Urea shortages: causes and remedies

Urea shortages - with farmers agitating across the country - have been extensively discussed by a number of commentators. However, these comments have mostly dwelled on manner of distribution of urea. Contextual analysis has been missing. This article therefore aims to review the array of causes of this unprecedented shortage and propose some remedies.
The fundamental issue is that the urea demand of the country for the last few years has outstripped national production capacity. Please see the table below. In 2003, industry produced 4.5 million tons of urea, about the same as demand. From 2003 to 2008, national demand increased by about four per cent per annum while production increased by two percent per annum. Imports therefore became necessary.
Could not the country produce more? It could not. Methane gas is the main ingredient for manufacturing urea and government did not allocate gas for urea production. New production capacity therefore could not be added. (The modest annual increase happened because of efficiency improvements only.)
UREA PRODUCTION AND DEMAND Imports by the private sector (or government) should have been a simple solution. But it is not. Since 2004-5 international prices have been substantially higher compared with local prices. Subsidies therefore have to be provided to cushion the local farmers from higher international prices. Although import of fertiliser is not restricted by government, it cannot be imported unless government allocates subsidy to offset the higher international prices - making import feasible for any private sector player.
The subsidy amounts involved are substantial. In 2008, the farmers in Pakistan were protected to the tune of about Rs 147 billion. Of this Rs 14 billion was government subsidy for urea imports, Rs 20 billion was the differential between fuel and feed gas, and Rs 113 billion was industry contribution by selling urea at low prices. Import of urea (and production) has to be therefore managed and monitored closely.
Ministry of Food and Agriculture holds an industry meeting - Fertilizer Review Committee - every month where all manufacturers of urea are present. Production plans for next six months from each player are collated and demand for coming months and seasons is discussed. National Fertilizer Development Centre also assists government in determining demand. Based on production and demand outlooks, the quantity and timing for imports is determined.
The Ministry, based on above quantity and the international prices of urea, writes to Ministry of Finance for approval of funds for subsidy. Once the funds are approved, Ministry of Industries is advised to arrange imports through Trading Corporation of Pakistan. When the product reaches Karachi, this is given to National Fertilizer Corporation, which markets imported urea through National Fertilizer Marketing Limited.
This process of determining the need for imports, allocating funds, importing, and distributing is lengthy. It also requires that decisions related to quantity and timing of import of urea are made well ahead of demand. Unfortunately, this could not be done for the last Rabi season. In September 2008 FRC meeting, demand for urea for Rabi 2008-09 (October - March) was estimated at 3.0 million tons while production estimates for these months were 2.4 million tons.
A minimum of 600 KT therefore needed to be imported, it was decided. FRC also advised that most of this 600 KT should arrive by December 2008 to meet the needs of peak consumption months of November and December. The Ministry of Food and Agriculture informed the relevant ministries of the same. However, the process of imports got delayed due to low national foreign exchange reserves.
Initial letters of credit opened by TCP for imports, it is said, could not be confirmed because of this reason. This was the primary reason for delay in imports. Gas load shedding at some of urea plants added to the shortage. There was some smuggling to neighbouring Afghanistan. Once market witnessed shortage, hoarders also became active, worsening the situation.
Fertiliser industry and government met regularly to mitigate the impact of shortage. At the field level, close co-ordination with provisional agriculture department and district administration was maintained by all the industry. At the federal level, in December, fertiliser industry agreed to provide fifty percent of its daily production to government for distribution.
However, this partial nationalisation of marketing of fertilisers did not yield the desired results and was abandoned in January 2009. Some logistic issues at Gawadar Port -- used for the first time by Government for fertiliser imports - also partially contributed to delay in distribution of imported product. These late measures were not however enough to defuse the sentiment of shortage in the market.
It became difficult to buy urea at the rate fixed by the producers with shortages dictating the price. Farming community naturally suffered - and hence the protests. What needs to be done to avoid such situations in the future? It is recommended that government and industry should import at least one month in advance all the requirements for the coming month. This is not difficult to do.
Government and industry have collaborated to import urea in time, for over four years, without any shortages. Extensive publicity of this planning and co-ordination shall also discourage hoarders. The good news is that from mid 2010 imports shall not be needed.
Engro's new plant with a capacity of 1.3 million tons per annum, worlds biggest urea plant of its kind, comes on stream in July 2010. In fact, Pakistan may be able to export urea for a few years. But the demand shall again catch up with supply, if production is not increased. Therefore, there is a need to start planning for more urea production beyond 2015!

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YEAR    PRODUCTION    DEMAND    IMPORTS

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2003       4.5         4.5            -

2004       4.4         4.7          0.2

2005       4.7         5.2          0.5

2006       4.8         5.2          0.6

2007       4.7         4.9          0.1

2008       5.0         5.5          0.5

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