Higher prices of various crops will improve the cashflow of the farmers

May 08 -21, 2000

One of the factor responsible for poor production and yield in agriculture sector is the nutrient deficiency of the area under cultivation. An appropriate use of chemical fertilizers, a combination of NPK, can help in overcoming this problem. Due to attractive government policies and the efforts of fertilizer manufacturing companies not only the country has achieved self-sufficiency in urea but consumption of all types of fertilizers has increased.

During the year 1999 urea sales touched new record level of over 4.1 million tonnes whereas potassium and phosphatic fertilizer exceeded 1.5 million tonnes. This indicates 6 per cent increase in the demand of urea. This growth in demand was due to: favourable climatic conditions, bumper cotton crop and higher availability of loans to the agricultural sector. The demand for urea is expected to grow by 4 per cent, at least, in the year 2000. The consumption for phosphatic type fertilizer was above 0.7 million tonnes. This was mainly due to reduction in its prices and increase in support price of wheat. Despite commencement of DAP type fertilizer in the country, there will be a need to import 0.75 million tonnes DAP as its demand in the year 2000 is expected to grow by over 10 per cent.

The consumption of fertilizer in the country has increased due to its attractive prices — which was possible mainly due to supply of gas (feedstock) at subsidized rate and no other tax applicable on the product. However, it is expected that the government may impose GST on fertilizer. If 15 per cent GST is imposed on urea, farmers will have to pay over Rs 50 per bag. If this happens the consumption of urea may go down. The farmers already suffer from an acute shortage of water. Therefore, the manufacturers will not be able to pass on the additional burden to the farmers.

Another factor which will continue to erode the profitability of fertilizer manufacturers is gradual withdrawal of subsidy in feedstock. However, at this stage and looking at the increases in the past, it is not possible to quantify the possible increase. Therefore, the manufacturers will be forced to re-define their marketing strategy or take a further hit on the already declining margins.

The two key players, namely Engro Chemical Pakistan and Fauji Fertilizer, continue to suffer from their own problems. Engro's LPG terminal has not been operating at full capacity due to a dispute on tariff with the government. The cashflow of Fauji has been disturbed due to interruptions in the production of DAP fertilizer by FFC-Jordan.

While it is expected that FFC-Jordan would be able to overcome technical problems, related to DAP plant in due course, it is also necessary that the country must increase production of composite (NPK) fertilizer. As such Pakistan has achieved self-sufficiency in urea production and further increase in production will be there once Engro is able to increase its production to over one million tonnes. This increase will be possible through de-bottlenecking of the plant and enhanced availability of feedstock quota by the government.

An interesting feature to watch will be the privatization of fertilizer units still working in the public sector. It is expected that all the three key players will actively participate in the process of bidding. They need to acquire these units to increase market share and diversify their product range. It is expected that with the transfer of management control of state enterprises to the private sector both production and productivity of these units will be improved.

Due to enhanced attention of the government, to improve the performance of the agriculture sector, consumption of all types of fertilizers in the country is expected to increase. As such consumption of fertilizer is very low in the country. Increase in the support prices of various cash and food crops and higher yields is expected to improve the cashflow of the farmers and result in improved use of the crop nutrients.

Gas availability, to fertilizer units, and its price are the two key issues the government must address on priority basis. Enhanced availability of gas to Engro and Dawood Hercules can ensure higher production of urea in the country. For the last many years Dawood has been operating around 80 per cent capacity utilization and Engro's output can be increased by nearly 150,000 tonnes per annum.