The government has adjusted the price of natural gas for nitrogen fertiliser factories on the basis of a new calculation that factors in the price per ton of urea both locally and for export.
The mechanism will be updated monthly. The decision does not affect companies for which the price of natural gas is already stipulated in contracts with the government or companies that produce other types of fertilisers. The latter will continue to receive natural gas at $5.75 per million British thermal units (BTU).
The government purchases 55 per cent of the output of domestic fertiliser plants and supplies it to local farmers at subsided prices.
The new measure is likely to reduce the profitability of nitrogen fertilisers because the new calculation method effectively raises the price of the natural gas the factories need to operate, according to a report by Beltone Financial, an investment bank.
There are two types of fertiliser plants in Egypt: the producers of nitrogen fertilisers, which include Abu Qir Fertilisers and Chemical Industries, MOPCO, and Alexandria Fertilisers, and the producers of phosphate and potash fertilisers, such as the Evergrow Company.
According to the Beltone report, the impacts of the price hike on the companies will vary depending on their ratios of local and export sales and cost structures. The report estimates that the new calculation method will raise the cost of the natural gas the government supplies to nitrogen fertiliser factories to $7.67 per million BTU.
Despite the anticipated 33 per cent hike in the cost of natural gas, it predicts that the global prices of fertilisers will offset this to some extent.
In taking the measure, the government aims to take advantage of a significant rise in the prices of urea fertiliser. The profits of local fertiliser firms have increased dramatically in the past 18 months, presenting the government with an opportunity to increase its natural gas supplies to them and its revenues from this resource.
International fertiliser prices began to shoot up at the beginning of last year due to the growing demand for fertilisers after the Covid-19 pandemic subsided. The prices shot up further because of Western sanctions against Russia, the world’s largest fertiliser exporter. The cost of urea has since doubled to reach $850 a ton.
The fertiliser companies affected by the decision will need to assess their profitability. The impact could be considerable, especially given that they benefited from previous price supports that enhanced their ability to source and supply new export markets.
According to a statement by the Exporters Council, if the cost of supplying natural gas to the companies equals the international cost, Egyptian fertiliser products will find it harder to compete in export markets.
It added that the old natural gas prices had helped fertiliser companies to reinvigorate their export sectors and open new markets in Brazil and Argentina. The new pricing system could erode their profitability due to the increased cost of the most important raw material.
Exports of the chemical and fertilisers sector rose by 35 per cent in the first half of 2022 over the same period in 2021, increasing from $3.2 billion to $4.3 billion and making this Egypt’s biggest export sector, according to the Export and Import Control Authority.
The government’s decision had taken the fertiliser companies by surprise, said Hassan Abdel-Alim, CEO of the Helwan Fertilisers Company. He said his company stood to lose around $50 million of the profits it had earned last year, since the cost of natural gas represents 70 per cent of the cost of production.
Abdel-Alim said that the price of fertilisers can fluctuate considerably depending on supply and demand. Last month, a ton of fertiliser for export cost $880. A week ago, India submitted a tender offering it for $600.
According to the Beltone, Abu Qir Fertilisers is likely to be the hardest hit by the new decision because of the company’s fixed cost structure that is contingent on the cost of natural gas supplies. The company’s ratio of exports to domestic sales is 55 to 45 per cent.
The Alexandria Fertiliser Company, a subsidiary of the Egyptian Kuwaiti Holding Company, will also be adversely affected by the decision, according to Beltone, expected at times of high urea prices, which drive the cost of natural gas supplies to levels higher than the current $5.75 per million BTU.
Nevertheless, the report said that in this case the effect would be minor during the next two years because of the rising cost of urea.
*A version of this article appears in print in the 22 September, 2022 edition of Al-Ahram Weekly.