Fertilizer makers facing heat of gas cut crisis By: - Articles Detail
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Fertilizer makers facing heat of gas cut crisis  Back
Mohammed Arifeen

The fertiliser sector produced five million tons of urea in 2009 against a capacity of five million tons, 5.15 million tons against a capacity of 5.6 million tons in 2010, 4.9 million tons compared with 6.9-million-ton capacity in 2011.
The fertiliser sector's performance remained completely poor in 2012 due to an abnormal reduction in gas supply. Barely 4.1 million tons of urea was produced against an installed capacity of 6.9 million tons. The sharp decline in the overall production was primarily due to frail functioning of SNGPL-based fertiliser plants, confronting the worst gas crisis. 
SNGPL-based fertiliser plants brought about only 11.6 percent of their total urea production capacity. Urea production of such plants stood only at 256,500 tons urea. This is the lowest-ever output of these fertilizer plants in any of the year.  
Fertilizer manufacturers in Pakistan suffered over 2.7 million tons urea production loss in 2012 mainly due to gas curtailment. Pakistan also incurred significant losses by importing urea worth over $1 billion and providing a subsidy of over Rs 50 billion on imported urea over the same period.
All four SNGPL-based fertiliser plants incurred significant losses over the last two years because of non-supply of gas.  
According to knowledgeable sources all four fertiliser plants on SNGPL network are facing a complete closure, leading to very low production and financial losses.  Four fertiliser plants on the SNGPL network, including Pakarab, Dawood Hercules, Engro's new plant and Agritech, remained the main sufferers of the gas shortage. 
SNGPL-based plant are facing worst-ever crisis in the aftermath of gas breakdown in excess of 300 days in one year. Such shortages had not been witnessed before 2012. The substantial gas curtailment to fertilizer plants, in violation of existing supply contract of 12 months a year, has given rise to substantial loss to the manufacturers during the year 2012.
On the other hand if the gas sufficient reduction continues during the present year, SNGPL-based fertiliser plants would be compelled to default on their loan obligations worth over Rs 166 billion, as well as forcing them to quit a large number of highly skilled manpower. 
The decline in urea production poses a grievous threat to crop yields. Pakistan might not be able to meet its agriculture and export targets, besides hastening inflation. Decline in domestic production of urea also compelled the government to import huge quantity of urea to meet farmers' demand.
To meet this production loss government imported over 1.23 million tons of urea spending 566 million dollars and also paid over 24 billion rupees subsidy to keep the imported urea's prices at par with locally produced urea.
Fertiliser industry has vehemently opposed further import of urea for upcoming Rabi season saying there is no fear of any shortage of the commodity as enough stocks will be available in the country. Industry sources said  that urea demand for this Rabi season will be easily accomplished with domestic production and already planned import of some 0.3 million metric tons.
During Rabi 2012-13 some 2.93 million tons of urea stocks will be available for domestic consumption. This includes opening inventory of 630,000 tons, local production of 2 million tons and an import of 0.3 million tons in Rabi 2012-13.
Urea rates have been tremendously increased by 88 percent from Rs850 to Rs1, 600 per bag. This has been increased unjustifiably on excuse of gas shortage. 
The federal government has given subsidies of over Rs 77billion  to urea manufacturers in the last three years (2008-11) in the form of reduced price of feed stock gas (Rs500 per bag of 50kg) with a view to make urea available to growers at cheaper rates. But unfortunately growers never gained from this liberalization as they continued to endure regular price hikes.
 A sub-committee of the Economic Coordination Committee (ECC) of the cabinet has given its blessing to see gas supply to fertilizer plants during present winter season.
Sources say that during winter supply of 75mmcfd of gas would be ensured to four fertilizer plants and the Ministry of  Petroleum & Natural Resource (MPNR) has told the ECC that there would be no import of fertilizer by next year as 20 lakh ton fertilizers would be produced by country's fertilizer plants.  Because of no import of fertilizers, around Rs120 billion savings would be attained.  
Pakistan can become self-sufficient in urea production and save a huge amount of foreign exchange if SNGPL-based fertiliser plants are provided non stop gas supply. With full capacity utilisation, Pakistan could even export an extra million ton of urea every year, earning a huge amount of foreign exchange.
Despite the dramatic gas curtailment over the past two years, domestic urea plants were provided Rs 365 billion gain to farmers over the last five years by keeping local urea prices significantly below international levels. 
 Now this time the government has fully assured fertiliser sector that gas would be provided for 11 months to produce maximum fertiliser for the agriculture economy. It must be reminded once again that the  country's overall urea production capacity is about 6.9 million tons annually, as against the demand of some 5.8 million tons, providing an opportunity to export some one million ton of urea annually.
The SNGPL plant owners also claimed that if at the same proportion of gas curtailment continues during 2013, the SNGPL-based fertilizer plants may compel to shut down permanently resulting in lay off of highly skilled manpower, increase in bad debts and huge burden on national exchequer, to import urea to meet the urea shortfall.
Fertilizer sector experts says that it's not just fertilizer plants that would face the brunt, the whole farmers' community as well as the country would be the final losers if fertilizer plants with over 2 million tons of capacity were shutdown due to unavailability of gas. They said that government needs to support fertilizer industry to ensure cheap local urea to farmers. 
The government plan to provide $400 million from receipts of the Gas Infrastructure Development Cess (GIDC) to fertiliser firms is under study, in order to subsidize the building and laying of gas transmission lines. The GIDC is a tax imposed on gas consumers, to bring forth funds intended for gas pipelines and LNG import projects.
The plan will help save fertiliser plants from the affect of load-shedding; they will now receive gas supply instantly from different gas fields, without having to rely on gas utilities.
At present, as progress on these projects remains very slow, the Ministry of Petroleum has now agreed to a proposal put forth by the fertiliser industry; which asked for funds for a transmission and distribution network from committed sources of gas.
In this context Pakistan take the example of Indian fertilizer market that witnessed robust growth. India has made progress in fertilizer sector by increasing incomes of rural areas, providing cheap farm credit and by arousing public/private awareness campaigns etc. The consumption volume of fertilizers in India grew at a CAGR of 7.6 percent during 2005-06 - 2011- 12.0.