS).
EFERT’s margins would align with FFC’s if the government eliminated this distortion by raising the price of Mari gas. Since forty percent of EFERT’s gas is now priced higher than FFC’s, EFERT’s margins are currently worse. A positive annual impact of Rs. 7.6 billion (EPS Rs. 5.7) will result from EFERT in this scenario.

In addition, stabilizing urea costs for farmers and earning an extra Rs. 80-100 billion in revenue would be possible for the government if the distortion was eliminated through elevated Mari gas prices.

In order to prevent distortion and to comply with the IMF’s recommendation to do away with subsidies, Topline stated that the government has to set the gas prices for the entire sector.

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