Aug 04 - 10, 2008

Agriculture sector has been the key driver in economic growth of Pakistan and thus, any up or down turns in agriculture directly impact the countryÝs GDP. The recently ended fiscal year witnessed relatively slow growth in the economy and the main impediment to growth remained slowdown in agriculture sector ˝ on account of unexpected poor output of major crops.

Fertilizer is one of the key inputs to agricultural production. Balanced usage of fertilizer helps in increasing crop yield from 30-60 percent in different regions of the country. Supply of cultivable land in Pakistan is inelastic and land is highly deficient in nutrients; consequently, yields are low. Therefore, the foremost means to increase agricultural productivity is by the use of fertilizers. However, in the past, exploring the full potential of the soil has remained below par due to imbalances in fertilizer usage, especially in terms of over application of nitrogenous fertilizers compared to phosphatic fertilizers. Realizing this and following the steep increase in international prices of phophatic and potassic fertilizers, the government increased the relief in price of DAP. The focus of the government on agriculture as an engine of growth, and rapidly increasing demand for agricultural produce, place the fertilizer industry in a strategic position.

The bulk of fertilizers, subsequent to the GoP's ongoing privatization drive, are now being manufactured / distributed by the private sector. The private sector manufactures urea, DAP, CAN, various grades of NPK, and recently also SSP ˝ single super phosphate ˝ subsequent to the privatization of Lyallpur Chemical and Fertilizer, in addition to managing imports of different fertilizers. The main market for urea is wheat growers, followed by cotton growers and then rice and sugarcane cultivators. Wheat has the highest acreage under cultivation and therefore, has the highest demand while sugarcane requires the uppermost application of fertilizers.

The fertilizer sector is the second largest consumer of gas after the power sector. Gas is used as fuel (fuel stock) and as the principal raw material (feedstock) in the production of fertilizers. Feedstock accounts for three-fourth of the total gas consumption. Progressive escalation of feedstock prices led to a consistent rise in the cost of production. Due to relatively inelastic demand, supply shortage and high prices of imported products, the sector has been able to transfer the impact of rising feedstock prices on to the end consumers.

Global fertilizer industry is facing growing demand due to increasing global population growth. Moreover, rapid mechanization, growing awareness and better support prices have resulted in increased fertilizer usage which has led demand exceeding supply. Within Pakistan, demand is composed of two main fertilizer products and they are Urea and DAP. Although the overall production and name plate capacities of many fertilizer producers have increased due to expansion spree, demand remained higher than the total supply and the gap continued to be bridged through high cost imports.

During 2007 and onwards the fertilizer demand, after witnessing consistently higher growth in recent years, increased by a marginal amount. The domestic production of fertilizers during the first nine months (July 2007 to March 2008) of the current financial year was less by 2.2%. On the other hand, the import of fertilizer in nutrient increased by 27.4%; hence, the total availability of fertilizer increased by 3.9%. Total fertilizer off-take remained virtually at the previous year level, mainly because of the fact that urea off-take increased sharply while DAP off-take declined with almost the same percentage. Substantially increased international prices of DAP overshadowed the subsidy effect. Urea prices are moving in tandem with DAP prices. After the recent hike in DAP prices, urea prices are one-fourth of DAP prices, compared to almost half historically. To exploit the opportunity, most fertilizer companies increased urea prices. Although the fuel gas prices raised by almost 5.5% in January 2008, it would hardly have an impact of Rs.3-4/bag on urea manufacturing cost. Given this along with proportionately higher output price increase, cash margins of urea manufacturing companies are likely to increase. At the same time, besides growing demand of fertilizers, going forward, the element of uncertainty still persists in the industry. Water availability and crop output uncertainty may cause demand to slouch a little bit.

Recent Developments/ Budget FY09 and its Impact on Fertilizer Industry: Fertilizer sector has been one of the biggest beneficiaries of the Budget FY09. Below are the relative measures and their impact on the fertilizer industry:

* Fertilizer Subsidy: The total fertilizer subsidy has been enhanced significantly by 137% YoY to Rs.32bln. DAP subsidy per bag has been increased to Rs.1000 from the previous level of Rs.470/bag. This is expected to reduce DAP retail price by 22.4%. Total DAP subsidy based on total DAP off take for FY09 of 1.19mln tons is calculated at Rs.23.73bln (76% YoY).

* Removal of sales tax: the sales tax on urea and DAP fertilizers has been removed, which will act as another trigger for fertilizer sales.

* DAP sales to receive boost: increased DAP subsidy is expected to boost DAP sales and may encourage pre-season dealer buying as DAP prices are expected to go up.

* Wheat support prices: these are expected to be announced prior to the wheat sowing period between Aug-Sep. Earlier support prices will help farmers in planning their input purchases particularly DAP fertilizers.

Budget FY09 is quite positive for the fertilizer sector. Almost all companies in the sector stand to benefit from fertilizer subsidy, especially companies making DAP, which includes inventory gains on existing DAP inventory also. This is expected to correct the declining trend in DAP sales. At the same time, this can be a challenge for urea sales, though modestly. The overall fertilizer outlook is positive supporting from increasing sales and likely improvement in margins. Increase in agriculture credit and crop support prices are further expected to boost farmers' propensity to consume fertilizers.