The announcement of a massive hike of up to 193% in gas tariff for different sectors of the economy and households is feared to accelerate the already high inflation to 24.5% in the current fiscal year as industrialists are expected to revise up their product prices to pass on the impact of high costs to end-consumers.
The industries that may resort to price increase include fertiliser, cement and steel, which will make agricultural production and construction material more expensive.
“With the current inflation rate standing at 31.4% as of September 2023, we anticipate that, taking this effect (gas price hike) into account, the average Consumer Price Index for FY24 will likely reach 24.5% year-on-year,” said Arif Habib Limited (AHL) in a detailed commentary on Tuesday.
The inflation forecast is higher than the State Bank of Pakistan’s (SBP) projection of 20-22%. The central bank governor has said that the expected gas price hike has been incorporated into the inflation forecast.
The caretaker government has increased gas tariff with effect from November 1, 2023 just before the first IMF review under the $3 billion short-term loan programme. This is the second gas price increase in 10 months.
The gas price hike is a condition attached to the loan programme. It may pave the way for the release of second IMF tranche of $700 million.
Fertiliser sector
Feed and fuel stock prices are forecast to increase to Rs580 per million British thermal units (mmBtu) from the current price of Rs510, and to Rs1,580 per mmBtu from the current price of Rs1,500, respectively.
Earlier, the Oil and Gas Regulatory Authority (Ogra) had notified revised gas prices in February 2023 for consumers of Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL), after which Fauji Fertiliser Bin Qasim Limited (FFBL) and Engro Fertilisers jacked up fertiliser prices.
With further revision in feed and fuel prices, the impact will be minimal. For Engro, the impact will be lower due to its partial gas dependency, hence “the company would need to increase prices by Rs98/bag to completely pass on the impact.”
For FFBL, the effect will primarily be on its feed gas, for which “the impact of Rs79/bag for urea and Rs37/bag for DAP (di-ammonium phosphate) will have to be passed on.”
If Ogra notifies a revision in feed and fuel prices for Mari network, the impact will be significant. Fauji Fertiliser Company (FFC) receives feed and fuel gas at Rs302/mmBtu and Rs1,023/mmBtu, respectively. Therefore, after a potential revision in gas prices, “the company will have to augment urea prices by Rs469/bag to completely pass on the impact,” AHL said.
Cement sector
The gas tariff for cement players running captive power plants is expected to swell to Rs2,600/mmBtu from the current Rs1,200, up 117%.
It is pertinent to note that very few key players have a captive gas or dual-fired power plant, namely Lucky Cement, DG Khan Cement and Maple Leaf Cement, and only Lucky’s dependency on gas-based power generation remains notable.
“Therefore, our working suggests that Lucky will have to raise prices by nearly Rs45/bag in order to completely pass on the impact of higher gas prices,” AHL said.
Steel sector
The gas tariff for industries (non-export) is expected to be raised to Rs2,600/mmBtu (+117%). The consumption of gas by long steel players (manufacturers of rebars), including Aisha Steels (ASTL) and Mughal Steel, during the reheating process is very low.
“The hike in gas tariff will necessitate a Rs4,000/ton increase in ASTL’s rebar prices to completely pass on the impact,” it said.
For Mughal, the working suggests that the impact is expected to be slightly on the higher side since it has a 27-megawatt captive gas power plant, which increases the company’s exposure to the gas price hike. Therefore, “prices may have to be increased by Rs15,000/ton.”
Chemical sector
The rise in gas prices has also a detrimental impact on chemical companies, namely Engro Polymer and Chemicals Limited (EPCL) and Lotte Chemical (LOTCHEM). This is primarily because EPCL and LOTCHEM rely on gas-based captive power plants to meet their energy needs.
Given the ongoing gas shortage in the country, EPCL has already been adversely affected. The gas price for the captive power plant used by EPCL has been increased to Rs2,600/mmBtu from Rs1,200 earlier, representing a substantial hike of 117%.
EPCL may need to raise PVC prices by $94/ton in order to fully offset the impact.
The gas price for LOTCHEM has gone up to Rs2,050/mmBtu from Rs1,100, up 86.4%. LOTCHEM will need to raise PTA prices by $20/ton in order to fully offset the impact.
The tariff hike, however, is estimated to generate gas development surcharge (GDS) of Rs57 billion, taking the cumulative annual revenue to Rs755 billion for the two public gas utilities against their required revenue of Rs697 billion, according to the AHL analysis.
The decision will also increase cash flow for Pakistan State Oil (PSO) and Oil and Gas Development Company (OGDC), which will likely reduce the gas-sector circular debt of Rs2.1 trillion.