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Urea manufacturers can earn $250m per annum if right impetuses are offered

At present Pakistan suffers from precarious balance of payment situation. Its exports are too paltry to finance imports. Though, remittances are reasonable, meeting debt service obligation has got out of control. Even the recently acquired facility from International Monetary Fund (IMF) and other countries will soon prove insufficient. In the prevailing situation the country has to expedite the two-pronged strategy of boosting exports and containing imports. While boosting exports may not be easy, one industry stands distinguished in terms of its ability to support the cause and that industry is urea manufacturing. Manufacturers have the spare capacity and what is needed is just an uninterrupted supply of gas through which one million tons of exportable urea can be produced to fetch US$250 million per annum, at the least.

Many economic analysts were surprised when the incumbent government decided to import 100,000 tons urea recently. They were of the opinion that import of urea had not only aggravated balance of payment situation, but also put fertilizer industry at an odd. Analysts have the consensus that Pakistan is capable of producing more than one million tons of exportable surplus urea, if right impetus is offered. They insist that no rocket science is required as the industry is ready to make use of low quality gas produced at Mari gas field to produce exportable urea whilst maintaining uninterrupted supply of urea in the local market. For any other industry, developing such capability will require significant outflow of forex for capital investment and substantial time.

It is estimated that an imported bag of urea of 50kg had cost Rs2,800 to the Government, which is being sold at Rs1,790, in line with the prices of locally manufactured urea. In other words the Government had to pay Rs1,010 subsidy per bag. Lately, two plants having an aggregate capacity of 0.9 million tons are being operated on RLNG and a subsidy of Rs1,250 per bag is being paid on the output of these plants translating into whopping sum of PKR 21B as an additional annualized burden on the national exchequer. Unfortunately due to carry forward losses, operations of these units do not help in alleviating the fiscal deficit of the country.

Reportedly, the nameplate aggregate capacity of urea manufactures in Pakistan is 7 million tons. At present the output hovers around 5.8 million tons, enough to meet the local demand. This below optimum capacity utilization is because of interruption/non-supply of gas to plants, which include Engrofert base plant, Fatimafert and AgriTech, the aggregate unutilized capacity of these three plants is in excess of 1 million tons per annum.

 

It may be said without mincing words that only the Government of Pakistan (GoP) can be held responsible for: 1) non supply of gas to efficient fertilizer units, 2) interruptions in gas supply and 3) disparity in pricing mechanism for various fertilizer industry players. It is on record that the GoP had dedicated Mari gas field to fertilizer industry in 2001. However, two power plants (Guddu and Foundation) are still getting gas from this field, in complete violation of Fertilizer Policy 2001. The current gas production capacity of this field is estimated around 680MMscfd. It is also apprehended that there has been no significant increase in production of gas over the years. Analysts say that even if there has been no increase in production, discontinuation of supply to power plants can help in boosting the availability and ensuring longevity of gas supply for the fertilizer industry which make use of this low quality gas in the most optimum manner.

Over the years, the Government has made great efforts to ensure that local fertilizer prices enable positive farm economics. The Fertilizer Policy introduced in 2001, was aimed at improving farmer economics by ensuring that the local fertilizer prices remain less than imported fertilizers. To give effect to this, feed gas prices for the fertilizer industry were aligned to the then prevailing Middle Eastern gas prices. Whilst, the Policy demands that fertilizer industry operates under this pricing regime, certain players in the industry are receiving part of their gas requirement at a price stipulated by the Petroleum Policy 2012, is 56% higher than the rate provided in Fertilizer Policy 2001.

Despite some companies being subject to higher gas pricing, the industry has kept urea prices at a significant discount over import parity and has not followed the volatile trends in the international market. This laudable action has been despite significant rupee devaluation and volatile crude prices in international market. This has made it difficult for such players to remain competitive in the local market. However, they may still be competitive to export in the international market. It is imperative for the Government to encourage the fertilizer industry to compete in the international market and generate foreign currency for the country through enhanced exports.

Textile industry presents a good model to replicate, where based on locally available gas under the Petroleum Policy, the country is benefitting from significant foreign currency inflows contributing positively and improving balance of trade. Fertilizer sector with its multi billion dollars investments over the past decades is well poised to export value added urea by monetizing non pipeline quality gases available locally that are sold to them.

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