Fertiliser sector needs the gas most

The inevitable happened last week as the leading fertiliser manufacturer, Fauji Fertilizer Company (FFC) announced a reduction of Rs.140 per bag in urea prices. It was only a matter of time that the local fertiliser players would succumb to the pressure of abnormally high urea inventory in the country which is touching 0.8 million tons.
The fears of over-supply got the better of local players as TCP is all set to import more urea for the upcoming season and the barter trade with Iran is also in the news. Urea off-take was considerably slower in the first quarter of CY12, with the local manufactures taking massive hit to their sales as they could not compete with the imported urea.
The move by FFC, in all likelihood, will be followed by other major players, sooner than later - as a result of which, the market has estimated considerable slide in the forecasted earnings of the major players. FFC could still afford to lower its price as it was merely a beneficiary of the massive price increase which was started by Engro, due to extended gas s curtailment to its new plant.
But Engro may find it tougher as it will have to bear a rather significant dent on its already thin primary margins. Bear in mind, that urea industry is now paying thrice the amount for feedstock gas, more than what it was paying a year ago, as the imposition of cess has led to a massive increase in feedstock gas price.
There are chances that Ogra will announce another round of price increase, which could be a telling blow to the local players margins, especially at a time when the feedstock gas supply situation remains uncertain.
It has long been argued that Pakistan is better off producing urea locally than to divert gas for power production. A research report titled Pakistan Integrated Energy Model, prepared by the International Resources Group for the ADB and Planning Commission of Pakistan states very clearly that reducing gas to the fertiliser sector costs the energy system Rs.196 million per mmcfd.
The report derives that using 100mmcfd for fertiliser saves Rs.29.4 billion compared to fertiliser imports, while replacing the same quantity of gas for power sector saves Rs.6.4 billion compared to fuel oil imports. Thus, gas has a higher economic value for fertiliser production compared to both fertiliser imports and power generation.
The fertiliser industry has long been arguing with the government, but their plea has largely fallen on deaf ears. It is high time the government should act in the better interest of the industry and the country, in order to keep the fertiliser industry afloat.