Fertilizer: CCP proposes withdrawal of GIDC on feedstock gas supply

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  • Competition Commission of Pakistan (CCP) has proposed to withdraw levy of GIDC on feedstock for pre-2001 fertilizer plants (Fauji Fertilizer, Fauji Fertilizer Bin Qasim and Engro’s old fertilizer plant).
  • On the other hand, it is also proposed that the GIDC Act may be amended to rationalize the GIDC on fuel gas for the fertilizer plants. This will eliminate the cost disadvantage of pre-2001 fertilizer plants.
  • The imposition of GIDC in 2011 on feedstock gas supplies at Rs197/mmbtu and the subsequent enhancement of the cess to Rs300/mmbtu in 2013 has resulted in a price differential of Rs355/mmbtu between pre and post 2001 fertilizer plants.
  • Even if the govt. directs post-2001 fertilizer plants to sell at a lower price, it will disrupt the pre-2001 plant offtake. In this case, the price differential will benefit the hoarders & the impact will not trickle down to the farmers.
  • The above proposals are in favour of Fauji group because of its fertilizer plants are all pre-2001. Nonetheless we remain vary of these proposals as it is very early to gauge the likelihood of its implementation.

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CCP recommends equal levy of GIDC on all fertilizer plants

Competition Commission of Pakistan (CCP) has issued a ‘Policy Note’ to the govt. and recommended equal levy of Gas Infrastructure Development Cess (GIDC) on all fertilizer plants to create a level playing field in the urea market. For that purpose, it has been proposed that the levy of GIDC on feedstock for pre-2001 fertilizer plants (Fauji Fertilizer, Fauji Fertilizer Bin Qasim and Engro’s old fertilizer plant) should be withdrawn and on the other hand the GIDC Act may be amended to rationalize the GIDC on fuelstock gas used by fertilizer plants. This will eliminate the cost disadvantage of pre-2001 fertilizer plants.

New plants gain at the cost of old plants

To recall, before the imposition of GIDC the feedstock gas cost differential between pre-2001 and post-2001 fertilizer plants was merely Rs41/mmbtu. However, with the imposition of GIDC in 2011 on feedstock gas supplies at Rs197/mmbtu and the subsequent enhancement of the cess to Rs300/mmbtu in 2013, the price differential has expanded to Rs355/mmbtu. Note that the GIDC on fuel gas supply is same for all plants and domestic urea producers sell urea at the same price. Even if the govt. directs post-2001 fertilizer plants (Fatima Fertilizer and Engro’s Enven plant, whose concessionary gas rate agreement is still pending) to sell at a lower price, it will disrupt the offtake for pre-2001 plants. In that case the price differential will benefit the hoarders and the impact will not trickle down to the farmers. Therefore it is a win-win situation for post-2001 fertilizer plants.

Recommendation

Though it is still too early to speculate on government’s response to CCP’s recommendation, but looking into CCP’s recommendations in the past, it has not been taken that seriously by the stakeholders. Nevertheless, we highlight the aforementioned proposals to be in favour of Fauji group because the group does not have a post-2001 policy fertilizer plant like Engro or Fatima Fertilizer. We currently have a ‘Buy’ recommendation on FATIMA (TP: Rs32) and ENGRO (TP: Rs235) and ‘Hold’ on FFC (TP: Rs117) and FFBL (Rs42).

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