CCP urea price enquiry

The Competition Comm-ission of Pakistan has proposed to initiate proceedings against local fertiliser manufacturers for the abuse of dominant position, which, according to the Commissions enquiry report, led to unreasonable and unjustified increase in urea prices in the country. Recall that urea prices in Pakistan did increase considerably during 2011, nearly doubling in the first ten months of the calendar year to Rs.1,800 per bag from Rs.900 per bag at the end of 2010. Local urea manufacturers were asked to submit replies to reason and justify the massive price hike, and the response mainly focussed on extended gas curtailment being the key reason for such an increase. As a matter of fact, the fertiliser companies linked with the SNGPL network faced extended feedstock gas curtailment, which went beyond the scheduled outages, restricting urea production to a considerable degree. However, the plants linked with the Mari and SSGC networks continued to receive feedstock gas in accordance with the schedule, which is also evident from the near 100 percent capacity efficiencies. The enquiry report quite rightly states that only 27 percent of the total urea manufacturing capacity was affected due to extended gas curtailment, hence, the near 100 percent price hike in such a short span lacks justification. CCP does have a point; especially, when the major input cost that of feedstock gas remained unchanged during the year. The CCP also raised concerns over Engro invoking writ jurisdiction in the court of law, as it did not exhaust the remedy options available in the GSA with the SNGPL. The CCP makes it a point that, since the remedy options were not fully exhausted, basing the price increase on gas supply failure does not seem justified. Remember that the court has already ordered in favour of Engro, and there is no guarantee that SNGPL will be able to restore full supply in the near future either, which leaves Engro with no option but to increase prices. The magnitude of the price increase, though, could be debated as Engros new plant receives gas at highly concessional rates (as per policy). The CCP may well be within its right to accuse the fertiliser firms of unjustified price increases of urea, but it also remains a fact the market is captive in nature and whoever changes the price is followed by other players. There have been incidences of the industry following one company, in case of price reduction as well, just as recent as last month. The enquiry report hits the nail touching the subsidy issue, recommending the urea subsidy to be offered directly and in a targeted manner. Not only will it serve the purpose better, but also will ease the pressure off fertiliser manufactures that face heavy criticism of misusing the subsidy. The report, however, seems to have missed the point that local fertiliser producers also do their bit to benefit the farmers, by providing huge relief in terms of the price differential with imported urea. In 2011, the gas curtailment cost the farmers Rs.38 billion on account of higher urea prices and Rs.28 billion to the government for the subsidy on imports. Whereas, local manufacturers contribution owing to local production was Rs.92 billion, as the local prices stayed lower than international prices. Even if feedstock gas price is equated to the fuel gas level, locally produced urea would still be considerably cheaper than imported urea. Should the industry receive gas on a permanent basis, it will go a long way in rationalising urea prices, as industry players themselves have publicly stated of reducing urea prices by Rs.300 per bag in case of plants operating at full capacity. The urea price hike during 2011 may or may not have been unjustified, but, if Pakistan has to move on, the government needs to prioritise gas allocation. The fertiliser companies, too, need not benefit from a problem thats not theirs, there needs to be an adjustment mechanism within the industry, to minimise the impact on the end user.