The government's decision to reduce GIDC by Rs 400 per bag of urea and hesitation in increase of feed gas price has landed farmers in different parts of the country in a dwindling financial situation.
On February 6, 2020, Prime Minister Advisor on Commerce, Industries and Production and Investment, Abdul Razak Dawood held a detailed meeting with domestic fertilizer stakeholders but failed to convince them that reduction in urea prices must be the same across the country.
Recently, Fauji Fertilizer Company (FFC) reduced rates by Rs 300 per bag instead of Rs 400 per bag and M/s Engro Rs 160 per bag as it has a different view on GIDC.
There are apprehensions within parts of the industry that the GoP's decisions have yet again proven to be a serious impediment to rejuvenating business confidence.
The government had claimed that its decision to reduce GIDC on urea would provide relief to farmers of Rs 400/bag. However, owing to multiple gas pricing frameworks applicable industry-wide, the GIDC reduction impact will differ from one company to another. For example, Fauji Fertilizers prices its products on fertilizer policy gas pricing and, therefore, could have reduced the price in proportion to the decrease in GIDC.
Engro's calculations are based on fully passing on the benefit of GIDC reduction, given the particular mix of gases being received by the Company. On account of its massive investment of over a billion dollars in setting up a state-of-the-art new fertilizer plant, the Company receives gas under fixed price contracts which do not attract GIDC. The impact of a prospective reduction in GIDC is therefore lower in the case of Engro as compared to FFC.
Moreover, owing to ongoing litigation on the applicability of the GIDC, Engro has not fully recovered GIDC from end consumers. Despite this, the company has decided to support both the government and farmers by being the first one to reduce overall urea prices by fully passing on the impact of prospective reduction in GIDC on its Old Plant.
The government in order to meet the stringent directions of the IMF is compelled to eliminate subsidies but on the other hand it is forced to dismiss some proposals regarding it. The recent move to increase gas prices in the country is reeking of unfair treatment to certain industries such is the claim of industry.
Insiders claim that initially OGRA proposed a list of increments in gas prices for specific consumers which was then revised by the Ministry of Energy (Petroleum Division).The initial recommendation by OGRA proposed a 71% increase in gas prices for the textile sector, despite being the core base of the country's exports.
Fertilizer industry was faced with an increase of 136% and 32% on feed and fuel respectively, reducing the amount of subsidy meted out to the sector. Even with this increase, the fertilizer industry was extended a significant discount over general industry pricing.
However, the subsequent revision in prices by Ministry of Energy (Petroleum Division) suggested that gas prices were increased by 27% for the textile sector whereas the earlier proposed increase for fertilizer industry is being considerably reduced to 5% on feed and 31% on fuel which creates a sense of partiality within industry.
Agriculture analysts say that the supposed burdening of the fuel rate dilutes the impact on the fertilizer industry as fuel component makes up roughly 20% of the industry's gas consumption. The major proportion of the gas in the fertilizer business is consumed in the form of feed gas.
"The gas price increase for the sector merely translates into 17% increase on weighted average basis. In comparison to 27% increase for the textile sector, the increase for fertilizer industry alludes to a result of flawed decision-making on the Government's part," said one of the petroleum sector analysts.
He further stated that the resultant effect negates the Government's desire to curtail the worsening Gas Development Surcharge deficit and looming circular deficit situation in the country. Moreover, with continued subsidy to specific sectors, it leads to a disproportionate contribution to the reduction of GDS deficit.
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