The Minister for Industries and Production, Liaquat Ali Jatoi who chaired a meeting with the representatives of fertilizer companies in the country on Tuesday (August 3) to review the overall supply and demand and price situation in the fertilizer sector, reportedly advised the manufacturers to ensure stability in the prices by increasing production and to plan additional investment for expansion in production capacity.
He said that the government was taking appropriate measures to curb the rising trend in the prices of fertilizer but emphasised that a long-term policy to increase production had to be evolved.
In this connection, he advised the fertiliser manufacturers to chart out their strategies in addition to suggestions to the government for suitably amending the policy designed to attract new investment in this sector. At the same time, he assured the fertiliser manufacturers that gas supplies to them would be maintained without any interruption in the winter season when the pressure of demand for gas from domestic and other consumers normally goes up substantially.
The minister had called the meeting with the fertiliser manufacturers to assess the prospects of fresh investment in view of the fact that the demand in the country has risen almost to the level of existing production of urea fertiliser. The capacity is stated to be around 4.80 million tonnes as against which the urea fertiliser off-take during the calendar year 2003 was estimated at 4.36 million tonnes.
The increase in demand during 2003 was estimated at 2.5 percent. In the context of the rapidly increasing demand for fertiliser, it is projected that the country would be facing a shortfall in the supply from local production after the next two to three years and consequently resort to import urea fertiliser may become unavoidable.
The implications of this situation would not only be shortages but also an uncontrollable rise in prices, which will be detrimental to the prospects of sustained expansion in agricultural production. As a result, the farming community may have to put up with difficult times. In these circumstances a sustained process of expansion in fertiliser production capacity in the country has to be pursued through suitable policies.
The fertiliser policy of 2001 is generally blamed by the fertiliser manufacturers for the lack of fresh investment over the last few years. This policy is largely oriented to free market mechanism whereby all sorts of subsidies, including subsidies in gas prices for the use of gas as feed stock, would be completely phased out over the next five years. At the same time the policy also projects an increase in the prices of natural gas by 5 percent in first year and by 12.5 percent over the next few years.
This policy was seemingly formulated in the light of the government's pricing policy of crude oil and natural gas for explorers. Accordingly, the explorers in the newly found oil and gas reserves have been allowed to charge international prices from the consumers in the country under the free market mechanism.
However, contradictions in this policy were noted recently when the government advised the fertiliser manufacturers not to increase prices of fertiliser in the face of a 7.5 percent increase in the gas prices effected in July last year.
Subsequently the prices of fertiliser were increased by Rs 5 per bag.
Expansion in fertiliser production capacity is thus the need of the day. However, the manufacturers have complained of lack of fiscal incentives for increasing investment in the industry. There can be no doubt that the fertiliser industry which is heavily capital-intensive, does deserve suitable incentives to ensure the profitability of new plants which would have to compete with the existing ones.
According to some estimates, an economic size plant would involve an investment of about Rs 32 billion out of which equity investment by the sponsors would not be less than Rs 12 billion. Thus the cost of capital in a new plant would have to be covered through adequate fiscal concessions/incentives.
Moreover, as the commissioning of a new plant takes about five to six years the costs to be borne by the sponsors would be quite heavy, and therefore the manufacturers are justified in demanding meaningful incentives.