How would the rise in natural gas prices affect the industrial sector, the stock market?
Egypt has raised 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 spread between future values (FV) and current market prices is not large, because stocks initially did not reflect peak profitability, the market will not take the news and stocks will be under pressure.
Al Ahly Pharos Research said the only scenario that would save upside potential for the industrial sector in general is for the government to use a formula-based cost of gas, even if it is applied with a lag in the time. Technically, the Fuel Pricing Committee should review the cost of gas on a quarterly basis. As a result, this is not a far-fetched scenario.
For the fertilizer sector, Al Ahly Pharos Research said that if current gas prices are fixed and local subsidized prices are not adjusted, FVs would be close to current market prices, especially stocks have not been adjusted. not reflected the rally in urea when gas was at $ 4.50 (i.e. market prices did not rise 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 based on a formula at EGP 121.32. Liberalizing subsidized prices would help, but that does not change the situation.
The game changer here would be, in addition to local price liberalization, the assumption that gas prices would change, as world commodity prices fluctuated, which is in effect a formula-based arrangement. “With a lag” in decision making, depending on when the Fuel Prices Committee makes the decision. In this case, ABUK FV would be 26.83 EGP, EKHO FV $ 2.06 (32.30 EGP) and MFPC FV would reach 123.56 EGP.
Regarding the steel sector, Al Ahly Pharos Research estimates that according to current known assumptions, Ezz Steel (ESRS) is negatively impacted by the new cost structure and has significant downside potential, with FV dropping from 17 , 45 EGP to 10.45 EGP. The only way out that would equate FV to the current market price is to use a gas cost formula linking it to world prices, where FV would be EGP 14.83.
Although there is no impact on cement producers except South Valley Cement, which continues to use gas in production. However, the new cost of gas will discourage producers from any intention to revert to using gas in production. [instead of coal], even if the price of coal skyrockets, because their current effective cost will always be less than $ 5.75 / MMBtu
Regarding the ceramics sector, Al Ahly Pharos Research said that rising gas prices will cost companies a rise in COGS of around 5%. This might be slightly cushioned by higher selling prices, especially as global competitors pay higher gas costs, but it will be difficult to implement in the local market where local demand and power are available. purchase are quite low. At current known fundamentals, Al Ezz for Ceramics and Porcelain (ECAP) still shows 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.