The fertilizer policy does
not provide incentive for expansion in capacity
By SHABBIR H.
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
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
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
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
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