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The fertilizer policy does not provide incentive for expansion in capacity

May 20 -June 02, 2002

There seems to be a temporary over-supply of urea in the country and manufacturers bent upon exporting surplus. This surplus is mainly due to lower offtake. The Fertilizer Policy announced last year has failed in creating conducive environment for the increase in installed capacity.

If the additional capacity is created by establishing grass-root projects, Pakistan will be forced to spend millions of dollars annually on the import of urea to meet the demand.

The key issue this policy has not been able to address is the supply of gas (feedstock) to new plants. The industry was expected that the GoP would continue with the policy of feedstock at a lower rate compared to the gas used as fuel. However, due to pressure of lenders, the GoP decided the contrary. At the best, a nominal increase in production is expected through de-bottlenecking. Whereas, looking at the historical growth in demand, additional capacity to produce 1.2 million tonnes has to be added to keep the country self-sufficient in urea. Though, the leading players were ready to undertake expansion, after the announcement of the policy all of them have deferred the plans.

Availability of feedstock at an affordable price is the key issue which the policy has failed to resolve. The GoP has succumbed to the pressure of lenders by announcing escalation in feedstock price. The industry has been pleading that continuation of supply of feedstock at lower rate is necessary to boost production of food and cash crops. Because the cultivable area in the country is deficient in nutrient contents. However, the GoP seems to have failed in convincing the lenders about this justification. In fact the stance taken by the lenders is uncalled for.

All the countries, developed or developing, provide subsidy to agriculture sector, the US being on the top. However, the denial to allow Pakistan to follow the same is not justified. Agriculture is the backbone of the economy of Pakistan and fertilizer is the major input to boost production of food for the growing population and its key industrial sector, textiles.

Any effort to withdraw subsidy on feedstock would make the locally produced urea expensive, add to cost of agricultural produce and ultimately force the country to become net importer of food items and industrial raw material.

The stance lately taken by fertilizer industry was that the GoP should fix the feedstock price which is comparable with the feedstock price charged in the Middle East. The data shows that Pakistan has witnessed dumping from the Middle East in the past. Therefore, if the local manufacturers are charged a higher price of feedstock, the flood gate would open once again. Pakistan has also experienced dumping from CIS countries but it was only for a brief period only.

The critics say that local urea producers have taken the undue advantage of supply of feedstock and hardly passed on the advantage to farmers. The industry sources have always refuted the allegation. The claim, "The price of locally produced urea has always been lower compared to its international prices, except for a couple of years. They also say that availing the incentive, over the years industry has invested US$ 1.2 billion to create additional urea production capacity.

According to a presentation made by Zaffar A. Khan, President, Engro Chemical, at a seminar recently, "During 1991-2001 period the company has earned Rs 9,440 million profit out of which Rs 5,399 million was distributed among the shareholders. Besides, the company undertook capital expenditure of Rs 9,304 million and also made long-term investment worth Rs 1,346 million. Alongwith this, a total of Rs 13,166 million was contributed to national exchequer in the form of duties, taxes and development surcharge."

According to fertilizer industry sources, "We have invested US$ 1.2 billion in response to the GoP's previous feedstock price incentive. For the year 2001 the subsidy on feedstock amounted to Rs 12,409 million. The net benefit accrued to the industry was Rs 2,783 million and Rs 7,720 million was passed on to farmers in the form of differential between domestic urea price and imported urea cost."

Since Pakistan's economy is heavily dependent on agriculture and agro-based industries, it is demanded that feedstock supply to urea manufacturers, at modest cost, should continue. Three major urea manufacturers are supplied feedstock from Mari gasfield. This gas is not of pipeline quality and cannot be used as fuel. Therefore, this gasfield should be dedicated to fertilizer industry only.