Fertilizer margins under pressure

Farmers may not have gotten any relief protesting in Islamabad on the budget morning, but they surely must have gone home later in the day. As highly expected, the federal budget FY17-18 had a lot to offer for farmers, rightly and deservedly so too. The key decision is that the government has decided to maintain fertilizer prices at prevailing rates.

First and foremost is the decision to sell the existing imported urea stock with the National Fertilizer Marketing Limited (NFML) at concessional rates of Rs1,000 per bag. Recall that the existing urea price in the market is Rs400 per bag over and above the proposed rate. The existing stock with the NFML sits around 0.235 million tons and the move should result in a subsidy of Rs2 billion.

The amount itself is peanuts in the bigger scheme of things, but has the potential to impact overall urea off-take in an adverse manner. The move will certainly mean that the industry stock which sits at over 1.5 million tons, will be under immense pressure. It remains to be seen how much of the inventory is allowed to be exported, as government’s clearance offer will certainly create an unwelcome distortion in the market.

The other step is maintaining the urea prices at current levels through reduction in tax rates and subsidy. The GST on urea has been maintained at the existing rate of 5 percent, despite calls from the fertilizer industry to abolish it and smoothen the subsidy mechanism and eradicate obstacles that arise in claim settlement.

The government had instead reduced the GST on sale of natural gas to urea manufacturers to 10 percent. This, in principal, should work well as far as smoothening the mechanism goes. But the same cannot be said if this would prove sufficient enough to maintain rates at current levels without further contribution from the manufacturers themselves.

Recall that government was contributing to the tune of Rs180 per bag in form of cash subsidy, which has now been substituted with concessional GST rates on feedstock gas. But the impact of GST reduction on feedstock would roughly be around Rs120 per bag. That leaves fertilizer manufacturers to face some margin erosion to the tune of Rs50-60 per bag in order to comply with the proposed rates. Although, Ishaq Dar in his budget speech has mentioned subsidy in addition to GST reduction tools, it is nowhere to be seen in the documents.