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Karachi, November 28, 2012 (PPI-OT): A much needed impetus for the ailing Fertilizers!
As per Arif Habib Limited’s channel checks, the subcommittee of the Economic Co-ordination Committee (ECC) has approved the long term plan regarding the gas availability to the ailing fertilizer sector.
According to Arif Habib Limited, approval from the committee makes the case of fertilizer sector very strong for the upcoming ECC meeting. In today’s ‘Morning Call’, Arif Habib Limited highlights the approved proposal and its possible impact on the fertilizer sector.
No requirement to lay down a 1,000km pipeline!
Under the approved proposal, fertilizer sector would not require to lay down a 1,000km pipeline to have a dedicated gas field. Fertilizer sector will use the existing Sui network and only 136 km line would be laid down by the SSGC. This is a positive development for the fertilizer sector in general, and Engro Fertilizer in particular, as they would not require investing in the pipeline anymore, thus phasing out the opposition to utilizing the funds from the Gas Development Infrastructure Cess (GDIC).
Gas to be purchased directly from the E and Ps
Fertilizer companies will be signing Gas Purchase Agreements (GPA) directly with the E and Ps. Under the new Petroleum Policy, E and P companies are now allowed to sell 10% of their gas directly to the consumer; bypassing the Sui companies. This will help fertilizer companies ensure uninterrupted gas supply.
Sui Network to supply gas on tolling basis to assure uninterrupted supplies
Under the new framework, both the Sui companies are expected to supply gas from the E and P fields on a tolling basis to fertilizer companies. Since the gas supplied to the fertilizer sector would be on a tolling basis, Sui companies would not be able to divert this gas to any other sector. Arif Habib Limited has seen in the past gas being diverted from fertilizer companies to other sectors despite gov’t guaranteed contracts with the fertilizer industry. However, with the implementation of this arrangement, certainty of gas supplies to the fertilizer sector could be assumed to a great extent.
Engro; The biggest beneficiary
Engro Fertilizer is expected to gain the most from the implementation of the long term plan as it would bring its Enven plant into full production. As per Arif Habib Limited’s discussion with the industry, fertilizer sector is making arrangements for Engro to receive gas in short term as well, which Arif Habib Limited believes would be a major trigger for the company’s earnings.
Gas availability to bring urea price down
Implementation of the long-term plan will improve the availability of gas, which in turn may result in urea price decline. FATIMA and ENGRO would be the least impacted fertilizer companies under a price cut scenario due to their long-term contract of low-feed gas prices. Faujis (FFC and FFBL), on the other hand, are expected to bear the brunt of declining urea prices due to their relatively less efficient plants and comparatively higher feed gas tariffs. In the mean time, Engro’s stock may gain traction that has lost its vigor by 5% since July-12; underperforming the benchmark KSE-100 index by a massive 24% so far!