KARACHI, March 18: The country is in urgent need of one or two additional fertilizer (urea) producing plants, so as to fill the gap between demand and supply. The demand is currently met through imports, which are a drag on the economy.

Market sources affirm that in the last two years, the government has been importing urea and providing it at subsidized rate to the farmers. It is estimated that during FY2004 and FY05, the government provided Rs4 billion and Rs8 billion subsidy on imported urea. For 2006, the figure has already crossed Rs4 billion.

Industry report by JS Capital Market said that Pakistan was likely to face constant shortage of urea, compelling it to import the product on a regular basis. Imports could figure at more than one million tons per year after 2007. This would entail provision of larger subsidy to farmers out of the national kitty.

Live Securities Limited reported that during 2005, average retail price of urea stood at Rs472/50kg bag, approximately 53 per cent below the international price. 0.561 million tons urea was imported by the government to meet the shortage. The cost of imported urea stood at $266/ton compared to $224/ton in 2004. This indicated that the import parity price was considerably higher than the prevailing domestic prices, thereby requiring the government to heavily subsidize the imports in order to maintain prices at the domestic level.

While analyzing past 3-years supply numbers, JSCM noted that despite huge rise in demand, local supply remained in the range of 4.5-4.7 million tons. That was in spite of de-bottlenecking by some of the local producers. Shortage of gas in the country, the base ingredient used to produce urea, has been the major reason for the government’s reluctance on sanctioning new plants. As a result no new plant has been established in the past seven years.

In September last year, the federal government allocated 100 MMCFD natural gas explored from Qadirpur gas field to establish a new urea plant at Dharki in Sindh. Leading urea producers are believed to have shown interest in the project. However, the decision of allocating gas to them has not been made yet. “In recent developments, Prime Minster Shaukat Aziz had directed setting up of a committee for the provisioning of gas,” says the analyst, adding: “We believe that if the government allocates gas now, it would take at least 3-4 years i.e., 2010, before production starts from this new plant.”

The demand for fertilizer has been spurred by the growth in agricultural sector. The sector, which constitutes 23 per cent of the GDP, has been growing at the rate of 4.1 per cent, 2.2 per cent and 7.6 per cent in FY03, FY04 and FY05, compared to the overall GDP growth of 5.1, 6.4 and 8.4 per cent. The urea demand growth during those years has risen by 2.7, 5.1 and 9.8 per cent in 2003, 2004 and 2005, respectively. “Bumper crop that increased farmer’s income and easy availability of farmer credit by banks supported this tremendous upsurge in urea demand,” says the market watchers.

The analyst expects demand to grow at a 4-year CAGR of 4.5 per cent. That is expected to be mainly on the back of increasing availability of irrigation water and government’s efforts at bringing more areas into the ambit where key fertilizer inputs are utilized. A recent study suggest that only 35 per cent farmers use or can afford to use fertilizer, which is far low for an agricultural based economy, as ours.

For 2006 and 2007, analysts expect demand of urea to grow by 5 per cent. But beyond that in 2008 and 2009, the pace of growth would slow down to 4 per cent.

Going forward, while looking at new upcoming addition in supply, only FFBL’s de-bottlenecking of around 0.16 million tons and the commissioning of Fatima Fertilizer (0.30m tons) are scheduled to come online, after gas was allocated to them. This was expected to take total local production to around 5.2 million tons.

Other issues, besides that of shortages and delay in additional plant installation, that looms over the fertilizer industry includes the delay in the announcement of a definitive fertilizer policy and the upward revisions of gas prices. The fertilizer policy of 2001, illustrates that feed stock prices are to increase by 15 per cent effective July 1, 2006. Beyond that, it is unclear as to how feed stock prices would be regulated.