USAGE OF GAS IN FERTILIZER SECTOR

S.KAMAL HAYDER KAZMI,
Research Analyst
, PAGE
Jan 11 - 17, 2010

There was a growth in consumption of gas by households, commercial, fertilizer, industrial and transport sectors during 2008-09. The gas consumption in industry increased owing to its cost effectiveness.

Fertilizer sector's gas consumption showed a negligible improvement of 0.7% during first nine months of the current fiscal year. However, the major gas consuming sectors, power and cement witnessed negative growth of 35.3% and 13.1% respectively over the same period last year due to reduced construction activities and growing inter-corporate circular debts, which kept power plants underutilized.

NATURAL GAS SALE PRICE (RS. PER MMBTU)

FACTORIES

FEEDSTOCK

ELECTRICITY/ STEAM

Pak-American Fertilizer Company Ltd. 102.01 382.37
Dawood Hercules Chemicals Ltd. 102.01 382.37
Pak-Arab Fertilizer Ltd. Multan 102.01 382.37
Pak-China Fertilizer Ltd. Haripur 102.01 382.37
Hazara Phosphate Fertilizer Plant Ltd. Haripur 102.01 382.37
ENGRO Fertilizer Company Ltd. 56.70 382.37
Fauji Fertilizer Bin Qasim Ltd. 102.01 / 56.70 382.37

Although the fertilizer sector has seen buoyant growth over the recent past, it has also encountered some traditional problems. Natural gas, the main raw material and fuel for the production of urea, is in abundance in Pakistan-proven reserves of natural gas are estimated at 32 trillion cubic feet (TCF). Fertilizer sector is the second largest consumer of natural gas.

GAS CONSUMPTION

The production of synthetic ammonia currently consumes about 5% of global natural gas consumption, which is somewhat fewer than 2% of world energy production. Natural gas is overwhelmingly used for the production of ammonia, but other energy sources, together with a hydrogen source, can be used for the production of nitrogen compounds suitable for fertilizers.

The cost of natural gas makes up about 90% of the cost of producing ammonia. The increase in price of natural gas over the past decade, along with other factors such as increasing demand, has contributed to an increase in fertilizer price.

LONG-TERM SUSTAINABILITY

Inorganic fertilizers are now produced in ways which cannot continue indefinitely. Potassium and phosphorus come from mines and such resources are limited. While atmospheric nitrogen is effectively unlimited (forming over 70% of atmospheric gases), relatively few plants engage in nitrogen fixation (conversion of atmospheric nitrogen to a plant-accessible form). To make nitrogen accessible to plants, nitrogen fertilizers are synthesized using fossil fuels such as natural gas and coal, which are limited.

FERTILIZER INDUSTRY

The fertilizer industry in Pakistan is of an oligopoly nature, with the four major players namely Engro, FFC, FFBL and Dawood Hercules forming 90% of the total urea production in Pakistan. FFC has the highest share of urea production (45%), Engro (20%), FFBL (13%), and Dawood Hercules (11%).

The fertilizer sector has demonstrated a 24% rise in profits in FY08 compared to FY07 with net profit of the sector rising from Rs 11 billion to Rs 13.7 billion. In terms of earnings growth, Engro took the lead with 34% YoY. FFC took second position with 22%, followed by a 14% rise in FFBL. In terms of contribution to the sector's profitability, FFC holds the largest share of sizeable 48%, followed by Engro 31%, and FFBL 21%.

Gross margin of the sector was 33% in 2008 compared to 31% in 2007 mainly on account of rising urea prices relative to gas prices. Net margins, however, fell due to rising financial charges. An overall assessment of the financials makes this sector as a safe investment bet.

OVERVIEW OF THE SECTOR IN 2009

The market demand for urea, during the first quarter of 2009, was 1.55 million tons showing an 11% increase over the first quarter of 2008 with demand at 1.4 million tons. The enhancement in demand is attributed due to improved farm economics for wheat, which led to an increased sowing and also improved the urea application.

FERTILIZER INDUSTRY

MANUFACTURER UREA CAPACITY CAPACITY UTILIZATION MARKET SHARE
FFC 1,904,000 118% 45%
Engro 850000 107% 20%
FFBL 551,100 105% 13%
Dawood Hercules 445,5009 1% 1%
Pak American 350,000 100% 8%
Pak Arab 92,400 124% 2%
Total 4,193,000 10% 100%

Domestic production in 1QFY09 was 1.16 million tons, which was 3% lower as compared to 1.2 million tons during the same period last year.

International urea prices declined during the period and on average the landed price of imported urea was approximately Rs 1,210 per bag ($300/ton) as against average domestic price of Rs 670 per bag. Industry wide sale of phosphatic fertilizers increased over 100% to 0.2 million tons as compared to 0.1 million tons for the same period last year.

Low phosphatic fertilizer prices kept the demand high. The manufacturing costs pertaining to fertilizer industry were impacted by inflationary factors such as 5.5% escalation in fuel gas price from January 2008 and escalation of 31% on July 1, 2008.

CONCLUSION

Currently, the fertilizer sector has seen buoyant growth over the recent past. It has also encountered some traditional problems. The fertilizer sector is the second largest consumer of natural gas and remains one of the most important industrial sectors in Pakistan.