Fresh investment largely dependent on feedstock price for fertilizer units up to year 2010

Oct 09 - 15, 2000

The present government is making its best efforts to come up with a conducive Fertilizer Policy. It is following the strategy of developing sector specific policies to broaden the manufacturing sector in the country. The delay in announcing Fertilizer Policy is inevitable due to involvement of a number of stakeholders. Unless all the concerned ministries (Petroleum, Agriculture, Industries and Finance) and fertilizer manufacturers arrive at a consensus regarding price of gas (feedstock), the most important component of the fertilizer policy, details cannot be made public. All the stakeholders have to indulge in extensive deliberations before recommending the final policy. The Policy was expected to be announced by September end. It is said that all the stakeholders are striving hard and would be able to complete the due diligence process by December this year and policy would be announced before the year 2000 ends. It is feared that the delay can prove fatal for the country. The economy of the country is heavily dependent on agriculture, which has also been given a very high weightage in the plans to put the economy on faster track of development by the current economic managers.

It is very clear by this time that DAP production in Pakistan is not a economically viable proposal. Therefore, the country must increase indigenous production of urea and ensure its export to finance the import bill of DAP. To maintain self-sufficiency in urea, its production capacity must be increased by another 2.5 million tonnes. This capacity addition would be according to a certain time frame (for details refer to the cover story in our issue number 32). Since the industry is capital intensive no major investment can be made without a guaranteed feedstock price up to the year 2010. Therefore, the GoP must announce the Fertilizer Policy as early as possible.

Another factor which has raised serious concerns among the farmers is price and availability of DAP for the current Rabi season. The apprehensions were due to low imports and also low level of DAP stocks at the beginning of Rabi season. Provisional estimates for September indicated opening DAP inventories around 195,000 tonnes. These were considered to be lower by historic standards. DAP off-take for October and November is estimated around 530,000 tonnes. It is feared that the existing inventory would not be enough to meet the demand.

According to industry sources around 500,000 tonnes imported DAP would be available in November and ease the situation. However, they also express serious concern about DAP prices. They fear that its availability, at farms, would be delayed due to a number of factors. Any delay due to late arrival, slow clearance and transportation can cause shortage of the commodity particularly in Punjab. DAP prices are already on the rise currently selling around Rs 640 per bag of 50 kgs as compared to Rs 560/bag prevailing in July. The rise is due to speculative buying by the dealers expecting imposition of regulatory duty as well as anticipated sharp increase in international prices of DAP and depreciation of Pak rupee..

Regulatory duty on dap

After the announcement of FFC-Jordan results, posting Rs 2.3 billion losses, it is understood that the Company is soliciting imposition of regulatory duty on imported DAP. The rationale is that the profitability of the Company as envisaged in its feasibility report was based on certain level of international prices of DAP. However, after the unit commenced operations, international prices of DAP had gone down below that level. Even the supply of gas at subsidized rate to the unit could not ensure profit for the Company.

A closer look at the performance of FFC-Jordan nullify a common myth that fertilizer manufacturers make huge profit due to availability of feedstock at subsidized rate. FFC-Jordan is not the only company which incurred losses, the same was the case with Pak American Fertilizer. Some analysts go to the extent by saying that the profitability of a fertilizer company is largely dependent on the management skills. Even the low cost feedstock, alone, cannot guarantee profitability for the manufacturers.

Some analysts, go to the extent of saying that manufacturing of DAP in Pakistan is not an economically viable proposal. Fauji Fertilizer had made a bad choice and imposition of regulatory duty on DAP would be worst. They do not stop here and continue to say that efforts should be made to minimize losses of FFC-Jordan regarding DAP operations. This is a joint venture with Jordan and equity partners should also help in containing the cost of basic raw material, phosphoric acid.

They suggest that instead of imposing regulatory duty, the GoP should pay the difference between the then prevailing price and current price of DAP. The farmers should not be asked to pay the higher price. Any increase in DAP price will have an adverse impact on its consumption which may affect the yield of various crops. The efforts should be to increase production and productivity in the agriculture sector.