Mar 16 - 22, 2009

Fertilizer crisis faced by Pakistan should be an eye opener for the economic managers. This year water availability was better as compared to previous years but gross mismanagement in import of urea and its distribution became a stumbling block in enhancing agriculture growth. The most regrettable part of the story is that despite government paying billions of rupees subsidy farmers had to buy fertilizer at exorbitant cost.

During 2008 Pakistan's foreign exchange reserves came under sever pressure because of import of urea and DAP. Prices of both the commodities touched peaked. The distress level could be gauged from the fact that during 2008 urea prices touched a high of US$850 per ton and a low of US$375 per ton. Higher price not only inflated import bill but the government had to increase subsidy. The situation was the worst in case of DAP as its international prices hovered around record high levels.

Even with huge subsidy prices of DAP were unaffordable for the farmers. In an attempt to compensate for lower use of DAP farmers applied extra dose of urea. This did not help the farmers in achieving balanced use rather had a negative impact on crop and yield was reduced. It also contaminated subsoil water.

Facing worst shortage of urea at the tail end during Rabi season government involved Utility Stores and National Fertilizer Marketing in its distribution. The government even asked the manufacturers to give a substantial quantity of urea to Utility Stores and National Fertilizer Marketing. This created havoc rather than facilitated supply because the two entities hardly had any experience of urea distribution and they also became a victim of interference by the local politicians.

According to a fertilizer sector expert, "Only government can be held responsible for fertilizer catastrophe. The decision of involving Trading Corporation of Pakistan was a big blunder. On top of this, delayed decision-making, very slow discharge of urea from ships, delays and interruptions in dispatches created the fiasco. Ideally the government should have asked the manufacturers to import and distribute quantities according to their market share. Had this strategy been followed Pakistan could have saved huge foreign exchange and subsidy. On top of every thing, timely availability would also have helped in containing black marketing."

According to another expert, "Rabi crops are smaller as compared to Kharif therefore I see a bigger mess during this Kharif season. It may be true that prices of both the urea and DAP have come down substantially but supply remains far less than the demand. The TCP has not been able to tie up suppliers for the demanded quantity. It again lags behind and one could only fear another mishap. The way out is that government allows only the manufacturers to import urea and also does not intervene in its distribution."

It seems that the government feels complacent with the available stocks, which is totally wrong. After growth in urea offtake during 2008, there was a marginal decline of 4.3% YoY during January 2009. It is relevant to highlight that the first few months of any calendar year do not set the tone for fertilizer consumption trends. The last 6 months of any calendar year are generally regarded as high consumptions months.

While a massive fall in DAP consumption was evident in 2008, it is likely that DAP offtake will show a marked improvement during 2009. With DAP prices having declined to US$330 per ton from their high of US$1,200 per ton it is likely that the government will not feel the need to subsidize DAP. However, if international DAP prices resume their 2008 volatility, this will not bode well for local demand. Currently DAP prices in the local market are at approximately Rs1,900 per bag.

Fauji fertilizer Bin Qaim started 2009 with 173,000 tons DAP inventory. It was not feasible for the company to continue make DAP. At the start of the year P205 suppliers continued to negotiate prices at over USD 1,000 per ton with DAP prices having declined to USD400 per ton pushing DAP primary margins into the red. More recently the price of the recent P205 quarterly contract has been negotiated at just over US$750 per ton, pushing primary margins back in the positive and making it feasible for the company to resume DAP production.

Urea market shares of FFC, ENGRO and FFBL declined to 36%, 14%, and 4% respectively as National Fertilizer Marketing dominated urea sales in January 2009 with a total of 206,000 tons (37% of total). DAP market shares for ENGRO and FFBL stood at 13% and 46% respectively. FFBL urea and DAP production was down to 22,600 and 58,200 tons respectively owing to closure of plant for maintenance and gas curtailment period.

Lately, retail price of urea was recorded at Rs729 per bag, which is a decline of 4% MoM despite the Rs10 per bag increase in urea prices in January this year following an increase in gas prices. The decline in urea prices could be attributed to 1) imports of 248,000 tons in January, which improved overall availability, 2) better price control.

Retail DAP prices were also down by 14% MoM to Rs 2,510 per bag, in line with the declining trend in international prices of DAP. Prices have further reduced in February, with average retail prices hovering around Rs 2,042 per bag. However, on a YoY basis the urea and DAP prices in January were still higher by 23% and 47% respectively.

Commencement of Fatima Fertilizer has been delayed exceptionally. The government must look into the affairs. Once in operation, the company can enhance availability of locally produced urea.