Some fertiliser manufacturers in the country have requested for permission to export their surplus stock so that they can compete in the international market on their own. They have also made some interesting comments on land distribution and made some suggestions – that are mostly in their favour – with respect to targeted fertiliser subsidies for small farmers.
The proposal is based on these manufacturers’ excess supply capacity. The current market need is some 300,000 tonnes. Also, there is the issue of gas shortage, which nullifies the purported excess capacity. The government has recently imported fertiliser as the commodity was short in supply in the domestic market. Fertiliser companies have their own distribution network. They are supposed to control their distributors and retailers instead of passing the blame onto the government.
If there is excess, it should be reflected in market prices which should have gone down – this has not happened so far. It is a strange coincidence that the company prices of urea are uniform. Is it price collusion in the face of excess capacity? Previously, urea prices had been deregulated on the premise that there would be competition and prices would come down.
The government has given subsidies to fertiliser manufacturers in the form of extremely low-priced gas which is the main raw material of urea manufacturing. In principle, in face of such high subsidies, fertiliser prices should have been regulated, which could have brought down the prices to a lower and more competitive level. Currently, fertiliser companies are making excessive profits.
At present, Pakistan is short of natural gas. The country’s urea making capacity is also determined by natural gas supplies in addition to plant capacity. A better way to utilise the excess plant capacity is to reduce prices so that demand and utilisation increase.
The current prices of urea are Rs 1,717 per 50 kg sack ($195/tonne) as opposed to $690 per tonne in the international market. In April, international prices were $350 per tonne. The prices increased due to increasing natural gas spot prices of $34 per MMBtu as against a normal of $8 per MMBtu. Fortunately, natural gas prices are still low in Pakistan. Local gas prices are at around $6 per MMBtu and long-term contract prices are at around $10 per MMBtu. Very small amounts of LNG have been bought at the current high prices. The average cost – the weighted average cost of gas (WACOG) – should be under $8 per MMBtu. The ‘clever’ proposal of fertiliser companies is to get the gas at the WACOG of $8 to be able to sell at $690 plus per tonne. On the other hand, the current high urea prices are determined by the current high spot prices of gas at $34.
The government of Pakistan is not composed of simpletons. The consequence of ill-thought-out sugar exports has been suffered by the entire nation. It is almost certain that the government will not take this bait of the fertiliser exports proposal – buying gas at $34 per MMBtu on spot and selling it to the fertiliser sector at $8-10 per MMBtu. Export proponents would not agree to buying gas at the current spot prices. We would still emphasise that such proposals be rejected with the disdain that it deserves.
Excess capacity is a relative term, and it is usually a must for competition. Demand is price elastic. The demand-supply equilibrium is achieved at right competitive prices. Urea prices must come down to bring down the excessive profits to a reasonable level and to wipe out excess capacity.
High profits in the fertiliser sector are indicated by earnings per share (EPS) of major companies, which have risen to Rs13. Cheap gas, uncontrolled prices, and taxation loopholes and changes provided such high-profit opportunities. Let us have a comparison of cost in various jurisdictions utilising the 2019 data. In India, gas is supplied to the fertiliser sector at $6.5 per mmBtu at a consumption norm of 22 units per tonne of urea, resulting in a regulated price varying between $245 and $310 per tonne of urea. The share of gas cost in the final fertiliser price comes out to be $143 per tonne or 46-58 percent.
Another cost estimate is from Yara, a major and credible international fertiliser company with the global market share of 20 percent. It provides urea production cost at $146 per tonne based on the gas price of $4 per unit. By comparison, Pakistan’s urea price at half the gas price of Rs300 ($1.93) per unit is $217 per tonne. To be fair, the taxation effect has not been included in it, which may make the difference a bit less glaring. In Pakistan, gas cost in urea comes out to be $42.46 per tonne. Thus, the overhead cost/margin in India is $100 per tonne vs $174.54 per tonne in Pakistan.
There is no denying that Pakistan is short of gas. Its local gas resources are dwindling fast. No major gas discovery has been noted so far. Also, the international gas market is getting unstable. Since gas is the main raw material of fertiliser production, exporting fertiliser will tantamount to exporting gas which we don’t have. It would be quite an achievement if we manage to maintain consistent supplies to the fertiliser sector.
Many experts argue that the fertiliser sector is meant for cheap and abundant gas producers and exporters. In Pakistan, the sector has been built around food security consideration. The authorities must consider bringing fertiliser prices under regulation. Under free market pricing, concessional gas prices to the fertiliser sector may have to be done away with and replaced by direct subsidies or taxation in case international fertiliser prices increase or decrease as compared to local benchmark prices. On the other hand, fertiliser companies may import LNG on their own.
Exporting fertiliser should be a non-starter in any case, as it would not only improve the already bloated balance sheet of fertilizer companies at the cost of people and farmers but also put upward pressure on domestic fertiliser prices. The case for fertiliser exports is even weaker than that of sugar exports, for sugar production is seasonal while fertiliser production is almost constant and consistent. Fertiliser companies should not consider exporting the surplus amount. Such a decision is not financially viable for the country.
The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.
Email: akhtarali1949@gmail.com
