Money Matters

Energy crisis

Money Matters
By Mansoor Ahmad
Mon, 12, 21

After increase in gas rates from $6.5 mmbtu to $9 per mmbtu there is no cost difference if textile sector shifts to electric power, but the devil lies in details.

Energy crisis

After increase in gas rates from $6.5 mmbtu to $9 per mmbtu there is no cost difference if textile sector shifts to electric power, but the devil lies in details.

The government has acted in haste and without planning. In fact, if electricity is made seamlessly available at 9 US cents per unit, it is slightly cheaper than the power that the textile sector produces from its captive gas generators. The hue and cry of the textile exporters is not on cost. It is on the quality of supplies and the quantity of power that is offered to them. Most of the textile units used grid power for emergencies only. Their sanctioned loads were less than their requirement.

When gas was freely available, they never felt the need to increase their grid power loads as every increase translates into high monthly rent or cost. Still, as the exports started increasing at a very rapid pace many millers applied for load increase. Some applied about 6 months back. The load was not upgraded by the power distribution companies on the plea that they do not have sufficient transmission structure or available power.

This plea is surprising, as the country officially has excess power generation capacity. The government is paying very high-capacity charges to the private sector power producers for not using those capacities.

Another problem faced by exporting manufacturers is the quality of the power supply. They claim that power supply is not stable, there are surges of high and low voltages that damage their machines. The unplanned power interruptions cause loss of expensive raw materials that become useless when the processes are interrupted during these outrages. The energy managers did not do their homework openly before forcing the industries to shift to grid power from their gas run generators.

The system flaws should have been removed first. The apparel sector is somehow managing their machines on grid power, but the spinners cannot because their sanctioned power is lower than their requirement and their applications for increasing load are pending.

It is a week now that the government has suspended gas supplies to 108 spinning mills in Punjab that do not have enough sanctioned power load to operate them. At 25,000 average spindles per mill, there are 2.52 million spindles that have almost gone out of production. Many are operating at 30 percent of their capacity.

Theoretically, the power is available, but practically it is not. The quality and regular supply issues need full time attention of the energy managers from top to bottom. Efficiency of energy workers must be rewarded, and inefficiency severely punished.

The loads of the spinning mills should be immediately increased and quality of power ensured (both possible if governance is improved and rampant corruption in the power sector checked). The power supply to textile exporters is hardly 5 percent of the total power supply in the country. Dedicated efforts to improve its efficiency will help the government to ultimately set things right in the entire sector.

This government assured the textile exporters that it would ensure long-term supply of gas to them at a fixed rate of $6.5 per mmbtu. Long-term literally means for a period of five years. The government never envisaged that the gas prices in the international market would shoot up much more than the crude oil rates.

The subsidy on gas in the beginning was around Rs20 billion annually, but after increase in global LNG rates it increased to Rs80 billion. Ultimately, the government was forced to increase the subsidised rate to $9 per mmbtu although the subsidy amount was still much higher.

Textile exporters after a lot of grumbling agreed to the higher price. The ineptness of the government is evident from the fact that after increasing the gas tariff, it found that it was impossible to buy LNG from the floating market. It had entered long-term contracts with Qatar and Russia at reasonable prices based on a certain percentage of prevailing crude oil prices. But this gas was not enough. The demand for gas increases manifold during winter in the global market. Every year the government fulfills that demand by procuring it from the open market. Certain global players that have contracts with the supplying countries bring their LNG vessels in the open seas. These floating vessels charge rates according to the market demand.

When demand is low, they sell vessels at lower rates, and when demand is high they charge very high rates. Pakistan cannot buy LNG at current open market rates. Still the government signed deals with few of these suppliers at high rates. These agreements have clauses under which the defaulter (buyer or seller) must pay a hefty fine.

Unfortunately, the gas prices skyrocketed, and the buyers preferred to pay the penalty to Pakistan and dispose of the vessels at much higher than contracted rates. After the acute gas crisis, the government suspended the supply of gas to the exporting industries. Textiles sector being the prime exporting sector was impacted the most.

It is true that most of the textile units were operating highly inefficient gas generators that consumed twice the amount of gas than the recently commissioned public sector gas-run power plants. This fact was known to the energy managers of the country for years, but they are pointing out this inefficiency now. Many spinners realising the importance of efficiency imported new gas generators that are highly efficient. They have also been deprived of gas, resulting in the wastage of huge investments they recently made.

Pakistan is one of the few countries that produce from yarn and fabric to apparel mostly from the domestically produced cotton. The disposal of cotton depends on the sustained operations of the spinning mills. If yarn production declines, so would the cotton uptake decrease. The exporters in the value-added sector have enhanced their capacities because of the influx of export orders. They are now feeling the shortage of domestic yarn.

They have the liberty to import the yarn duty free and stock it in their bonded warehouses for three years. This is an excellent facility, but after Covid-19, imports are not feasible as the transport charges have increased exponentially. A container of yarn that cost $2,000 before pandemic, is now available at $8,000 that has made imports unfeasible.

Apparel exporters are worried about the short supply of yarn, and it is delaying the execution of export orders. The buyers have mostly refused to extend the letter of credit and are demanding delivery through air which is very expensive.

Large consignments cost somewhat less, but even these exporters pointed out that all their margins vanish and, in some cases, they suffer some loss. The small exporters are more perturbed as air freight cost is unbearable for them. Some may default.

Leading textile exporters are of the view that the export thrust could sustain in December, but there would be an appreciable dip in textile exports in January. Foreign buyers are reluctant to place fresh orders. Only two months back, the Pakistani exporters were refusing orders that they could not execute and went for capacity expansion to accept more orders. Now, the situation is dismal.

The writer is a staff member