Fertilizer: Urea price hike on the cards following denial of relaxation on GIDC payments

September 15, 2020 (MLN): As the government rejected the request of providing an extension in the payment of GIDC related dues, the fertilizer manufacturers indicated that they would increase urea prices, a report by Fortune Securities stated.

For the unversed, the fertilizer manufacturers recently requested the government to provide an extension in the payments of GIDC related dues from 2 years monthly installments to 10 year to ensure the better liquidity position.

In this regard, the government on September 11, 2020, held separate meetings led by Adviser to PM, Dr Abdul Hafeez Shaikh with the delegations of fertilizer and textile industries. In this meeting the above-mentioned request was refuted by the government representatives, stating that the fertilizer industry had started collecting GIDC related dues from CY11 onwards and even after receiving stay orders from High Court did not reduce prices.

Furthermore, the ROE of fertilizer manufacturers was also quoted to indicate handsome profitability generated during the previous decade (5-year avg. ROE of FFC and EFERT was 46% and 32% respectively).

As the relaxation was denied, the report stated that fertilizer manufacturers might increase urea prices by Rs 500 per bag w.r.t 24 equal monthly installments and Rs 100 per bag for the installments over a 10-year period.

The possibility of Rs 500 per bag increase in urea prices is highly unlikely as this would negate the discontinuation of GIDC levy implemented in Jan’20 by ECC and would create inflationary pressures leading to lower utilization of urea in this crucial Rabi season., the report added.

The report further presented the two scenarios that can create amicable working plan.

The first scenario tells that if the fertilizer manufacturers increase urea price in the range of Rs 100-150 per bag for 24 monthly installments, this would still keep urea prices below Rs.1800 per bag levels. At these levels, the discount to international prices would still remain at 40% ensuring passing benefits to poor farmers. At annualized levels, Rs 100 per bag increase in selling prices would have an EPS impact of Rs2.8 and Rs 2.0 for FFC and EFERT respectively.

The second scenario states that fertilizer manufacturers could use their receivables (subsidy receivable and ST receivable) from GoP for netting off payments which would reduce cash flows and improve dividend payouts.

As the GIDC payments being utilized for TAPI and IP projects, the report is of the view that any such scenario where payments stream would be stretched over a period of 10 years is unforeseeable, considering Pakistan’s already increasing reliance on imported RLNG.

Moreover, 24 -monthly installment plan would not be extended, but price hikes of Rs 100-150 per bag and netting off payables with receivables would be a viable solution for every party involved, the report concluded.

Copyright Mettis Link News