Fertilizer manufacturers: Anomaly in gas prices creates price distortion

KARACHI: The government should remove current price discrimination among fertilizer manufacturers to bring stability to urea prices and benefit from higher revenues, according to a brokerage house report.

A Topline Securities report highlighted that, “Recent increase in gas prices has created an anomaly among the fertilizer sector as government has increased gas prices for fertilizer manufacturers using gas from the SNGP and SSGC networks, affecting 60 percent of the industry’s production capacity. While the gas tariff for fertilizer companies relying on MARI for gas remains unchanged.”

Engro Fertilizers (EFERT), Fauji Fertilizer Bin Qasim (FFBL), and Agritech (AGL) are on the SNGP and SSGC networks. The feed gas rate for these manufacturers has been increased from Rs 580/mmbtu to Rs 1,597/mmbtu.

Meanwhile, Fauji Fertilizer Company (FFC) and Fatima Fertilizer (FATIMA) are on the Mari Network and continue to receive gas on the subsidized price of Rs 580/mmbtu. As a result of this price discrimination for the same homogenous gas supply, the affected fertilizer players have been forced to adjust their prices based on their input costs.

In response to the recent gas price increase and uplifting of imported urea from the Government, FFBL has already raised its urea price to Rs 5489 per bag. According to channel checks, urea prices for both Engro Fertilizers Limited and Fauji Fertilizer Company Ltd stand at Rs 3,767/bag. However, Engro Fertilizer is expected to raise its prices in the next few days, based on the significant cost increase in its gas supplies.

The discrepancy in gas prices has caused immense instability in the fertilizer market, with excessive profiteering and hoarding by middlemen pushing urea prices to around Rs 5,000/bag for the farmer. The report warned that, even if gas rates for MARI-based customers remain unchanged, they are likely to increase urea prices in line with other players.

“If the government were to remove this distortion by increasing Mari gas prices, then it would be able to stabilize the urea prices for farmers and collect additional Rs 80–100 billion in revenues as well. We believe the government should equalize gas rates for the whole industry; otherwise, it will create distortion and go against the IMF’s suggestion of elimination of subsides,” the report added.

Experts believe that the optimal way to overcome this instability in urea market prices is to remove the current gas price discrimination among fertilizer manufacturers and completely end their subsidies. By introducing the same gas price for all fertilizer manufacturers, the government will be able to benefit from higher revenues and consistent urea prices that will support the country’s agricultural growth.

Copyright Business Recorder, 2024