Egypt has increased natural gas prices for the industrial sector to $5.75/MMBtu, except for companies that calculate gas costs based on a formula tied to selling prices.
Stock market experts believe that while the gap between the future values (FVs) and current market prices is not wide, because stocks had initially failed to reflect the profitability spike, the market will not take the news well and stocks will be under pressure.
Al Ahly Pharos Research said that the only scenario that would save the upside potential for the industrial sector in general is that the government would utilize a formula-based gas cost, even if applied with a time lag. Technically, the Fuel Pricing Committee should look into gas cost every quarter. Accordingly, this is not a far-fetched scenario.
For the fertilizers sector, Al Ahly Pharos Research said If the current gas prices will be fixed and local subsidized prices are not adjusted, FVs would be close to current market prices, especially that stocks failed to reflect Urea rally when gas was at $4.50 (i.e. market prices did not surge with global commodity prices). Abu Qir Fertilizers (ABUK) FV would be EGP 22.79, Egypt Kuwait Holding (EKHO) FV would be $1.97 (EGP 30.90), and Misr Fertilizers Production Company (MFPC) FV would not be affected since its cost is already formula-based at EGP 121.32. Liberalization of subsidized prices would help, but it is not a game changer.
The game changer here would be, in addition to local prices liberalization, the assumption that gas prices would change, as global commodity prices fluctuate, which is effectively a formula-based arrangement “with a time lag” in decision making, depending on when the Fuel Pricing Committee takes the decision. In that case, ABUK FV would be EGP 26.83, EKHO FV would be $2.06 (EGP 32.30), and MFPC FV would reach EGP 123.56.
As for the steel sector, Al Ahly Pharos Research believes that at current known assumptions, Ezz Steel (ESRS) is negatively impacted by the new cost structure and has a significant downside potential, as FV goes down from EGP 17.45 to EGP 10.45. The only way out that would equate FV with current market price is the utilization of a formula for gas cost linking it to global prices, in which FV would settle at EGP 14.83.
While there will be no impact on cement producers, except for South Valley Cement, that continues to use gas in production. However, the new cost of gas will discourage producers from any intention to switch back to utilization of gas in production [instead of coal], even if coal price shoot higher, because their current effective cost will still be lower than $5.75/MMBtu
Regarding the ceramics sector, Al Ahly Pharos Research said that the hike in gas prices will cost companies a rise in COGS by around 5%. This might be slightly cushioned by higher selling prices, especially that global competitors are paying higher gas costs, but this will be hard to implement in the local market where local demand and purchasing power is pretty weak. At current known fundamentals, Al Ezz for Ceramics and Porcelain (ECAP) is still showing some upside potential, although FV goes down to EGP 12.75, but Lecico Egypt (LCSW) has a downside, as FV goes down to EGP 2.44.
