Crisis of urea fertilizer in the offing

Another crisis, now in urea fertilizer is in the offing as government has reduced GIDC by Rs 400 per bag but at the same time Rs 200 per bag rise is envisaged due to increase in natural gas prices.

At a recent meeting of the federal cabinet, during discussion on increasing price of fertilizers, it was brought to the notice of the cabinet that a meeting was held with the representatives of the fertilizer industry to consider the measures through which prices of fertilizer could be reduced. It was stated the fertilizer industry had agreed to reduce price of urea per bag by around Rs 400 in lieu of reduction in GIDC.

However, this has not been implemented as yet. Majority of cabinet members argued that an urgent meeting of the ECC may be convened to decide on the steps needed to be taken to ensure reduction in fertilizer prices.

Industry sources told Business Recorder that benefit of reduction in GIDC rates is less likely to reach the farmers as rumours of gas price increase in the offing has marred deliberations.

Insiders claim that the uncertainty, so induced in the supply chain may disrupt availability of fertilizers and lead to another crises like in wheat and sugar. The ECC decision has seen mixed reaction from the manufacturers.

The industry has divergent views on the issue as new plants are exempted as per their legal stance in the court cases. However, industry is unanimous on its inability to pass through the impact of GIDC, and industry is constrained to pass on the impact of gas increase, to the consumers, if it follows suit.

While Fauji fertilizer with old plants has welcomed the decision, as it would reduce their cost of production substantially while Engro is not happy as GIDC is illegal as per their understanding.

"There are strong rumours that the summary on the gas price revision will be considered in the upcoming ECC meeting in which proposal by Ministry of Petroleum recommended to provide gas under fuel head at the price of LNG (Rs 1672 per MMBTU in December) will be approved," said one of the stakeholders.

Fertilizer industry argued that this is driven by the urge of gas companies for higher revenue generation and providing a level-playing field to all players, while reducing burden on farmers. This becomes a hanging sword in the form of price increase @200 per bag. Such a move immediately after reduction of Rs 400/bag through GIDC revision is politically incorrect.

"It is feared that this indecisive position of the Government and market uncertainty may lead to disruption of supply chain," he said, adding that the farmer is waiting for reduction of price by Rs 400 per bag, while dealers holding inventory procured at Rs 1980 desire to liquidate their inventory before new price comes into effect.

"The fertilizer manufacturers want to sell what they manufacture before new prices are applied, however, dealers are reluctant to book at the present prices to avoid losses in the short term," the industry sources continued.

There are apprehensions in the fertilizer sector that the reluctance of farmers may lead to delayed application of urea and damage the wheat crop. If the government further withholds the decision on gas prices, there is likelihood of severe shortage in the market in spite of adequate domestic production.

"As price adjustment is effected post GIDC reduction, the farmers would go in for panic buying in view of fear of price increase due to gas prices, while dealers would be reluctant to sell for the same reason to mitigate their losses," he continued.

Manufacturers will also be in a fix due to mixed market sentiments. Therefore, the government, instead of point scoring through GIDC reduction and later shifting the blame on manufacturers, should act prudently and combine both factors, thus offering a reasonable package to the farmers. This will ensure least disruption of supply chain and avoid a crisis that seems to be in the offing.

When contacted, Executive Director Fertilizer Manufacturers of Pakistan advisory Council, Brig, Sher Shah Malik said that delay in decision making is highly disturbing for the industry as production cost of urea at present is very high while government wants substantial reduction in prices.