Furthermore the gas curtailment put a severe burden on the Companys cashflows

Furthermore the gas curtailment put a severe burden

This preview shows page 44 - 46 out of 94 pages.

Furthermore, the gas curtailment put a severe burden on the Company’s cashflows. Resultantly, in mid 2012, it approached majority of the lenders to allow for deferment of principal payments and the restructuring has now been practically completed. 5.2 INDUSTRY OVERVIEW Demand Agricultural sector is the backbone of Pakistan’s economy contributing a significant 21% to its Gross Domestic Product. Application of fertilizers plays an important role in supporting the stability of this sector. Of all the fertilizers, nitrogenous based are the most widely used followed by phosphates and potassium. Urea is a critical source of nitrogen in the country and comprises 71% of the overall fertilizer demand in Pakistan. Urea demand peaked at 6.5 MT in 2009 gradually decreasing to 5.3 MT in 2012. The fall in demand resulted from higher Urea prices owing to un-precedented gas curtailment and increase in gas prices. Going forward, the industry demand is expected to increase in view of better farm economics and resolution of gas supply issue. The Urea demand in the country is currently estimated to be around 5.7 MT which can be easily met without imports, if all the local urea plants are operating at 80% capacity utilization. Supply-Capacity Fertilizer sector in Pakistan witnessed a growth in urea capacity from 5.1 MT in 2009 to a current 6.9 MT with a 1.3 MT contribution coming alone from Engro Fertilizers Limited’s new urea plant. Natural gas is the principal raw material (feed stock) used in urea manufacturing in addition to being used for utilities (fuel gas). Historically, under the fertilizer policies, the Government allocated gas to this sector promoting the local manufacturing of urea with the intent to secure agricultural growth. Supply-Production The urea plants across the country draw gas either from fields connected on the network of gas distribution companies (SNGPL / SSGC) or those directly linked to the plants (Mari gas field). Lately, supply of gas has lagged behind the demand as extraction of gas from new fields has been fairly stagnant coupled with the continuous increase in demand. Additionally, the massive import oil bill has encouraged the power sector to partially shift to gas resulting in its shortage. This combined has led to a significant curtailment of gas to fertilizer sector, in particular, on the plants setup on the SNGPL network. Consequently, the local industry was able to produce only 4.2 MT of urea in 2012 despite a demand of 5.3 MT. This follows the historical trend whereby the demand has been higher than the local supply with the resulting gap bridged through expensive imports.
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Page 45 of 94 Pricing While the fuel gas is at commercial rates, the Government gives concessionary prices on feed gas to keep urea prices low for farmers protecting them from the higher international prices. In addition, the Government, under Fertilizer Policy 2001, guaranteed a discounted feed gas price for initial ten years incentivizing investment in this capital intensive sector. Given the Government’s policy to reduce the gap between feed and fuel stock, the urea prices have been on the rise in the past years. However,
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