Gas price hike to further push up inflation

Gas price hike to further push up inflation

KARACHI: The recent approval by Economic Coordination Committee (ECC) to increase the prices of gas will further push up the inflation, analysts said.

The country is already facing the alarming rise in inflation following sure in prices of petroleum products and electricity tariff.

The analysts at AKD Securities said that ECC approved hike in gas tariff after a break of almost two years, which was last increased in October 2020.

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“The latest increase will put further pressure on already sky rocketing inflation, as manufacturers are likely to pass on the impact, resulting in higher product prices and slowdown in demand,” the analysts said.

However, the aforementioned hike will put brake on ballooning gas circular debt, which currently stands at Rs1.23 trillion. As per new flows, the move will generate Rs666 billion in revenue for gas distribution companies.

Export oriented sector including textile companies will also feel the pinch of this increase as the proposed hike for these sector stands at 77 per cent and 38 per cent, respectively.

This development will severely impact country’s exports due to rise in manufacturing cost and higher financing rate.

READ MORE: Govt. halts gas supply to export industry: APTMA

The proposed weighted average gas prices for domestic consumers stands at Rs885/mmbtu, up by 90 per cent. The government has also made some changes in domestic slabs which has now reduced to 5 as compare to 7 slabs earlier.

The gas bill of consumers who are using gas up to 400 cubic meter are likely to be affected most, due to increase of 253 per cent in tariff.

They said that the inflationary impact of the said development will be 66 basis points on Month on Month (MoM) basis, taking average inflation to 21.5 per cent for the current fiscal year.

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The gas tariff for fertilizer plants is proposed to increase by 42 per cent and 82 per cent for feed and fuel gas, respectively. As per estimates, this will increase cost of urea manufacturing by Rs420/bag for FFC, while the increase for EFERT is Rs340/bag, due to its reliance on PP12 based gas pricing.

The manufacturers are likely to pass on any increase in gas tariff as they have already increased urea price by Rs350/bag on 1st July.

The increase in gas prices is expected to bode well for the E&P sector, including Oil and Gas Development Company Limited (OGDC), Pakistan Petroleum Limited (PPL), and Mari Petroleum Company Limited (MARI), as this would lead to improved cash collection for the companies in lieu of gas supply.

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As of March 2022 quarter end, OGDC’s receivables from SNGP stood at Rs142.42 million (Rs33.11/sh), whereas those from SSGC stood at Rs163.58 million (Rs38.03/sh). Similarly, PPL’s receivables stood at Rs141 million (Rs51.82/sh) from SSGC and Rs181.8 million (Rs66.81/sh) from SNGP. Whereas MARI’s receivables stand at Rs5.9 million (Rs44.90/sh) from SSGC and Rs8.3 million (Rs61.90/sh) from SNGP.

Due to liquidity issues, the companies have historically faced challenges in expanding their exploration activities. During 9MFY22, 61 per cent of PPL’s total sales were derived from SNGP and SSGC, hence PPL stands to be a major beneficiary of the proposal gas price hike.

The much waited tariff increase is a positive development for gas distribution companies as it will improve their cash flows. Similarly, this will provide a breath of fresh air to E&P sector in the form better liquidity, thus allowing them to expand their exploration activities.

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