Amid all the hue and cry over gas curtailment, the fertilizer sector made into the news yesterday when the Competition Commission of Pakistan (CCP) nailed the two industry giants with a massive Rs8.6 billion fine for unreasonable increases in prices.
In its enquiry report issued in July 2012, the anti-trust watchdog took notice of the exorbitant increase in urea prices since December 2010. And from the looks of it, the calculations by CCP for the high price period are spot on.
The gains are more pronounced in Fauji Fertilizer Company (FFC) due to its price matching tactics. However, gains are also being made by Engro only that they are offsetting losses emanating from its new plant.
The issue of gas curtailment and efficiency losses brought forward by the fertilizer sector has been answered quite aptly by CCP, at least for FFC. The market leader has been reaping the benefits of insignificant gas curtailment due to its geographic proximity.
On input cost basis, the anti-trust watchdog finds no significant changes. The natural gas feed stock subsidised by GoP stands at an average of 10 percent for the fertilizer sector.
The gross and net margins of the industry make the allegations against the fertilizer companies quite plausible. Especially the argument of government failure in passing the subsidies to the end consumer – farmers – cannot be denied.
However, the legacy of the windfall gain, be it in any sector, rests with the very notion that the government has always taken a back seat in efforts to boost the private sector; it is primarily a portrayal of adhocism and lack of institutional memory.
Poor and inconsistent gas prioritising policies along policy loopholes are the chief reasons behind the unjust urea pricing and fertilizer sector exploitation.
The Government has failed to fulfill its sovereign guarantee time after time. And it happened with gas curtailment too. Had the government not gone against its promise of supplying gas to the fertilizer sector, the current situation may not have emerged.
While the CCP is well within its right to stick out a red flag over the practices of leading fertilizer manufacturers, perhaps the watchdog should also issue a policy note to the government, to compel it to action on the gas curtailment issue at the heart of this fiasco.
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Annual Capacity 2009 2010 2011
( 00 ton) % % %
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FFC 2,048 120.3 121.4 117.0
ECPL-old plant 975 97.6 99.7 97.7
ECPL-new plant 1,300 0.0 0.0 50.3
Subsidies-Rs(mn) 2009 2010 2011
FFC 9,640 10,551 11,008
ECPL 5,788 6,949 4,495
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Gross Margins (%) 2009 2010 2011
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FFC 43.3 43.6 62.2
ECPL - 46.9 53.37
PBT(%) 2009 2010 2011
FFC 36.1 36.4 60.1
ECPL 27.37 21.9
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Feed-Stock As % of
Cost-2011 Revenues
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Rs (mn)
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FFC 5,552 10%
ECPL(old & new) 1,768 8%
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Source: CCP Enquiry Report-Urea Fertiliser
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