Higher gas prices to harm steel, cement industries

Weighted average cost of gas to go up by 43%, says AHL

KARACHI:

Economic analysts are wary that the government’s decision to increase gas prices to satisfy the IMF will benefit the Exploration and Production sector but harm the steel, chemical, and textile industries, while also causing an increase in the inflation rate.

The approval of an increase in gas prices by the government, in line with the IMF’s recommendation, will result in a 43% increase in the weighted average cost of gas, which will effectively jump to Rs885/mmbtu from Rs620/mmbtu, according to Arif Habib Limited (AHL) research. Taurus Research also hints that ‘gas prices may increase by up to 112%’.

The gas tariff to be applied from January 1, 2023, to raise additional revenue of approximately Rs310 billion in the first of the steps required to rationalise gas prices to reduce the flow of circular debt, will mainly affect non-protected residential consumers, and commercial, cement, export, and non-export sectors.

The fertiliser companies are expected to fully pass on the impact of the price hikes, resulting in increased urea prices, and EFERT is expected to be a major beneficiary due to higher margins versus its peers resulting in the calendar year 2023 earnings per share (EPS) impact of Rs1.9. On the other hand, Fauji Fertiliser Bin Qasim (FFBL) is expected to bear higher costs for its feedstock requirements in the case of Diammonium phosphate (DAP).

“The IMF wants to prevent any further addition to the circular debt of the gas sector, and this price increase will ensure that the current half-year shortfall is eliminated,” said AHL in a statement.

Under the new mechanism, some retail gas consumers will be shielded, while the prices have been increased across the board for all other gas consumers.

The increase in gas prices will help the government raise an additional revenue of Rs310 billion. The impact of the hike will be significant on the fertiliser industry, as feed, and fuel stock prices are expected to increase, requiring fertiliser manufacturers to increase urea prices by an average of Rs375 per bag. The impact of the increase in gas prices will necessitate a Rs400 per tonne increase in ASTL’s rebar prices in the steel industry.

Published in The Express Tribune, February 15^th, 2023.

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