FERTILIZER: NEED FOR ADDITIONAL CAPACITY

The country to face shortfall of urea supply by the end of year 2004


By SHABBIR H. KAZMI
Mar 22 - 28, 2004

The GoP has constituted a 12-member committee to submit a plan for attracting fresh investment and suggest the remedies to resolve the problems facing fertilizer sector. Formation of the committee was one of the decisions taken at a high level meeting by the senior officials of various ministries and government institutions to consider the factors impairing the performance of the sector. The formation of this committee can be termed a futile effort because the GoP knows well that Fertilizer Policy has failed to attract investment for grass root plants and further deliberation cannot yield any result. The fresh investment in fertilizer sector is directly linked with the cost of gas (feedstock) and the GoP does not seem to be ready to guarantee the price for next ten years, as demanded by the sector.

According to a sector analysts, the failure of Fertilizer Policy is the result of lack of guarantees regarding supply of feedstock for new grass root plants. While the industry has been demanding fixing of price at Middle East parity, policy planners were not willing to commit. However, it must also be kept in mind that when the Policy was announced, international urea prices were almost half of the current prices. Therefore, the industry did not consider making fresh investment in fertilizer manufacturing a viable economic proposal. However, if one looks at current international prices of urea, investing in fertilizer plants may look attractive

According to another analysts, had the industry started working on achieving financial close for grass root plants in 2001, plant and machinery should have been on its way to Pakistan by this time. Even if they start working now the country will have to face shortfall and import urea at 40% above the price of locally produced commodity. While some of the analysts are not able to comprehend the sudden and sharp rise in international prices of urea, they also say that by the time Pakistan is able to even add one grass root plant, the price may revert back to around US$ 100/per tonne.

According to a fertilizer sector expert, additional one-tenth of existing capacity is expected to commence commercial production within next 12-18 months. Therefore, local investors must act very prudently. However, the overwhelming perception is that Pakistani urea manufacturers have virtually lost the opportunity. According to him, "The timeframe for setting up of grass root plants was known to government as well as local manufacturers. However, either the local manufacturers failed in putting up a convincing argument or the policy planners were bent upon not changing the policy till the crisis starts appearing.

The constitution of Committee raises the suspicion that the policy planners wanted the existing manufacturers to decide not to invest in fertilizer plants and at the same time preparing some other group (not belonging to fertilizer sector) to complete its home work. They wanted to wait till the crisis starts appearing. Once crisis starts appearing than the entry of this group be termed remarkable achievement. It is also believed that this group would be given far more incentives than those being demanded by the existing players.

If such a situation emerges it would raise questions regarding the much talked about transparency of policies being followed by the existing economic managers. The Policy announced in 2001 must have been changed by this time. However, it is never too late to mend. The GoP must come up with a clear cut and transparent policy immediately.

It is not the question of profitability of urea manufacturers but self-sufficiency of food and accelerating the GDP growth rate for poverty reduction. Pakistan's economy and GDP growth is heavily dependent on a vibrant agriculture sector. The country must not only continue to produce at least 2% surplus annually but must also produce substantial surplus quantity of urea for export to finance the import bill of DAP and other types of fertilizers. Don't waste time in reinventing the wheel. Only guarantees about feedstock price can ensure fresh investment in the sector.

COMMITTEE MEMBERS

The Committee is headed by Secretary Ministry of Production & Industries and other members include Secretary Ministry of Food & Agriculture; Secretary, Ministry of Petroleum & Natural Resources; Chairman, Central Board of Revenue; representatives of the Finance Division and Board of Investment; Chief, National Fertilizer Development Centre, Planning & Development Divisions; Chairman, National Fertilizer Corporation; General Manager Marketing, Fauji Fertilizer Company; Managing Director Fauji Fertilizer Bin Qasim; CEO of Engro Chemical Pakistan and a Director of Dawood Hercules.