The federal government has decided to review fertilizer price mechanism after witnessing current "unjustified" increase in urea prices by the local fertilizer industry which is already making huge profits, sources close to Secretary Industries and Production told Business Recorder. The decision was taken by the Economic Coordination Committee (ECC) of Cabinet on April 3, 2018 under the chairmanship of Finance Minister, Asad Umar. However, the local industry is unhappy with the decision and using its influence to get it scrapped.
The sources said ECC on February 19, 2019 had directed the Ministry of Industries and Production to ensure continuous operation of two fertilizer plants up to the end October 2019 and submit a formal plan along with cost comparison of subsidy required to run the plants compared to the financial impact in case the urea requirement is met through imports.
According to sources, in pursuance of the directions of the ECC, Petroleum Division and SNGPL were advised to restore gas supply to two plants (Fatimafert and Agritech) which remained non-operational from February 14 to 25, 2019 and both plants are now operational. Closing inventory for urea at the end of October 2019 has been projected at 627,000 MT. The cost of imported urea vis-à-vis local urea was analysed in a meeting of Fertilizer Review Committee (FRC) and the following observations were made: (i) the agreed feasible price of gas is Rs 782/MMBTU so that the cost may be capped at that level by subsidizing it and total subsidy for it is estimated at Rs 11.191 billion; (ii) it is calculated that GoP at current market prices shall have to provide subsidy of Rs 846/ per bag if urea is imported from Middle East. It would be Rs 1061/ bag in case of import from China. This is besides the foreign exchange expenditure. Quantum of subsidy per bag in case of local production is calculated at Rs 871/ bag which implies that in case of urea import from Middle East, it is more than the subsidy for gas price differential, however, it is offset by tax/revenue; and (iii) besides, GST on RLNG which is being charged by FBR at OGRA notified tariff, should be charged at the subsidized price of Rs 782/ MMBTU.
The sources said, Ministry of Industries and Production proposed that two SNGPL-based urea plants may be kept running on RLNG or system gas / RLNG( if available) till end of October 31,2019 and cap the price of gas being supplied to SNGPL based plants at 782/ MMBTU. The ECC may also direct FBR to levy GST at Rs 782/ MMBTU.
The sources said, during discussion on this issue, the ECC observed that the market price of fertilizers have been raised unjustifiably by the manufacturers, which hit farmers badly due to higher cost of the production which in turn would ultimately entail a price hike of crops in the country. Another argument was that fertilizer is a deregulated commodity under fertilizer policy therefore, market forces of fertilizer industry take advantage of this policy.
The ECC observed that the government is providing subsidy on urea manufacturing to fertilizer plants in the form of subsidized RLNG. Therefore, urea should have been available in the market at reasonable rate.
The ECC directed the Ministry of Industries and Production to review price mechanism of fertilizer industry and hold meeting with fertilizer manufacturers to ascertain the reason/ justification for price escalation of urea fertilizer and submit a report thereof along with recommendations to the ECC. The ECC also decided to allow import of 100,000 tons of urea to cater for Kharif crop.
The meeting was also informed that 70 MMCFD LNG is being supplied to two fertilizer plants for urea production. It was stated that power sector requirement for LNG is about 850 MMCFD which can be increased during peak summer season, therefore, this factor should be taken into account while considering the proposal supply of LNG to two fertilizer plants for urea production.
The ECC directed to run two fertilizer plants on RLNG/ system gas upto August, 2019 subject to the condition that provision of LNG/ gas to fertilizer plants should not effect the supply to power plants during peak summer seasons.
Meanwhile, urea manufacturers making huge profit have written a letter to the Secretary Industries and Production, opposing import of 100,000 tons of urea.
"The fertilizer industry is of the view that there is no possibility of shortage of urea during the year. Moreover, LNG price has also declined considerably, thus local industry can be run to the fully capacity without foreign exchange on import and paying heavy subsidy by the government to sell imported stocks," said, Sher Shah Malik (retired) Executive Director Fertilizer Manufacturers of Pakistan Advisory Council, in his letter.
The government has also been informed that Pak Arab fertilizer is also likely to come into operation in May, which implies that urea production will enhance.
"Your intervention is solicited to suspend the execution of ECC decision, thus saving foreign exchange and subsidy, besides helping domestic industry to keep running and contributing to the national exchequer," Shah said in his letter.
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