The unstoppable growth of circular debt has forced the federal government to increase prices and comply with the IMF. To minimize the impact on industrial and domestic consumers, the decision was made to increase the gas prices for fertilizer manufacturers. In principle, the decision is right, but the way it is being executed, there are concerns.
One reason for proposed hike in gas prices is that the retail prices are already much higher than the dealer transfer prices (ex-factory price), and some circles in the government (mainly ministry of industries) were of the view that since the delta between the market and ex-factory prices is already higher, any increase in the gas price will only effect the ex-factory price, not the market price. That is a risky assumption, and the ministry of energy doesn’t agree with it at all.
The higher delta between the ex-factory and market price is purely a governance issue, while fertilizer dealers are making windfall profits. Historically, over the last twenty years, on average, ex-factory urea prices remained at 36 percent discount to import parity prices while the retail prices to ex-factory prices premium averaged at 12 percent.
In the recent past, from 2019-2022, the average ex-factory to import parity discount was 50 percent while the retail to ex-factory premium was mere 7 percent. However, in 2023, the retail to ex-factory premium (averaged at 26 percent) and started growing abnormally. In Jan 2024, it stood at whopping 32 percent. Nothing excepta lapse in governance can explain this, as dealers (which are either smuggling out or hoarding) are benefiting from this phenomenon. The authorities must address this through better administration.
The government has recently increased the price of gas for all users (expect those on Mari network) to Rs1,597/mmbtu–for both feed and fuel. Now there are different groups arguing differently. One group (Fauji fertilizer and Mari) wants the status quo to be maintained by not bringing Mari prices equal to others. On the other hand, Engro and Fatima want Mari network price to match others. Thirdly, the finance division wants uniformity in the prices across the board.
Everyone has own interests to protect. After revision in the gas prices, one company has increased its brand Sona urea prices by Rs1,050 per bag. Others would follow. If there is no increase in Mari network prices, Fauji and, partially Fatima, will make windfall profit, as their margins will swell. And if the Mari network prices increase, the increase in urea prices by Fauji would be higher than Engro and latter shall follow suit, leading to some windfall. Thus, both groups want to maximize the benefit at the cost of farmers (and public at large due to expected food inflation).
It is pertinent to note that Mari based fertilizer producers are not getting any ‘subsidized gas’. Ogra determined price of the gas is Rs556/ mmbtu; however, they receive it at Rs580 and Rs1,580 per molecule, respectively. This is falsely portrayed argument for level playing field of all producers with no sagacity to the consequences.
Since it is asserted that the higher retail price in the last few months is an issue of governance, one may suspect that the retail to ex-factory prices premium shall continue. Thus, the worry of the ministry of energy is not unwarranted, and upward revision in ex-factory prices would result in higher retail prices –at least to match import parity price (currently at Rs6,400/bag). Therefore, expect food prices to increase, as farmers shall invariably pass on the impact. And this may become a reason for higher wheat support price in the upcoming season. Not a goods sign, as high inflation has already broken the back of common man.
The other problem is with higher than required gas prices from Sui’s perspective, the benefit shall pass on from the farmers to Sui companies and in turn to provinces. It is pertinent to note that when Sui companies make surplus, they pass it on to provinces. On the other hand, the deficit shall be financed by the federal government (as it becomes part of the circular debt which is federal government’s liability).
Another thing that resulted due to hasty decision making was keeping feedstock and fuel prices same. Feedstock is the raw material, and it is provided as subsidy to ensure lower urea prices, while the fuel is provided to power fertilizer plant to run – it should be legally treated same as gas supply to industrial captive plants.
In a nutshell, it appears that the initial proposal of ministry of energy was better where it was suggested to have uniform feedstock price at Rs760/mmbtu and fuel stock at Rs1750/mmbtu. That would have resulted in much less increase in ex-factory and in-turn retail prices of Urea. Moreover, that would have been enough to end the cross subsidy (to comply with the IMF) and the ministry of finance would be happy as it wants uniform pricing.
Now things are getting out of hand, and reality shall sync in once the higher urea prices shall reflect in wheat support price and eventually into food inflation.Therefore, myopia will prevails as ECC decision distorted market prices even further while entailing repercussions which will take longer time to subside.
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