The delay in the fertilizer policy the increase in
gas prices and the duty on plants and machinery are the main issues
By SHABBIR H. KAZMI
Apr 02 - 08, 2001
The delay in announcing Fertilizer Policy is not
allowing fertilizer manufacturers to undertake capacity expansion to
keep the country self-sufficient in urea production. However, industry
experts fail to understand reasons which are keeping various
ministries entangled in any debate. It is simply a two-point agenda:
gas (feedstock) price and duty on plant and machinery. The increase in
feedstock price and imposition of duty on plant and machinery can only
bleak the potential for future investment in fertilizer industry.
It is often said and believed that fertilizer
manufacturers in Pakistan get feedstock at subsidized rate. It may
look so when one compares feedstock price with furnace oil price. But
the belief is totally incorrect when one looks at feedstock price
prevailing in the Middle East and the fact that feedstock is an
important raw material. Whereas furnace oil is a fuel.
In the recent past, Pakistan has witnessed large
scale dumping of urea from the Middle East. The only reason for lower
cost of urea in the Middle East is around one third price of feedstock
in the region as compared to the price being charged in Pakistan —
despite the claim that local urea manufacturers get feedstock at a
According to sector experts the feedstock price in
the Middle East range from US$ 0.5 to US$ 0.75 per MBTU, whereas
fertilizer plants in Pakistan pay US$ 1.4 to US$ 1.7 per MBTU. While
there was dumping from the Middle East, the GoP imposed regulatory
duty on imported urea to protect the indigenous manufacturers.
Imposition of regulatory duty can be termed a temporary remedy only.
The permanent solution is to make the industry strong enough to
compete in the global market without the crutches of regulatory duty.
Therefore, the price of feedstock in Pakistan should be comparable
with its price in the Middle East.
The other fact that feedstock constitute nearly 70
per cent of total cost of urea should not be ignored by the opponents
of low cost gas supply to fertilizer plants. The reasons being that
urea is an important agriculture input and the largest percentage of
total population is involved in the sector. While any hike in the
prices of agricultural inputs can influence less than 5 to 10 per cent
of total population in developed countries, the similar surges in
Pakistan not only affects over 65 per cent of total population of the
country, it also affects earnings of textile and sugar industries —
the engine of GDP growth. Therefore, the logical conclusion is
continued supply of feedstock at competitive price to urea
The argument put forward for the removal of subsidy
is that the World Trade Organization and multilateral lenders do not
approve this. This statement is not only incorrect but in conflict
with national interest. Pakistan should not bowdown before this
pressure. This is not a political statement. It is a fact that no
country can deny the fact that it offers subsidy to agriculture
sector. The only debate could be on the mechanism of disbursement of
subsidy. Even if one accepts that fertilizer plants in Pakistan get
feedstock at subsidized rate, it is the most transparent system.
Therefore, why to look for any other system which may not be so
According to the sector experts, the slogan for
withdrawal of subsidy has been raised only because urea manufacturers
make profit. Had they were making losses the resistance would have not
been there. Therefore, it is necessary to understand the quantum of
investment made in the industry and the profit being made by the local
players. In the recent years a fresh investment of over US$ 1.5
billion was made and the profit posted by these companies during the
year 2000 was around US$ 100 million. Another fact is that
manufacturers have not been distributing total profit to their
shareholders but ploughing back substantial percentage. Can this be
Another argument put forward in the opposition of
subsidy is that the price of urea is higher in Pakistan as compared to
its international prices. The basis of comparison is FOB prices.
Generally such comparison is based on recent prices which is not
correct. If one compares the prices over the last decade, it is clear
that urea prices in Pakistan were lower as compared to its
international prices. Besides, when the GoP decided to deregulate urea
trade, it also asked the manufacturers to bear higher cost if cost of
imported urea was higher. It is evident that local manufacturers have
sold expensive imported urea at lower price in the past. Therefore,
why a noise if they make higher profit when international price of
urea is low?
An important factor which these ardent opponents of
subsidy forget is that the basis of price comparison should be the
cost of urea delivered at farms and not the FOB prices. It should also
be kept in mind that now manufacturers are required to import, in case
of any shortfall in supply, according to their market share.
Therefore, the best efforts of these companies is to minimize the
landed cost of imported urea. The price issue was an outcome of entry
of commercial importers in the fertilizer trade.
It is understood that CBR is resisting continuity
of duty free import of plant and machinery for fertilizer industry.
Its only objective is to raise revenue collection and probably it is
not willing to understand the logic being put forward by the
industries in general. The prudent approach is to collect taxes from
industrial units which are in operation and not the front loading.
Imposition of import duty is outright front loading. Besides, there is
no logic in taxing an industrial unit which has not commenced
operations. As such the manufacturing companies enjoying bulk of the
market share pay corporate and other taxes in millions of rupees. Is
it not enough for the CBR?
Bulk of the market share is being controlled by
companies who get supply of feedstock from a dedicated gas field —
Mari. The companies drawing gas from this field are Fauji, Engro and
Saudi Pak. Therefore, any additional allocation of gas, if these
companies undertake expansion, could be ensured with least expenditure
on infrastructure for gas supply. As such the cost of pipeline from
gas field to fertilizer units was born by fertilizer companies and
they would do the so without any hesitation if they are allocated
additional quota. Engro is located within a radius of 6 miles and
Saudi Pak are located at a distance of 10 miles and 30 miles
respectively. This is as good as being located at the gas field. As
opposed to this, FFC-Jordan and Dawood are linked with a grid
supplying gas to millions of consumers.
Most important factor also ignored by the opponents
of subsidy on feedstock is that the GoP had dedicated Mari field for
fertilizer plants. The reason being that the specification of this gas
is most suitable for use in urea manufacturing plant. Besides, this
gas has low BTU value and it is not suitable for use for power plants.
Therefore, the best option is to increase the output of this field to
achieve higher production of urea.
Another argument in support of enhancing output of
Mari field is that the field is owned by the GoP and Mari Gas Company
Limited has been given operating rights only. According to sector
experts, gas purchased from any other operator of gas field is atleast
20 times more expensive than the gas drawn from Mari field.
Supplying low cost but having required
specification, to fertilizer plants is need of the day. Since bringing
more area under cultivation is difficult, at least for the time being,
a prudent option is increasing yield by using balanced nutrient
contents. The land under cultivation are mostly deficient in
nitrogenous content which is met by urea. As much urea use in the
country is below the required dosage. This consumption has to be
increased and the most appropriate option is increasing its indigenous
The country also needs to enhance local production
of urea to create exportable surplus. Pakistan has to earn extra
dollars to finance import of DAP type fertilizer. The current DAP
production is not capable of meeting the demand. On top of this DAP
production in Pakistan is not economically viable as one of the basic
ingredient, quality phosphate rock, is not available. The industry
experts also say that surges in price of urea are more intense as
compared to DAP. Therefore, the top priority for the country is to
remain self sufficient in urea production and continue import of DAP
An analysis of current demand and supply situation
of urea indicates a marginal over supply. This has been there only
because offtake has been low due to shortage of water. Had there been
normal supply of water Pakistan would have been forced to import urea.
Therefore, Pakistan has to add capacity according to a time frame. The
country has to add 2.5 million tonnes production capacity during the
next ten years. According to sector experts fresh investment decision
are dependent on two important components of new fertilizer policy —
price of feedstock for next ten years and rate of duty on plant and
In other words, fresh investment is linked with
return on equity (ROE). To arrive at a desired ROE the above mentioned
two factors are very important. At present ROE plays a key role in
selecting a particular project or industry for future investment. Some
sector experts say that the ROE has to be based on dollars and not on
Pak rupee. This formula has been accepted in case of independent power
plants. In gas distribution and oil refining sectors minimum rate of
return on operating is allowed. Therefore, a mutually acceptable
formula has to be drawn at the earliest to ensure self-sufficiency in
According to sector experts urea production
capacity in the country can be increased through debottlenecking of
the existing units and establishing three grass-root plants of 600,000
tonnes/per annum each. Both Engro and Fauji can increase their
capacity through debottlenecking and BMR. They are capable of adding
200,000 tonnes per annum capacity by the year 2003. However, they have
been forced to defer their plans due to lack of clear cut policy.
However, for the establishment of three units of
600,000 tonnes per annum each no decision can be made by any investor
in the absence of guarantee on feedstock price and duty on plant and
machinery. It must be kept in mind that urea plants are capital
intensive and even lenders insist on a certain levels of cashflow and
The policy planners must also realize that delay in
announcing fertilizer policy has become the major reason for the delay
in privatization of Saudi Pak Fertilizer. It must also be kept in mind
that another plant, preferably of 600,000 tonnes per annum, can be
established at this site with the least investment. A substantial part
of project cost consist of infrastructure cost. The existing plant is
located within a radius of less than 15 miles from Mari gas field.
This decision can only be made once the two key issues are resolved.
It is understood that Engro, Fauji, Dawood and a
consortium with foreign investors have been prequalified for the
bidding of Saudi Pak Fertilizer. All the three local companies would
be more than keen to takeover Saudi Pak due to proximity of its
location to Mari field and potential for expansion at least cost.
As it is evident that payment of subsidy is fairly
common, no efforts should be made to sell feedstock to local urea
plants at inflated price. As such the industry is not demanding any
subsidy, its requirement is availability of gas at Middle East price.
This is a very legitimate demand which should be accepted by the
government without any delay.
Availability of gas at a lower price alone cannot
ensure profitability of a fertilizer company and FFC-Jordan is one
such example. FFC-Jordan has not been able to overcome its operational
problems and the advantage of low cost feedstock is being wasted. The
key factors determining the profitability of a fertilizer plant are
efficient operation and cost optimization.
Since fresh investment in the industry is dependent
on feedstock price and duty structure on plant and machinery, the
announcement must come at the earliest. With each passing day the
country is inching towards import of urea — a threat to limited
forex reserves of the country.
The GoP is trying to boost GDP growth rate and
depending a lot on textile industry — the major foreign exchange
earner for the country. Alongwith this sugar industry suffers due to
poor capacity utilization. If production of cotton and sugarcane is
increased, by achieving higher yield, performance of two key
industries will improve substantially.
The GoP should also encourage relocation of
fertilizer plants. If Engro can do this once, they should be asked to
emulate themselves once again and others should be encouraged to
follow the footsteps of Engro. Buying a new plant is an expensive
On top of this, the economic managers of Pakistan
should not bowdown before the pressure of multilateral lenders. They
should convince the lenders about their own programme which include
higher GDP growth by boosting agricultural output. As such, the GoP
does not give any subsidy on feedstock. The price being charged is
still three times higher than the price at which gas is sold to
fertilizer plants located in the Middle East.
Pakistan has to add facilities capable of producing
additional 2.5 million tonne urea per annum. As the industry is
capital intensive, investment decision are dependent on ROE. Investors
look forward for an ROE not in rupee terms but in dollar terms.
Dawood and FFC-Jordan draw gas from the grid mainly
used for supply of gas to domestic, commercial and industrial users.
This is pipeline quality gas. Analysts suggest that no other plant
should be allowed to draw gas from this grid and all future sanctions
should be from Mari field. The gas from Mari field is not only better
suited for urea plants but far cheaper than the gas bought from other
gas field operators.
Supply of gas to fertilizer plants at competitive
price is more important than using it at power plants because wheat
and rice provide basic food. Textile and sugar industries provide not
only direct employment to millions of people, but textile industry is
the major foreign exchange earner for the country.