The regulatory actions in power sector space remained dominated by IMF directions. The government injected Rs. 200 billion into the energy chain in Mar’19 to bring down the overall stock of circular debt (Rs. 800 billion in Jan’19), where bulk of payments was directed to E&Ps and OMCs (PSO), financed through Energy Sukuk I. This was followed by an announcement of another Rs. 200-300 billion of cash injection by Jun’19. However, IMF’s restriction to keep government sovereign guarantees at 2 percent of GDP in any fiscal year caused a delay in its materialization. The IMF later relaxed this restriction in Oct’19, post which Energy Sukuk II issuing process again picked up some pace. Meanwhile, the government agreement with the IMF stipulates that electricity tariff be adjusted each quarter and the inefficiencies and other expenditures be passed onto the consumers. As a result, Economic Coordination Committee (ECC) approved Rs. 0.53/KWh and Rs. 0.17/KWh increase in electricity tariffs in Sep’19 and Dec’19, respectively.
The government and IPPs reached an agreement to avoid prolonged litigation on local and international forums, where IPPs agreed to withdraw legal charges. The agreement also entails clearance of 50 percent of all the overdue invoices of the signatory IPPs (which entered into the settlement agreement with government) within three months of the execution of the settlement agreement.
Cement players had an eventful year where regulatory changes mostly contributed to the agony of local players. Already marred by excess capacity posing significant pressure on prices (local prices declined by PkR140/bag during Jul’19-Sep’19), increase in FED by PkR25/bag to PkR100/bag and implementation of axle load limits increased the transport costs by 50-60% resulted in margins declining to 5% in 1QFY20 against 24% in 1QFY19.
Select players suffered additional injury from increasing gas prices (increased by 31% to Rs. 1,021/mmbtu for captive power generation) as cost of captive generation increased (mainly Lucky cement) while reduction in tax credit on BMR and expansion being decreased to 5% with applicable limit reduced to Jun’19 from Jun’21 impacted Cherat Cement and Maple Leaf Cement as both players commenced production from new plants in FY19. The same proved to be a dampener with expected commencement of expansions in FY21 (Lucky, Kohat Cement & Pioneer Cement).
The regulatory environment remained unfavorable for the fertilizer sector during CY19. The government ensured subsidized LNG supply to non-operational fertilizer plants till Nov’19. Consequently, the overall industry wide utilization levels increased to 97 percent in 10MCY19 vs. 88 percent in CY18. LNG based operations and a sudden dip in urea offtake in 4QCY19 resulted in ending inventory to creep up to 886,000 tons in Oct’19 vs. 212,000 tons in Oct’18. However, these implications have risen in 2HCY19.
Meanwhile, the fertilizer players were in a comfortable position in the earlier half of CY19 where they passed on the impact of gas price hikes (62/31 percent in feed/fuel gas prices w.e.f Jul’19) and inflationary pressures (Mar’19) to the end consumers. With (i) fiscal constraints (ii) IMF ruling out direct subsidies, and (iii) low to no room to maneuver sales tax (uniform 2 percent), a presidential ordinance in Sep’19 entailed 50 percent lower prospective GIDC rates. The fertilizer players on the other hand ensured government to reduce urea price by PkR200/bag, passing on the benefit of lower GIDC to the farmer community. The presidential ordinance, however, was later withdrawn due to pressure from the opposition parties.
Oil Marketing Companies (OMCs)
Major regulatory change for OMCs was revision in margins of HSD and MS which were increased by 6.4 percent to PkR2.81/ltr resulting in annualized impact for PSO/APL. Slated for Jul’19, margin revision faced significant delay and was finally implemented in Dec’19 while for future, it was decided that inflation of Jul-Jun (fiscal year) was to be taken as reference point against current time period of April and May.
Minimum tax on turnover for OMCs was increased to 0.75 percent from 0.5 percent, which came into play specifically after heavy exchange losses significantly depressed the bottom line for SHELL and HASCOL. Moreover, clearance of circular debt in the form of Energy Sukuk-I resulted in PSO receiving Rs. 60 billion, easing the liquidity concerns of the company.
HSFO prices have dipped further (down 17%MoM) continuing an already tremendous decline taking its refining crack against Arab Light to USD 29.3/bbl, blowback from impending IMO 2020 restriction and a clear dampener for mid-stream profitability. Additionally, this fall in HSFO prices has largely overridden PKR devaluation impact on grid generation costs, where a further slide would further curtail the difference in cost of generation between FO and RLNG.
HSD/MS were trading marginally higher while cracks for the same exhibited a downward trend however improvements are expected during 1QCY20. Calm on this front is likely to act as a catalyst for physical crude draws with early December OPEC+ agreement adding further impetus to bullish expectations, where 1.7 million bpd cut from January through March, should support cracks for HSD and MS.