Cheap urea? No more!

Such has been the frenzy over the prevailing natural gas crisis that major focus has been diverted to either CNG strikes or industrial closures, almost neglecting the massive hike that fertiliser companies have witnessed at once in their feedstock gas prices. The fertiliser industry has long been criticised by other industries of enjoying natural gas at steep discounts and making windfall gains on government subsidy. The much demanded feedstock price hike has finally come true, as older fertiliser plants have been slapped a three times increase in their raw material gas prices to Rs.313/mmbtu effective from the New Year 2012. Fertiliser companies have not reacted proportionately to the cost increase as yet, but it is only inevitable that urea prices will go through a round of massive price increases, which could range between Rs.300-Rs.350 per bag. One plausible reason, why there has not been a swift reaction to the feedstock price increase, is that January has traditionally been a high off-take month for urea and fertiliser firms may want to delay the price increase a wee bit. Recall that the largest urea producer in the country, Fauji Fertilizer Company (FFC), enjoyed windfall gains in 2011 mainly on account of hefty price increases without added pressure on costs. It was Engros trouble with gas supply to their new plant that led FFC to gain from the industry-wide price increase. It seems that the fortunes would be reversed this time around. The feedstock price increase has only been restricted to older plants, which exempts Engros and Fatimas new plants as they will continue to receive feedstock gas on previous discounted rates. Fertiliser manufacturers have never been found willing to give away their primary contribution margins-so it is safe to assume that FFC would go for a sizeable hike in urea prices only to be followed by Engro and Fatima. Engros fortune, however, would also depend on the supply of gas to the new plant, which has been limited throughout 2011. Moreover, other industries have also seemingly lost grip on the argument that fertiliser companies are being favoured by the government as far as gas pricing is concerned. The latest feedstock price is now $3.4/mmbtu higher than the international Nymex future gas prices which stand at $2.99/mmbtu. With this increase, fertiliser manufacturers can further narrow the gap between international and domestic urea prices and can even sell the produce at par. Fertiliser manufactures in all likelihood will be able to pass on the cost increase; the real test of the New Year-it seems, is for the farmers.