Fertiliser industry: Govt mulling ending cheaper gas facility

ISLAMABAD: The caretaker government is likely to unify feed gas prices of fertiliser industry at par with industrial rate of Rs 1,260/ MMBTU instead of subsidiaed rates, amid accusations that fertiliser industry is not passing on subsidy to the farmers, sources close to Energy Minister told Business Recorder.

The new proposal, if implemented, will result in an increase in urea price by Rs 800 per bag from Rs 3,800 to Rs 4,600 per bag whereas the imported price of urea is Rs 7,700 per bag.

“Unification of gas prices would result in saving of Rs 90 billion which may be routed to small farmers by the provinces,” the sources added.

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The fertiliser industry held a meeting with caretaker Minister for Commerce and Industry, Dr Gohar Ijaz, and discussed “inside” information about Energy Minister’s plans with respect to new gas pricing structure.

Urea expenditure as a percentage of farmer’s total input cost currently accounts for 3 percent which will increase to 4% after unification of gas prices whereas discount compared to international prices will reduce to 40 % from existing 51%. Reduction in discount of urea compared to international prices will act as a disincentive to smuggling.

The projected international urea price for 2024-28, are within the range of between Rs 6,500 – Rs 8,500 per bag whereas post unification, domestic urea prices will continue to remain significantly cheaper than imported urea.

The sources said that the proposal for Mari gas price increase will only temporarily improve Mari cash flows and fiscal deficit. However, the overall problems faced by the fertilizer sector will remain.

Urea price for farmers is Rs 3,800 per 50 kg bag despite the fact it is Rs 3,210 per bag fixed by FFC/ Fatima, Rs 3,600 per bag of EFERT and RLNG players which sell 3411 per bag and FFBL Rs 3,600, respectively. This implies that informal channels will continue to absorb the subsidies.

According to sources, informal channel will continue to charge premium over the highest of all notified prices allowing them to continue to absorb a significant portion of the subsidies intended for the farmers. Thus, the non-tax paying informal channels will continue profiting at the cost of the farmer.

Energy Minister argues that any significant devaluation of Rupee would increase the dollar-pegged PP gas rate, resulting in increase in urea prices for manufacturers, as informal channels still benefit from the varying urea prices absorbing subsidies.

Informal channels are already making profits of about Rs 700 per bag urea manufactured by FFC/ Fatima, Rs 300 per bag EFERT, Rs 200 per bag RLNG players and Rs 100 per bah on FFBL urea.

“Due to informal channels, farmers are buying urea at Rs 4500 per bag,” the sources said, adding that frequent price changes will continue to promote speculation and encourage hoarding and profiteering by informal channels.

The only permanent solution for all core issues is the unification of gas prices across all fertiliser manufacturers.

One view is that increasing urea prices to international level will have a catastrophic impact on the agriculture sector whereas another view is increasing local urea price to international levels will be a significant deterrent to eliminate smuggling and reduce imports.

The reduction in imports will reduce the trade deficit by $ 75 million and fiscal deficit by Rs 15 billion. To do this feed gas prices will have to be increased significantly to Rs 2,900 per MMBTU from existing Rs 317 per MMBTU.

However, with this, urea price for farmers will increase to Rs 7,500 per bag from existing price of Rs 3,800 per bag. This will have a catastrophic impact on the agriculture sector. On the face of it, this will not only eliminate the subsidy but also generate substantial additional revenue of Rs 200 billion for the government.

This will be an increased burden on the farmer and will specifically impact on the purchasing power/ cash flows for 7 million small farmers (90% of the total farmers) who already have limited financial resources and are highly dependent on Arthis (commission agents) for their normal course of the business.

However, this step will also trigger food inflation and will result in a spike in prices, whenever the Rupee depreciates (since urea prices will be pegged to international parity, like petrol and diesel).

This will also force the small farmers to resort to inefficient and outdated farming practices, which will have a devastating impact on the crop yields.

The availability of affordable urea, through agri-supportive policies, has been a major lever to date for the improvement in the crop yields.

This decision if implemented will have a massive negative impact on the agri-sector and will create a trust deficit within the farmer community. Further, this may spoil the good work done by the government to promote large scale farming including Green Revolution 2.0 initiative.

“Such extreme measures in the agricultural sector will have a catastrophic impact on 7 million farming families. The solution is a gradual increase in gas prices, by implementing the industrial gas rates,” the sources quoted Energy Minister as proposing.

It was observed that the fertiliser companies are making huge profits due to stagnancy in gas prices for the fertiliser sector. For instance, FFC’s profit after tax (PAT) will be Rs 33.165 billion in FY 2023-24 from Rs 20.410 billion. M/s EFERT PAT will be Rs 17.5 billion from Rs 16.003 billion and M/s Fatima Fertilizer to Rs 14.494 billion from Rs 14.139 billion. FFC PAT is projected to be higher considering multiple urea price increases without any gas cost increase.

“The era of providing cheap gas and subsidies must end. It is a strain on the fiscal deficit, allows undue profiteering by informal channels, and encourages smuggling worsening the trade deficit,” the sources quoting Minister as saying.

The fertiliser industry is receiving gas under various pricing regimes resulting in significant challenges.

Subsidies are not being passed onto the farmers. The government is currently providing subsidy to 2/3rd of the fertiliser manufacturers.

The entire subsidy of Rs 90 billion is not reaching the farmers and instead being absorbed by informal channels that do not pay taxes, resulting in additional lost revenue of Rs 30 billion to the government. The government is currently losing over Rs 120 billion to informal channels.

Minister for Energy maintains that declining gas pressure at HRL Gas Reserves of Mari is a major concern for all the fertiliser manufacturers.

To enhance pressure in Mari fields, investment worth $ 265 million will need to be undertaken by the fertiliser industry and if no investments are undertaken by the fertilizer industry to enhance Mari pressure, the government will have to import urea from 2025 onwards, resulting in trade deficit of $ 3-4 billion over five years and fiscal deficit of Rs 700 billion during this period.

An estimated 200,000 tons of urea is currently being smuggled from Pakistan due to local urea being significantly cheaper than imported urea. The subsidies provided by the government are being enjoyed by farmers across the border. This is currently being curtailed through temporary administrative controls at the border.

The cost of 200,000 tons of urea being imported will widen the trade deficit by $ 75 million and fiscal deficit by Rs 15 billion.

Committed allocation of gas to fertiliser players will encourage them to undertake any required investments along with further expansion. Investment in Mari pressure enhancement will result in sustainable gas pressure to fertiliser industry till 2029.

Fertiliser manufacturers are willing to undertake projects, which will increase production and reduce need for imports of 700,000 tons urea over last 2 years, resulting in reduction in trade deficit by $ 260 million and fiscal deficit by Rs 50 billion.

Copyright Business Recorder, 2023