Efforts on to earn forex by reducing imports

By Shabbir H. Kazmi
Sep 07 - 13, 1998

Three leading manufacturers of urea in the country have recently released their accounts for the first half of 1998. It was encouraging to note that urea off-take during these six months increased by 18 per cent as compared to the corresponding period last year. But, according to the manufactures, the demand has flattened out gradually. Still the off-take was comparable with the consumption in the pervious two years. Indigenous production of urea has improved requiring lesser import of the commodity. The demand for phosphatic fertilizer took a quantum leap registering a 16 per cent increase.

Various types of fertilizers are used in the country but urea remains the commodity with in the largest demand sector. The urea market is dominantly shared by three manufacturers namely, Dawood Hercules Chemicals Limited, Engro Chemical Pakistan Limited and Fauji Fertilizer Company Limited. All the three are listed at the Karachi Stock Exchange. Fauji has the largest production capacity and contributed 46 per cent of the total sale in 1997 followed by Engro 20 per cent and Dawood 11 per cent. The other manufacturer controlling any significant market share is Pak Saudi Fertilizer. FFC-Jordan Fertilizer Company Limited is a joint venture between Fauji Fertilizer Company and a Jordanian company. It is expected to commence commercial production of urea as well as DAP shortly. It is located at Port Qasim near Karachi. Engro's current expansion project is expected to come on line by the end of 1998.


The demand for urea has been increasing consistently and significantly. This is due to two factors: the government of Pakistan (GoP) besides offering various incentives to the fertilizer manufacturers to keep the cost of production low also extending soft term loans to growers for the purchase of various inputs. The manufacturers have been able to take the fullest advantage of the GoP policies and have expanded the production capacities over the years. This, on the one hand, has helped the country in achieving self sufficiency in the production of urea and, on the other hand, has reduced the foreign exchange expenditure on import of the product.

Consumption of urea is seasonal. In the past, during the peak consumption period, some unscrupulous elements used to indulge in black marketing of the commodity. However, with the enhanced availability of indigenously produced urea and an elaborate dealers network the manufacturers have been able to minimise such incidence.


One of the factors responsible for phenomenal increase in the indigenous production of urea is the policy of the government regarding supply of gas (feedstock) at concessional rate. The policy has benefited the country.

When the first urea manufacturing plant was established in the country in 1967 by Exxon Chemical, its installed capacity was only 148,000 tonnes per annum. The policy has encouraged establishment of new units and expansion of installed capacities by the manufacturers. The total installed capacity in the country now exceeds 3.2 million tonnes. This capacity will be further increased by one million tonnes by the end of this year when the current expansion by ECPL and FFC-Jordan starts commercial production.

However, some of the analysts believe that the advantage of supply of gas at concessional rates to fertilizer manufacturers is not being passed on to the farmers. In their views, at present the international prices of urea are lower than its domestic price. And therefore, they suggest that efforts should be made by the manufacturers to lower urea price. The manufacturers do not agree with this. They say that they have been importing expensive urea in the past and selling at lower prices – virtually subsidising urea sale — a responsibility of the government. Therefore, if the price of urea has declined in the international market, they should not be asked to lower the domestic price. In their views, it is a temporary phase as there is an over supply situation in the global markets. At this time the GoP must protect the local industry.


Since the lands in the country are deficient in nitrogenous material, urea has to be used to overcome the deficiency. The urea sale is directly linked to the purchasing power of farmers and the availability of credit to them. The cash flow to farmers is directly related to the prices of agriculture produce and the yields achieved during the preceding year. When there is a bumper crop and support prices are higher, the growers get more cash inflow. During the last few years, the income of cotton growers was adversely affected due to curl leaf virus (CLV) attacks on cotton crop.

Following the losses incurred to the cotton growers on various grounds, many of the farmers, particularly in Punjab, in order to avoid further losses, switched over to sugarcane cultivation. But, they could not get the similar income mainly because the climatic conditions of the area were not suitable for the cultivation of sugarcane. The result was that per acre yield was low and recovery of sugar was also below than the average recovery achieved in Sindh – the main sugarcane growing belt in the country.

The manufacturers also say that over the years, urea production capacity in the country has been increased which has gradually lowered the import bill of urea. While many other industries enjoying similar incentives have not taken the fullest advantage of the GoP policies, it is most probably, the fertilizer industry, which has exploited the best advantage of the policy. The country is almost self sufficient in indigenous production of urea. The industry has achieved the stage of potential earner of foreign exchange for the country. The export of surplus production can be done by the urea manufacturers to pay for the import of DAP type fertilizer and completely free the GoP from its import. With the commencement of DAP type fertilizer by FFC-Jordan the import bill of the commodity will be reduced partly because the country will be importing a major portion of the raw material from Jordan.

Some of the industry experts say that the country has exported urea in the past and, therefore, concerted efforts should be made to make this a regular export commodity. They say that by the end of this year the installed capacity in the country will be increased by one million tonnes. Therefore, the country is expected to achieve surplus in 1999 — may be a temporary phase but the country must make the best efforts to exploit this potential.

According to these analysts, during the last few years, the capacity utilisation of urea manufacturing units remained low on account of load-shedding of gas.

To substantiate their point of view they quoted the example of Dawood Hercules. During 1997 the capacity utilisation was around 82 per cent. The plant has been running above designed capacity in the past. They also said that while all the other urea manufacturing unit had increased their installed capacity, Dawood Hercules had not been able to expand its capacity in spite of increasing demand for urea in the country.

















However, the other group believes that the industry is still to achieved the status of potential export earner. The quantities imported over the year have varied sharply. While the total import of urea in 1994 was only 78,000 tonnes, it touched 506,000 tonnes mark in 1996. In 1998, till end of July, the country imported 233,000 tonnes and import of another 450,000 tonnes is expected before the end of the year.


During the peak demand period the three urea manufacturers, Engro, Fauji and Pak Saudi, face serious logistic problems. This include availability of trucks and railway wagons, heavy traffic and frequent traffic jams on National Highway as all these units are located within a radius of 100 kilometers. The manufacturers have been demanding, for a long time, of the government to expand the roads but the problem still persists.











Fauji Fertilizer Company Limited is the largest manufacturer of urea in Pakistan. In 1997 the

Company produced 1.507 million tonnes of urea as compared to a production of 1.407 million tonnes in 1996. Its share in the total sale of urea in the country was 46 per cent in 1997. During the first half of the current year it produced 740,000 tonnes of the commodity.

Fauji Foundation established the plant at Goth Machi, in early eighties, with an installed capacity of 570,000 tonnes per annum. Over the years it has enhanced the capacity to present level. The major expansion was in 1994 when the company established the second plant having a capacity to produce 635,000 tonnes per annum.

FFC—Jordan Fertilizer Company Limited is a joint venture of Fauji Fertilizer Company and Jordan Phosphate Mines Corporation. The US$ 370 million plant is being established at Port Qasim with a capacity to produce 551,000 tonnes of urea and 446,000 tonnes of DAP annually. The commencement of commercial production by the project has been delayed. The unit is expected to start commercial production during the last quarter of 1998. At a time when the unit will enjoy the advantage of proximity to the port to handle its imported raw material, it will also face a disadvantage regarding sale of finished product. However, the experts believe that the Company will have an edge over other urea manufactures once the country starts exporting the commodity — a stage not too far away.

Engro Chemical Pakistan Limited, formally known as Exxon Chemical Pakistan, was established in 1967 with an installed capacity to produce 147,000 tonnes of urea annually. The Company has already expanded the urea production capacity to 750,000 tonnes per annum. After the completion of current expansion programme, the annual production capacity will be enhanced to 850,000 tonnes per annum besides improving plant energy efficiency and strengthening the environment conservation measures. The delay in manufacture and shipment of some critical equipment by an overseas supplier has delayed completion of project from March 1998 to last quarter of the year. The project cost due to the change in scope and delayed commissioning has increased from US$ 59 million to US$ 72 million. However, according to the Company sources, the project economics remain unchanged due to enhancement in gas utilisation efficiency.

During 1997, ECPL produced 665,600 tonnes of urea as against a production of 738,200 tonnes in 1996 — a decline of 10 per cent. According to the Company sources the drop in production was due to operating difficulties, necessitating extended plant shutdowns for repairs or replacement of defective equipment. The longer unplanned shutdowns and maintenance put an adverse impact on the manufacturing expenses. However, from October 1997 onwards, the plant has been operating smoothly. During the first half of the current year ECPL produced 317,000 tonnes of urea.

After undertaking major expansions, ECPL is diversifying its operations. Engro Paktank Terminal Limited, the 50:50 joint venture of the Company with Royal Pakhoed of The Netherlands was formally inaugurated in May this year. The jetty and chemical storage facility at Port Qasim was built at a cost of US$ 65 million.

Engro Asahi Polymer & Chemical Limited (EAPCL) is a joint venture of ECPL with Asahi Glass and Mitsubishi Corporation of Japan for the production of PVC resin. The project is also being built at Port Qasim. It will have a capacity to produce 100,000 tonnes of resin annually. The project cost is estimated around Rs. 4 billion.

Dawood Hercules Chemicals Limited has not been able to enhance its production capacity lately. The Company operates on a gas network which is primarily domestic consumer oriented. Any increase in demand for gas or reduced gas availability, due to the fault in the system, immediately results in diversion of supply to domestic consumers particularly in winter months. During 1997 the Company was subjected to an unprecedented load-shedding of gas in summer months. This lowered the capacity utilisation significantly. The capacity utilisation by the Company was only 82 per cent whereas fertilizer plants in some other areas were able to achieve at least 10 to 12 per cent production above the designed capacity.

The Company produced 383,724 tonnes in 1996 and 365,734 tonnes in 1997. During the first of the current year production exceeded 188,492 tonnes indicating capacity utilisation at 85 per cent as against a capacity utilisation of 76 per cent during the corresponding period in 1997. It is believed that the average capacity utilisation for the year will improve to 90 per cent provided there is no load-shedding of gas. However, to achieve capacity utilisation above designed capacity the Company needs supply of gas at optimum level. This will not be possible without improving the pipeline network.


By the end of year 1998, approximately one million tonnes of additional urea manufacturing capacity is expected to come on stream in the country. This would not only improve the availability of the product but would also result into greater competition. With the present downward trend in the international price of urea, the ability to recover escalation in cost through higher prices will be limited. To remain successful in the tough competition it will be necessary for the manufacturers to focus on cost control and improved productivity.

The policies of the government assign the highest priority to allocation of gas for the fertilizer industry to boost agriculture production in the country. It is necessary that the government abides by the policy and meets industry demand for allocation of additional gas at reasonable price. To ensure availability of urea at competitive prices the government must avoid any escalation in the gas (feedstock) prices in the near future as the government intends to enhance production of food and cash crops in the country. Besides, the industry has become a potential foreign exchange earner. Efforts should be made to enable the industry to earn foreign exchange after freeing the country from its import liability.