FERTILIZER usage plays an important role in agriculture economy like Pakistan’s. In Pakistan, agriculture accounts for 25 per cent of gross domestic product and employs 44 per cent of the workforce and contributes substantially to export earnings.

Growth in agriculture output is dependent upon the extent of fertilizers’ applications. Despite a nitrogen, deficient soil, its current usage at 112 kilogram a hectare is one of the lowest in the world. Urea, rich in nitrogen is the most widely used fertilizer, followed by the DAP, a phosphatic fertilizer.

The government supports the sector through various incentives aimed at increasing the agricultural output. It is a balance between the government’s limitation on continuing concessions and offering competitive incentives for new investors. The fertilizer policy has provided incentives for existing capacities and for expansion, with the government anticipating $1.2 billion of investment in the next four years. At present, 10 units are operating in Pakistan. Four of them — Fauji Chemicals, Dawood Hercules, Engro Chemicals and Fauji-Jordan Fertilizer - are operating in the private sector with a combined production capacity of 3.62 million tons. These private units dominate the industry by producing 66 per cent of the total fertilizers and over 77 per cent of total urea output.

Against the annual production capacity of 5.66 million tons, fertilizer output was 5.06 million tons in financial year 2000. Urea accounted for 75 per cent of the total capacity and 78.4 per cent of the total production. As current installed urea capacity is inadequate to meet the local demand, shortage makes its import essential. In the fertilizer policy 2001, any expansion, major balancing, modernization, restructuring or de-bottlenecking of an existing plant, which results in an increase in the production capacity of the plant, will be treated at par with a new plant for five years for concessions and exemptions. It would have a positive effect on the industry, pushing balancing modernization, restructuring within the sector.

Natural gas is the basic raw material used for the manufacture of urea and the DAP. The gas is supplied to fertilizer plants through Sui Northern Gas Pipeline Limited and Mari Gas Company. The SNGPL supplies gas to Dawood Hercules, Pak-China Fertilizer and Pak-Arab Fertlizer. The MGC supplies gas to Engro Chemical, Fauji Fertilizer, and Pak-Saudi Fertilizer. The Sui Southern Gas Company supplies gas to Fauji-Jordan Fertilizer. Gas is used both as raw material (feedstock) and fuel (fuelstock). The feedstock gas prices are offered at relatively low rates, while the fuelstock prices are in line with international high sulphur fuel oil prices.

The new policy provides gas for feedstock at the existing fixed prices in 2001-2002, increasing prices by five per cent in July 2002, and 2.5 per cent onwards annually until the financial year 2006 to gradually eliminate the subsidy element. The concessional feedstock allowed under the 1989 fertilizer policy to companies that undertook expansion will be continued until their 10-year period is exhausted. Afterwards, the price will be at parity with the Middle Eastern feedstock prices, treating them as the benchmark.

On September 3, the government imposed a 15 per cent general sales tax on the import and supply of all kinds of fertilizers, whereas the urea has already been brought under the GST net. Through this measure, the government withdrew the sales tax exemption on the import and supply of fertilizers. In the policy 2001, the selling price of fertilizer will remain deregulated on the understanding that the manufacturers will allow the free-market forces to prevail, they will pass the benefits in the form of lower price of fertilizer to the farmer.

The urea demand increased by five per cent on an average between 1986-92. Later, it showed an erratic tread: consumption fell by 2 per cent to three million tons in 1994 due to inclement weather conditions and then rose by five per cent an annum from 1995 to 1997 when agriculture witnessed a strong growth. In 1998 demand slowed down due to severe attack of the leaf-curl-virus on the cotton crop early in the season. This coupled with the increase in capacity of 100,000 tons by Engro Chemicals, led to a sharp fall in imported urea. The second half of 1998 was better for domestic manufacturers as there was a surge in demand, but its effect was neutralized. The international manufacturers resorted to dumping urea, a portion of which filtered into Pakistan, resulting in large inventory build-up for domestic manufacturers and a fall in prices. In 1998-99, the fertilizer import bill was Rs13.3 billion, which has since fallen to Rs9.82 billion in 2000-01.