Urea price reduction tied to smooth gas supply

MUSHTAQ GHUMMAN

Urea price
Urea price

The fertiliser industry on Wednesday said it will reduce urea prices up to Rs 200 per bag provided the government ensures required gas supply on consistent basis. This offer has been made by the Fertilisers Manufacturers of Pakistan Advisory Council (FMPAC), led by its Executive Director, Shahab Khawaja, former Secretary Industries and Production, in its maiden interaction with Islamabad-based journalists.

However, the fertiliser industry has made it clear that if the government reduces subsidy, the industry will pass on the difference to consumers by increasing prices which will negatively affect farmers who are already burdened by the increasing input costs. “Gas supply during the incumbent government has improved as the policymakers realise that fertiliser is a key input for food security,” the added.

Daud Hercules was represented by Nadeem Tariq whereas Faisal Muzammil, Aman ul- Haq and Waheed Hamid represented Agritech, Engro and Fauji Fertilizer Company Limited (FFCL), respectively. The association maintained that the government should assess very carefully implications of raising gas price of feedstock and its effect on farming community and food security.

In reply to a question, the association said that gas requirement for its member organisations at the SNGPL system is 240 MMCFD but they are getting only 75-80 MMCFD gas whereas at SSGC system, fertiliser sector needs 85 MMCFD gas but it is being supplied only 45-50 MMCFD which implies a difference of 35 MMCFD. Two plants, ie, Engro’s new plant and Agritech are operational presently whereas Daud Hercules was shut down recently.

“Production at Mari field has increased and Engro made some technical adjustment due to which it is operating for the last two three months. Likewise, the Agritech and Pak Arab plants are also operational as they are located in the North where supply has also improved,” said one of the representatives of FMPAC. The association also revealed that the government is extending average subsidy of Rs 225 on one bag of urea which was challenged by media. Engro Fertilizer in writing informed Business Recorder that it is getting subsidy of Rs 267 on one bag of urea. Some fertiliser plants are getting a subsidy up to Rs 300 per bag.

The association opposed printing of price on urea bags, arguing it is a commodity and nowhere in the world is the price of commodity printed. Fertiliser sector has to keep stock of packing material and it is not possible to print price on bags when prices of feed gas and taxes are raised periodically. The issue of price printing was raised in 2010 advertently for specific reasons.

“Printing of price on fertiliser bags has been made mandatory under Section 3 and we are passing through different experiments,” said one of the representatives of FMPAC. Replying to a question on allegations of a possible nexus between the fertiliser manufacturers and dealers which ultimately leads to increase in prices of fertiliser, the representatives dispelled the impression. Strength of registered dealers is 4500-5000. However, the association has not even rough idea of unregistered dealers who get involved in fertiliser business after increase in prices and devaluation of the rupee.

Pakistan’s seven major fertiliser manufacturers are FFC, Engro, Fatima, FFBL, Pakarab, Dawood Hercules and Agritech with installed capacity of 6.9 million tons of urea which is sixth largest in world against domestic demand of around 5.8 million tons making the country self-sufficient with potential to export provided installed capacity is fully operated. Gas, being the only raw material for fertiliser sector, is supplied from 3 sources – Mari (56 percent), SSGC (10 percent) and SNGPL (34 percent).

Fertiliser industry is facing severe gas shortage since 2001 and has paid over Rs 140 billion in taxes during the last five years. In 2012 average price differential between domestically produced and imported urea (without government subsidy) was Rs 1,015/bag (ex-GST). The government provided feed/fuel differential through concessionary feed gas of Rs 225/bag and remaining Rs 790/bag is passed onto farmers by the fertiliser sector voluntarily. Therefore, not only is the fertiliser industry passing on feed gas subsidy to the farmers, it is also passing on a much larger benefit voluntarily in addition to paying taxes to government. In total, farmer received a benefit of about Rs 365 billion over the last three years (about Rs 500 billion over last five years) in the form of lower domestic urea prices.

The government imported 435,000 tons of urea so far in 2013 at $140 million. Fertiliser industry maintains that no fresh imports are required for rest of the year 2013. About 300 Kt import was approved by the ECC for Kharif – all tendered but partial arrival yet, and 110 Kt through grants is also in the pipeline for running year. Pakistan would have to spend approximately Rs 360 billion annually on account of urea import if government decides to close down fertiliser industry by permanently disconnecting gas to 7 Fertilizer Plants with annual production capacity of 6.9 million tons.

The cost of importing 6.0 million tons of urea for the country would be approx Rs 312 billion and if government decides to subsidise this imported urea, as is the practice with imported urea, it would need additional Rs 140 billion to match the prevailing urea prices. The domestic fertiliser industry’s urea price is $340 per ton whereas the imported CFR price inclusive of handling, inland freight charges and sales tax is $454 per ton. The urea price includes GST of approx $50 per ton. If this amount is excluded, the domestic fertiliser price will come down to $290 per ton.

International price of urea is currently at its lowest ebb, and if an 18-36 month moving average is considered in which Pakistan imported over 3.1 million tons of urea by draining approximately $1.5 billion which was paid over Rs 80 billion subsidy, the differential between local and international prices is more than Rs 1,000 per bag. Courtesy Business Recorder

Published in ZaraiMedia.com

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