Higher LNG Prices for June to Impact Fertilizer, Power, and Industrial Stocks

What the LNG price increase changed

Pakistan's Oil and Gas Regulatory Authority (OGRA) has announced an increase in the price of Liquefied Natural Gas (LNG) for the month of June. This adjustment reflects global market rates and the cost of imported LNG, which is a significant energy source for various industries across the country.

Why it matters for industrial stocks

An increase in LNG prices directly translates to higher operational costs for industries that use natural gas as a primary fuel or as a chemical feedstock. This can compress profit margins for companies unable to fully pass on these increased costs to consumers, or it can lead to higher prices for end products, potentially affecting demand. For sectors like fertilizer, power generation, textiles, and steel, gas is a critical input, making them particularly sensitive to such price changes.

Which stocks, and why

The impact of higher LNG prices will be felt across several sectors:

• Fertilizer Sector: Companies like Engro Corporation, Engro Fertilizers, Fauji Fertilizer, Fauji Fertilizer Bin Qasim, and Fatima Fertilizer rely heavily on natural gas as a feedstock to produce urea and other fertilizers. A rise in the gas-tariff directly increases their cost of production, which can squeeze their margins if urea prices do not adjust proportionally. This is a significant negative for their profitability.

• Power Generation Sector: Independent Power Producers (IPPs) such as Hub Power, K-Electric, Nishat Power, and Kot Addu Power often use gas, including imported LNG, to generate electricity. While their tariffs typically allow for the pass-through of fuel costs, higher lng-price can exacerbate the issue of circular debt in the power sector, leading to delays in payments and impacting their cash flows. This is generally a negative for their business operations.

• Textile Sector: Textile manufacturers like Interloop, Nishat Mills, Gul Ahmed Textile, and Kohinoor Textile use natural gas extensively in their dyeing, processing, and power generation units. Higher lng-price will increase their energy costs, impacting their overall cost of goods sold and potentially reducing their competitiveness in export markets. This is a negative for their margins.

• Engineering & Steel Sector: Companies such as Mughal Iron & Steel, International Steels, and Amreli Steels operate energy-intensive plants, with natural gas being a key fuel for furnaces and other processes. An increase in lng-price will raise their manufacturing costs, which could affect their profitability, especially if construction demand or steel prices do not rise to offset these higher expenses. This is a negative impact.

• Chemicals Sector: Engro Polymer & Chemicals and ICI Pakistan have operations that use natural gas either as a fuel or as a component in their chemical processes. Higher lng-price will increase their input costs, potentially affecting their margins, particularly for products like PVC where energy costs are significant. This presents a negative pressure on their earnings.

• Gas Utilities: For Sui Northern Gas Pipelines and Sui Southern Gas Company, the increase in lng-price means higher procurement costs for the gas they distribute. While these costs are typically passed on to consumers through tariff adjustments determined by OGRA, there can be lags in recovery and potential for increased Unaccounted for Gas (UFG) losses or circular debt accumulation, which can negatively affect their working capital and financial health. This is a low-influence negative impact.

What to watch

Investors should monitor future OGRA tariff determinations and how effectively different sectors can pass on these increased costs to their end-users. The global lng-price trend will also be crucial, as sustained high prices will continue to pressure industrial margins. Additionally, any government interventions or subsidies to mitigate the impact on specific industries would be important to watch.