LAHORE – The government is planning to raise consumer gas prices for various categories in industrial sector in the upcoming budget 2012-13 effective from July 2012.

Industry sources said that the government has already imposed the Cess effective from Jan 2012 while another unprecedented jump is awaited. The new hike is likely to increase the gas cost by 32% and 17% for fertilizers and captive power plants, respectively, while it will enhance cost of cement manufacturers by Rs7 per 50kg bag, as the energy cost of cement sector will likely jump by Rs1.22/kwh

They said that the fertilizer industry consumes 15% of country’s gas. Though no proper plan has been approved by OGRA yet which regulates local gas prices in Pakistan, there are reports that some proposals have been launched to raise fertilizer gas prices by Rs87-100 per mmbtu (up 17-32%). It is estimated that the said increase in gas prices would increase urea cost of production by approximately Rs165 per bag. On January 01, 2012, government increased fertilizers’ feed stock prices (on old plants) by Rs197 per mmbtu (up 207% to Rs313 per mmbtu) and fuel prices by Rs74 per mmbtu (up 17% ro Rs508 per mmbtu).

Sources said that this Cess increase is to be formalized through the Finance Bill 2012, in the upcoming budget. This latest hike in Cess has taken place with the aim of providing the federal government a breathing space of approximately Rs55 billion in lieu of the staggering power subsidy bill that it is running.

As per industry experts, the fertilizer companies are likely to witness a substantial 32% increase in the price of feedstock gas to Rs413.3/mmbtu. The prevailing inventory situation of the industry indicates that there is little likelihood of pass through of the additional Cess to the final consumer in the immediate future, and this view is further supported by the recent temporary reduction in selling prices by urea manufacturers in an attempt to offload their huge inventories. Experts said that Engro’s Enven plant, and Fatima Fertilizer Company Limited are immune from this increase in Cess, and their final feedstock price remains intact at Rs60.67/mmbtu.

Industry experts said that the increase in the gas price is likely to affect cement manufacturers due to power intensive nature of cement manufacturing, as the electricity cost of cement industry will be jumped by at least Rs1.22/kwh

They said that most of the cement companies have gas fired captive plants for electricity generation. In addition to this, companies relying on the national grid may also face tariff revision due to increasing fuel cost for IPPs. Calculation suggests that this increase in Cess can augment the electricity tariff by RS1.22/kwh. They are of the view that the cement manufactures will be unable to pass on this cost push to the end consumer as they already facing a declining trend in sales and export volumes.

However, an expected FED decline of Rs10/bag in the upcoming budget may provide a cover to pass on this cost push. As per our calculations, cement manufactures will require to increase their prices by Rs7 per 50kg bag due to unprecedented hike in gas cess.