The urea prices have gone up by Rs200 per bag, breaching Rs2000 per bag mark for the first time in recallable memory. That was always on the cards following the government’s notification of price increase for feedstock and fuel stock gas for fertilizer industry, with effect from July 1, 2019. The fact that it took two months for the impact to be passed on shows the fertilizer industry has finally run out of options.
The industry had pinned hopes on the now revoked GIDC Ordinance 2019, which was aimed at settling the industry payables outside of court. The agreement with the industry was such that the government had asked fertilizer manufacturers to hold on to the price increase, as the Ordinance was entering its final stages.
It had all started when Asad Umar was still at the helm, and he first attempted to reduce fertilizer prices by way of assuring timely release of industry’s funds stuck in subsidies. The plan did not see the light of the day, as subsidy being a provincial subject hindered federal government’s role. Asad then brought the idea of GIDC settlement, which was furthered by Razzak Dawood, after his resignation, and was backed by the entire industry, and also “fully backed by the entire bureaucracy”, as per an industry insider.
The fertilizer industry maintains that it has not passed on the impact of GIDC, contrary to the claims on media which formed the basis for the PM to reverse the decision. While the fertilizer industry’s claims have some merit, it cannot blankly say that all costs on account of the GIDC have been absorbed.
“During the year, sales revenue showed a net increase of 35%, with a 32% positive impact of selling price due to imposition of GIDC,” reads an excerpt from the Fauji Fertilizer Company (FFC) annual report from 2012. “The increased levy resulted in significantly higher manufacturing cost for FFC which could only partially be passed on to the customers under the prevailing market conditions”, reads another quote from FFC’s annual report from 2018.
The Fertilizer Manufactures of Pakistan Advisory Council (PMPAC) would surely do better than to claim otherwise. The industry at large maintains that GIDC was being partially passed on till 2014 and not after that. While partly true, it must be remembered that a lot of factors are at play in fertilizer pricing. There have been times in the past, where international urea prices had fallen very close to local prices, which invariably test the pricing power of local manufacturers.
There have been instances where one company facing less impact of subsidized feedstock price increase owing to contracts, made windfall gains, following the industry price increase. So when the notion of free market competitive business environment applies in one case, should it not apply on the other case, where business dynamics dictate the pricing power? The jury is out on this.
Be that as it may, the industry claims that 70 percent of the GIDC cost has been absorbed, and had it been passed on, the prices today would be close to Rs2400 per bag, with the GIDC impact of around Rs400/bag. The claim is not entirely misplaced, as the recent revision of Rs200/bag on account of feedstock gas price revision does suggest, that bulk of GIDC has indeed been absorbed, of late, if not since 2011.
The industry often faces criticism for being the recipient of subsidized feedstock gas. That said, the feedstock gas price for the local industry is still around twice as high as compared to the countries from where Pakistan imports urea. Even after the recent increase of Rs200 per bag in urea price, the differential with international price is sizeable.
So what happens now? The GIDC is back in courts. In the worst case scenario for the government, it will be facing refunds to the tune of Rs285 billion. Forget financing that amount in the prevailing fiscal crunch. This could mean added pressure on farm input prices, either through GST or other means. Also, the whole episode should tell the government a lesson or two, on why presenting half backed measures won’t cut the deal. For now, the fertilizer companies are not any poorer with the GIDC saga, but the farmer sure is, with an additional burden of Rs24 billion spread over a year.