Fertilizer industry facing a catch-22 situation?

The fertilizer industry is said to be facing a catch-22 situation after reduction in Gas Infrastructure Development Cess (GIDC) rate by Rs 400 per bag of urea from Rs 405 per bag and projected an increase in feed gas price at Rs 100 per bag, expected to be finally approved on Monday (today) by the Economic Coordination Committee (ECC) of the Cabinet.

Well-informed sources told Business Recorder that the financial impact of both decisions has been calculated at Rs 300 per bag of urea which implies that the new price of urea will be around Rs 1740 per bag but what worries the stakeholders is that the small dealers who procured stocks at Rs 2040 per bag are unlikely to sell at Rs 1740 per bag.

Some analysts argue that dealers will not be able to bear the brunt of Rs 300 per bag as they are not financially strong. Presently, fertilizer industry wants to sell its stocks as early as possible prior to notification of reduction in GIDC rates by Rs 400 per bag and increase in natural gas price projected at Rs 100 per bag but dealers are not willing to receive the deliveries at the higher price. Likewise, farmers are also reluctant to procure urea at the higher price after the government announced it is reducing the rate of GIDC by Rs 400 per bag.

Another complication is that two fertilizer companies, Engro and Fatima, which are still enjoying tax incentives under the Fertilizer Policy 2001, are not ready to reduce their prices from current level of Rs 2040 per bag.

Fertilizer Manufacturers of Pakistan Advisory Council (FMPAC) maintains that despite pending decisions and statements by some responsible government officials regarding reduction of price of urea by Rs 400 per bag market sentiment is highly negative, thereby impacting on sales throughout the supply chain including farmers. Such an uncertain market environment in the middle of Rabbi Season is likely to hamper the timely application of fertilizers, impacting negatively on the wheat crop production, besides potentially leading to huge losses to the manufacturers due to prevailing higher cost of production.

According to the Association, Prime Minister Advisor on Commerce, Industries and Production and Investment, Abdul Razak Dawood, was reminded of the meeting on fertilizer on January 16, 2019 whereby FFC took a legal stance on the proposal to prospectively remove/reduce GIDC in full and expressed an inability to pass through its impact, but offered to reduce the price of urea by Rs 400 per bag, whereas, Engro Fertilizer expressed its disagreement to the proposal.

During the meeting, the Advisor was also apprised that any impact of gas cost increase will be passed on. The reduction of price by Rs 405 per bag as impact of GIDC was discussed but not decided, as recorded in the minutes, said Brig. Sher Shah Malik(retired) in a letter to the Advisor on Commerce, Industries and Production and Investment.

Fertilizer industry insiders state that the government's decision to reduce GIDC by 400 per bag and increase feed gas price by about Rs 100 per bag, has brought the industry's key players eye ball to eye ball with each other, as it will benefit a few stakeholders while others will suffer a financial loss.

The Government failed to take into account that owing to multiple gas pricing frameworks applicable industry wide, the impact of its proposal will differ from one company to another, said an insider on condition of anonymity.

FFC, which is priced entirely on Fertilizer Policy gas pricing and will be able to reduce its price in proportion to the decrease in GIDC while Fatima Fertilizers receives its entire gas at concessionary rates in line with the Fertilizer policy 2001 owing to its investment in the fertilizer plant as its feed gas is exempted from GIDC.

This implies that fertilizer manufacturers will decrease urea prices at different rates and this disparity will only create confusion in the market. The key beneficiaries of the confusion will be the dealers and large land holders who will use their connections and buying power to secure better prices, while the small farmers will continue to struggle.

According to these insiders, the Government was presented an alternate proposal whereby the decrease in GIDC rates would be concurrent with an equal increase in fertilizer feed gas rates which would have proved to be extremely beneficial for the social and economic interests of the country.

The mover of this proposal claims that this scheme would not create any disparity in urea prices and all farmers would be able to purchase urea at a price determined by market demand and supply dynamics. Furthermore, the move would allow the Government to significantly reduce the growing Gas Development Surcharge (GDS) deficit of state-owned companies which is reportedly nearing Rs 100 billion.

"The Government's decision has created a lot of confusion among the fertilizer players, the dealers and the farmers. There have been various reports of disagreements among fertilizer companies pertaining to decrease in price, with one leading player having reportedly addressed its concerns to the ministry as well," said another insider on condition of anonymity.

Industries Ministry also informed the Cabinet at a recent cabinet meeting that a meeting was held with the representatives of the fertilizer industry to consider the measures through which price of fertilizer could be reduced; and was informed that the fertilizer industry had agreed to reduce price of urea per bag by around Rs 400 per bag in lieu of reduction in GIDC.