[dropcap]I[/dropcap]n the recent past Pakistan attained self-sufficiency in urea production, after having remained a net importer of the commodity for a long time. This not only helped in timely and ample availability of the commodity, but also saved the government from spending millions of dollars on its import and payment of billions of rupees subsidy. The successive governments ensured availability of gas (feedstock) at a discounted price. However, lately the operating environment has become anti-urea manufacturers with the imposition of GST and GDIC. At present the manufacturers are sitting on more than one million tons urea inventory. The government’s prejudice is evident from the fact that it is willing to pay subsidy on the export of of urea, but not ready to curtail taxes imposed on locally produced urea and the income of manufacturers.
Urea manufacturers in Pakistan have an aggregate nameplate capacity of about 6 million tons per annum. However, through de-bottlenecking they have attained the ability to produce a little less than 7 million tons urea annually. The bulk of this capacity is owned by Fauji and Engro, plants getting the bulk of feedstock from Mari Gas Field, dedicated to the industry in Fertilizer Policy 2001. Prior to the import of LNG, manufacturers were forced to suspend production for a certain number of months.
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UNIT WISE NAME PLATE CAPACITY
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|---|---|---|
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Manufacturers
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Nameplate Capacity (000 tons)
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Higher of Nameplate or Demonstrated Capacity (000 tons)
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Fauji
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2,600
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3,148
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Engro Fertilizers Limited
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2,275
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2,275
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Fatima Fertilizers Limited
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500
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508
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Fatimafert (formerly DH fert)
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360
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530
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Pak Arab
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93
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105
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Agritech
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248
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430
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Total
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6,075
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6,996
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The point of concern is that during the year 2016 the actual production remained a little less than 6 million tons. It is evident that the actual production urea of the two major players was far below optimum capacity utilization, Fauji produced 2.955 million tons urea as against its capacity of 3.148 million tons. The worst performer was Engro, producing only 1.881 million tons against a capacity of 2.275 million tons. Operation of plants with far lower capacity can be attributed to the suspension of gas supply. However, a bigger concern is that the inventory as at June 30, 2017 was reported at 1.1 million tons. Therefore, under the prevailing circumstances – supply glut – even if the manufacturers get the full gas supply, it would be difficult for them to operate plants at higher capacity utilization. The top priority should be to facilitate the manufacturing in faster depletion of inventory.
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PRODUCTION DURING 2016
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Manufacturers
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Actual Production 2016 (000 tons)
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Fauji
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2,955
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Engro Fertilizers Limited
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1,881
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Fatima Fertilizers Limited
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508
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Fatimafert (formerly DH fert)
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360
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Pak Arab
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46
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Agritech
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248
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Total
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5,998
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GAS TARIFF IN PAKISTAN AND INTERNATIONAL PRICE OF GAS
The Government of Pakistan (GoP) has offered subsidy on urea. This may be termed a business friendly decision, but the overall policy towards urea manufacturers can be termed bias and the myth of subsidy on gas is beyond comprehension. If one looks at the prices of gas in Pakistan and some of the other leading urea manufacturing countries, the myth is completely negated. On top of that, RLNG price that is linked with the crude price and currently comes to USD 8.7 MMBTU (excluding GST). Therefore, running urea plants at RLNG would render them un-competitive.
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Urea is currently trading in the international market at a price of USD 210-220/ton, which translates into a landed equivalent price of PKR 1,420-1,440/bag (including GST). Domestically produced urea is sold at a price of PKR 1,210-1,230/bag. If subsidy is abolished, the price would go up by PKR 150/bag. Subsidy of PKR 150/bag was offered on urea till June 30, 2017, which is now reduced to PKR 100/bag.
Average domestic urea demand has remained in the range of 5.6 million tons over the last 5 years. Sales remained depressed in 1H of 2016 due to weak farmers’ economics amid falling commodity prices and expectation of price reduction through subsidy. However, demand for urea improved significantly in 2H due to reduction in urea prices, a direct result of the subsidy payment by the government and price cut by the manufacturers. This also led to better farmer economics on cotton and rice. As a result, industry sales for 2016 remained at 5.5 million tons in line with previous years. Accordingly, depressed sale become a serious issue. Because the surplus quantity cannot be sold to overseas buyers.
One of the proposed solution is that the government should pay subsidy to support the farmers and fertilizer industry and that subsidy is disbursed to the manufacturers on a timely basis. The past history shows that there has been significant delays in the disbursement of subsidy payments (at times more than 6 months). As a result, a request was made to the government to reduce the GST charged on urea to zero instead of giving subsidy to avoid cash flow issues.
Fertilizer sector has always supported the farming community by providing urea at the rates that was substantially low as compared to the international prices. Since 2010, total benefit passed on by the fertilizer industry is PKR 424 billion, whereas actual subsidy paid by the government on gas was paltry PKR 80 billion.
Despite fertilizer industry playing an important role in achieving food security, the manufacturers are not only required to pay 37% tax (including WPPF & WWF) but also forced to pay GIDC (30% of revenue). In addition to this, the government has also been levying ad-hoc tax @ 3% (super tax) for the past 3 years, which erodes the competitiveness of the industry. Overall, the profitability of the sector declined by approximately 40% in 2016.
Keeping in view the important role being played by the fertilizer manufacturers, it is proposed that the government should review the situation dispationately. Many of the critics suggest the withdrawal of subsidy on gas and fertilizer, but they forget the contribution of industry in making the country self-sufficient in food. There is an old saying that the government should not collect a tax that has to be refunded. Following this spirit the government should immediately reduce the tax rate applicable on the fertilizer manufacturers and also abolish GST and GDIC levied on all types of fertilizers.