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Pakistan Strategy: Govt. approves higher gas prices in a much anticipated move

• In a much awaited move, Economic coordination committee (ECC) has approved increase of gas prices, where the proposal is to raise industrial gas prices (Commercial, Fertilizer, General Industrial & Captive, Power, Cement, CNG) by 30-57% while domestic consumer gas prices are proposed to be increased by average 22%. For domestic consumers, the Govt. has proposed to create 7 slabs as opposed to earlier 3 slabs.
• Despite lower than anticipated increase in gas prices (earlier there were media reports that the Govt. is mulling to raise gas prices by average 46%), this is a bold step by the new government and is largely positive for the overall economy as it is anticipated to reduce revenues shortfall of Sui companies from Rs152bn to Rs58bn as per Govt. estimates. This could reduce fiscal deficit by 25-30bps.
• Gas price for lowest domestic slab (up to 50 cubic meters) will face gas price increase of 10% (gas bill to increase to Rs275 from Rs252). This segment represents 38% of consumers on system based gas.
• Further, gas prices for second lowest slab ( up to 100 cubic meters) will increase by 15% (gas bill to increase to Rs551 from Rs480).
• This 10-15% increase in gas prices for domestic consumers will have inflationary impact of 20-25bps on CPI. To note, there were earlier media reports of increasing gas prices by ~186% for lowest slab consumer, having CPI impact of 250bps.
• Among sectors, Fertilizer feed gas is increased by 50% to Rs185/mmbtu. While fuel price is increased by 40% to Rs780/mmbtu. To pass on this cost, urea manufacturers will have to increase urea prices by Rs120-130/bag. To note, Engro Fertilizer (EFERT) and Fatima Fertilizer (FATIMA) will be least affected as their Feed cost is based on concessionary pricing (US$0.7/mmbtu).
• Gas prices for exporters of five zero rated sectors will remain unchanged at Rs600/mmbtu. We consider this as a non-event for textile sector while investors’ sentiments will be generally positive.
• Gas prices for cement sector will be increased by 30% to Rs975/mmbtu. We expect negative bottom-line impact of 5-10% on select cement manufacturers.
• Furthermore, these gas prices are subject to approval of cabinet and its effective date will be decided by cabinet.