Another urea plant: To be or not to be?

Mr Wattoos statement about government plans of starting a urea plant in Southern Punjab soon, has failed to attract the attention that statements of such importance usually get. While there is nothing wrong about the idea of setting up another urea plant in an agri-based economy- the word soon used by the Minister of Industries is a bit questionable.
After having imported just a touch under half a million tons per annum between CY04 and CY08, urea imports are expected to be in excess of one million tons by the end of current year. Improved farming economy has been the trigger for double digit growth in urea off-take, which in turn has created a demand for higher imports.
But, come mid 2010 and the country will not be importing urea anymore for at least a good five years -assuming the average growth of 3.5 percent per annum seen in the last decade. Pakistan will add roughly around 2 million tons of urea capacity in the system by mid 2010 as the plants of Engro and Fatima Fertilizer are moving well along on intended course and are due to commence production on time.
Being in surplus is generally a good thing, but not necessarily, as urea surplus won be doing much to change fortunes. Global urea market is already in surplus and is expected to face a huge supply glut in a couple of years, implying that despite having the capacity to produce additional urea, local producers will confine themselves to just enough production to cater the local demand.
This is where the word soon causes disbelief as it does not justify the need of an additional urea plant at present. It is another thing, though, if this soon is like one of those typical of vague timeframes used by the government when referring to their efforts to eradicate any socio-economic evil such as poverty or power outages.
But even if one assumes that this urea plant will come at the right time and not too soon, one still has to look at the possible hindrances that might come its way. The fertilizer sector currently consumes around 16 percent of the countrys total natural gas output. This is all set to increase to about 18 percent as the demand for feedstock natural gas, a key raw material for urea production, by the sector will increase by a whopping 33 percent next year with the onset of new plants.
Meanwhile, gas requirement by power sector that has a share of 34 percent in the gas consumption pie has been growing rapidly of late and given the energy shortfall, it is expected to rise at a reasonable pace in the future. On the flipside, the production of natural gas has not been as swift, which raises the big question: how to supply gas requirement to another urea plant by 2015.
This calls for changes at the policy level to decide about the priorities. Relying more on other power generation avenues such as hydel and wind than increasing power sectors share in gas consumption is one way of making room to ensure that urea demand is met domestically. Discouraging the use of natural gas by the transport sector in a phased manner is another; however, both these measures are easier said than done and require major policy structure changes.
There is no denying the importance of meeting the demand for agri input and addressing the fears of food security in the future without burdening the import bill. But, if that must happen then policy makers must plan now as it seems almost certain that there will be no more subsidies to incentivise new urea plants. The need of the hour is to weigh the costs and benefits of whether to produce or to import in the absence of subsidy, while substituting gas consumption from one sector to another.