Expensive urea: Engro raises fertiliser prices

Move likely to be followed by other players after GIDC revision.


Farhan Zaheer January 02, 2014
Engro Fertilizers Limited increased its price of fertiliser from Rs1,722 to Rs1,900 per 50kg bag. PHOTO: FILE

KARACHI:


Following the government’s move of reviving Gas Infrastructure Development Cess (GIDC), Engro Fertilizer has increased the prices of its urea fertiliser on Thursday – a practice expected to be followed by other players.


The GIDC was first introduced by the PPP government in an effort to raise capital for infrastructure development, primarily for the Iran-Pakistan gas pipeline. However the Cess was repeatedly shot down by courts, until the Supreme Court finally gave the nod this year. The government on Wednesday revised the GIDC to raise Rs120 billion.

“Engro Fertilizers Limited has increased its price of fertiliser from Rs1,722 to Rs1,900 per 50kg bag,” said an official statement. “This Rs178 price increase is directly proportionate to the increase in GIDC imposed by the government and taking into account the rate of inflation.”

According to JS Global Capital, other fertiliser producers like Fauji Fertilizer, Fauji Fertilizer Bin Qasim Limited and Fatima Fertilizer are likely to follow suit to match Engro’s price hike.



Engro, however, urged the government to review its decision. “We encourage the government to reduce the increase in GIDC as well as reduce the amount of subsidy given on imported urea to increase revenue for the national exchequer,” its statement said.

Since the government did not decrease the subsidy on imported urea, Engro believes that dealers, not farmers, would pocket the entire subsidy on imported urea.

The company also said that this will result in huge outflows from the national exchequer, while simultaneously leading to huge gains for the sellers of urea who would buy imported urea at subsidised prices and sell it at market price.

The GIDC on fertiliser feedstock has been increased by Rs103 per million british thermal units (mmbtu) to stand at Rs300 per mmbtu, with fuel GIDC rising by Rs50 per mmbtu to stand at Rs100 per mmbtu.

At the same time, GIDC for other industrial units has been raised by Rs50 per mmbtu to stand at Rs100 per mmbtu.

According to Engro, the cost of imported urea (cost and freight) is around $350 per ton or approximately Rs2,600 per bag, but when one includes the subsidy on imported urea, its price is reduced to Rs1,600 per bag.

Impact on Karachi bourse

Most analysts say that the GIDC will be positive for Fatima Fertilizer given that the company’s production cost is buffered by its subsidised gas price agreement at $0.7 per mmbtu.

According to a JS Global Capital report on Thursday, Fatima Fertilizer is likely to witness margin improvement due to peer-led urea price hike, which it estimates will have a positive impact of Rs0.40 per share (8% expected jump in FY2014’s earning per share).

Due to this development, the stock of Fatima Fertilizer closed at its upper circuit lock when the Karachi bourse closed on Thursday. The development also brought positive activity on the parent company, Arif Habib Corporation, as its stock also closed with upper circuit lock, Sherman Securities reported.

According to JS Global Capital, this news is marginally positive for Fauji Fertilizer as well.

Published in The Express Tribune, January 3rd, 2014.

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