Reports

Analysis of Pakistani Fertilizer Industry – Academic Report

by Ravi Magazine · Published 16th April 2015 · Updated 10th December 2020

Importance of Agriculture in Pakistan’s Economy

The agriculture sector is important because it accounts for:

24% of the country’s GDP
50% of the employed labor force
65% of the country’s total export earnings making it the largest source of FX earnings
Forms the basis for over 50% of industrial production
Has growth rate of 3-4% per annum

And that population growth is roughly gauged at 2.3% p.a. (current population: 134mn) compared to 2.2% p.a. in India and 2.4% p.a. in Egypt. With larger population comes greater demand for food consequently higher demand for grain.

Problems in the agriculture sector

Our agricultural land is facing many problems and some of the major problems are:

The conversion of arable land into non-agricultural uses
Water-logging and salinity
Land erosion scenarios

The conversion of arable land into non-agricultural uses

The total land area of Pakistan is nearly 80 million hectares and the total arable land area is 23 million hectares. With the population presently at 134 million and the population growth rate at 2.3% p.a., the situation is bound to put tremendous pressure on the arable land of Pakistan in the near future. Our current and potential agricultural land is reducing and shrinking tremendously. It has been estimated that throughout the country, everyday approximately 500 acres (1 acre = 4,840 square yards) of farmland is taken out of agriculture by the expansion of settlements, roads, factories and many other non-agricultural activities. It is predicted that if this trend continues then after every decade approximately a million acre or more of crop land would be taken out of agriculture in our country.

Arable land is a basic and major resource for the production of human food. But it seems that the expansion of human population and human activities are reducing the availability of land, suitable for food production at an alarming rate. Expanding population demands more food on one side and devours agricultural land on the other side, which is a matter of great concern for everyone.

Water-logging and salinity

Out of total land area, 80 million hectares, 23 million hectares is cultivable. Of the total cropped areas 18 million hectares (78%) is irrigated and 5 million hectares is rain-fed. The annual rainfall in Pakistan varies from less than 100 mm in Sindh to more than 750 mm in the foothills and northern mountains. About 60% of this rainfall occurs during monsoon. In spite of a number of drainage and salinity menace control schemes being undertaken, the salinity and water-logging problems positively persist and each year 40,000 hectares of irrigated land is lost to water-logging and salinity. On the one hand, the nation needs more food to fulfill the demands of its increasing population while on the other hand, each year the cultivable commanded area (CCA) is decreasing due to this twin menace.

Pakistan’s canal irrigation system is one of the best in the world and is very essential for Pakistan because of the total area under irrigated agriculture, about 9.6 million hectares is arid, 3.8 million semi-arid and the remaining area is characterized as sub-humid. No doubt, irrigation system has increased agricultural production but on the other hand has created the problems of salinity and water-logging.

Percolated irrigation water has raised the underground water level and subsequently water-logging. Excessive salinity of the underground water has also harmful effects on the soil body. Ascent of dissolved minerals of irrigation water through capillary action increases the soil at salinity and damages its fertility. It is rightly said that water-logging is the cancer of the soil. Because of poor soil drainage and improper irrigation practices, the huge amount of arable land is waterlogged and has become saline now.

This problem has destroyed millions of hectares of farmland in the country with around 9 million hectares of land being cultivable waste. Water-logging and deposition of whitish crust of salts are changing farmland into unproductive land and many areas, the crop fields are reduced considerably. Reports say that during every five minutes, 0.4 hectare fertile farmland is taken out from agriculture, because of this problem. Such land losses must be checked by draining the affected areas and by planting hydrophytes.

Over the years, about 40 per cent of the irrigated cropping land in Pakistan, which produces around 90 per cent of the total agricultural output of the country has come under water-logging. The impact of salinity on agriculture productivity is similarly severe, robbing Pakistan of about 25 per cent of its potential production of major crops. This is happening in the most productive and fertile agricultural areas of the country and it is clear that unless the twin menace of water-logging and salinity is countered on an urgent basis and with a new approach, agriculture productivity of the country would be lowered. The reason of these two problems is mainly because of irrigation without drainage. The situation has been compounded by over-irrigation which many farmers carry out in the belief that it would help increase produce. Considering that 80 per cent of Pakistan’s cultivated area of about 17 million hectares is irrigated network, the Indus River irrigation system, the threat to agriculture is not just serious, it is grim and could result in emptying the country’s food basket. Implications of water-logging and salinity can be described in one word: “disastrous.”

It is not that the problem has been left unattended. Numerous efforts have been made in the past 40 years to counter water-logging and salinity and retrieving lost or damaged fields. All campaigns in this direction, however, suffered from two shortcomings. One, while affected lands were restored for cultivation, the malaise continued spreading engulfing other areas. Two, overtime, drainage channels constructed to rehabilitate land, got clogged for lack of maintenance. Nature has gifted us highly diverse and favorable environmental conditions for agricultural practices. But, unfortunately, the yield per acre and per capita is very low as compared to many other countries of the world. This is mainly due to illiteracy, ignorance, lack of improved strains, poor health of farmers. By eliminating these hurdles, the productivity of the land can be improved manifolds. For economic well-being of the country, these maladies must be removed through effective planning, otherwise, agriculture would remain in stress and food supply problems would become much serious with the passage of time.

Land erosion scenarios

Erosion removes top-soil and exposes sub-soil, thereby changing its characteristic productivity. Removal of soil by erosion and subsequent incorporation of underlying material by tillage reduces the organic matter. Reduction of organic carbon is associated with reduction in ion profiles of NO₃^–. The contents of Phosphorous. Zinc, Iron and Manganese also decrease as severity of erosion increase. The physical properties such as water holding capacity and infiltration capacity are reduced due to soil erosion, which consequently further enhances the process of erosion. The soil structure is highly variable throughout the country and largely affects its erodibility. Soils of some areas are several times more erodible than others. The soil structure and water holding capacity can be improved by green manuring, whereas heavy manuring reduces the soil erodibility up to 5 times. Developing vegetation cover can also reduce soil erodibility, because root system of plants penetrates into the soil and binds its particles in proper place. Then again, the proper usage of fertiliser in the correct dosages will also improve the soil’s crop sustaining strength and reduce top soil erosion.

Although eliminating these problems would take careful planning and expenditure, but further ‘disasters’ can be effectively controlled through right mix of chemical fertilizers for the various types of soil conditions prevalent in our country.

IMPORTANCE OF FERTILIZER

Food consumption is likely to rise in emerging markets where economic growth results in better income per capita because higher income would lead to increased food consumption and hence greater grain demand. With growth in arable land diminishing as a consequence of rapid soil erosion, fertilizer usage will continue to play an important role in food production. Despite bouts of industry swings in the intermediate terms, secular industry dynamics will remain robust for the industry because of the estimated 5-6% p.a. long terms growth in fertilizer demand in Pakistan and the largely inelastic food demand.

Benefits to the Crops

Fertilizer provides a number of benefits not only to the plants but also to the soils. The proper usage of fertilisers ensures that the soils retains its productivity and does not lose the nutrients that the crops need for sustained growth. Fertiliser gives the soil the nutrients which it is deficient in and also reduces top soil erosion. Fertilizer also improves the yield of the crops – this is described in a later section of this report. Another benefit from fertilizer usage is that it provides better resistance to plants from diseases.

The Nitrogenous Fertilisers provide the plant with Higher Protein Content, Color and Growth.

The Phosphorous Fertilisers promote strong, healthy root development and helps plants mature more rapidly and thus aids in blooming and seed formation. They are also critical for the synthesis of energy regulating substances in plants

The Potassium Fertilizers raise the resistance of plants to diseases and promotes growth from root to stack. They also increase the plumpness of grains and seeds, and provides winter hardiness to legumes and other crops.

Diminishing Growth in Arable Land

Diminishing growth in arable land must be compensated through higher crop yields and or increased use of recycled land. We believe this is best done through balanced fertilization in order to sustain food security for a population growing at 2.3% per annum. Balanced fertilization suggests the use of nutrient supply systems that maximize efficient use of nutrients by reducing losses of nutrients, improving nutrient cycling, and integrating inorganic fertilizer use with organic inputs such as nitrogen.

The use of fertilizer becomes necessary given that growth in arable land has been diminishing and food import is increasingly costlier. While nitrogenous fertilizers are predominantly used (NPK ratio 4:1:0.06), government and privately induced awareness of phosphoric and potassic type fertilizers are like to promote their greater usage. The NPK ratio a temporary area demand / supply imbalance in the intermediate term is likely to press industry margins (assuming intended capacities come on line and on time) thus long term industry outlook is positive given that more grain will likely be required to feed a growing population.

RELATIONSHIP B/W YIELD & FERTILIZER OFFTAKE

The following graphs shows the relationship between the yield per hectare of wheat, the fertiliser offtake and the same for sugarcane and the impact the usage of fertilisers has had on the yield of such crops.

From the graph above, it is evident that on average the fertiliser use and yields of the 2 crops has increased over the years. We have focused on these 2 crops since they are both Rabi crops, which are highly fertiliser intensive (especially Urea).

The trend is that in any year when there is an increase in the offtake of fertiliser, the yield per hectare of the crops increases in the following year. For example, in 1993-94, the offtake of fertiliser increased by almost 14%. In the following year in 1994-95, the yield per hectare of wheat increased from 1893 to 2081 kg/ha – an increase of almost 10%.

Similarly prolonged usage at the same level of fertiliser increases soil alkalinity (as there is heavier usage of Urea rather than a balanced usage of N and P). Therefore when the fertiliser use remains same for some time, the yield per hectare falls as the soil becomes more deficient in nutrients.

To keep the yield increasing of the major crops we need to invest not only in proper and balanced fertiliser usage but also give due importance to proper water availability and improved seeds, crop protection and other technological factors.

OVERVIEW OF THE FERTILIZER INDUSTRY

FERTILIZERS- A BRIEF HISTORY

The fertilizer industry is an integral part of Pakistan’s economy. The Pakistani fertilizer industry produces, imports and distributes various types of fertilizers. The National Fertilizer Corporation (NFC), a government corporation remained for most of Pakistan’s history as the largest manufacturer of fertilizers.

After the partition of the sub-continent, the Food and Agricultural organization (FAO) entered the scene forming an agreement with the Government of Pakistan. This resulted in the initiation of Rapid Soil Fertility Survey and Population of Fertilizers project in 1958. The conclusion from these studies was that the Pakistani soil is highly deficient in Nitrogen content and thus more emphasis should be placed on Urea consumption. Secondly they also concluded that our agriculture output is 1/3 rd of our potential.

Ayub Khan’s green revolution emphasized on the fertilizer sector in the Public Sector. The NFC set up Pakistan’s first fertilizer plant in 1958. The first private sector plant was set up by Exxon at Dharki in 1965 at a cost of $43 million. This was followed by Fauji Fertilizer in 1977 and Dawood Hercules later on. The NFC owned and operated six manufacturing units that accounted for the balance.

Until 1986, the fertilizer industry was highly regulated. The government fixed prices and the profitability of the manufacturers was capped at 20% of ROE. The regulated environment stifled private sector investment in the fertilizer industry, leading to a widening demand-supply gap that had to be bridged through expensive imports.

Urea prices were deregulated in 1986. However, this did not help the manufacturers significantly as urea price increases were not large enough to offset the loss incurred on selling costly imported urea at lower prices in the local market. By 1991, urea imports had risen to 584,900 tons, approximately 27% of installed capacity. Imports were not only causing damage to the local industry, but were also affecting the country’s foreign exchange reserves. In 1991 the government initiated a fertilizer policy which granted special incentives for setting up new projects and expansions.

FERTILIZER POLICY OF 1991

The salient features of that policy were:

Supply of feedstock gas at prices locked for 10 years
Guaranteed supply of gas for at least 9 months of the year.
Duty-free imports of the plant and machinery
Eight year tax holiday from date of commencement of commercial production for new projects
No sales tax or excise duty on the sale of fertilizer
Expansion of existing plants to be allowed the same concessions as new plants
No government sanctioning of private sector investment needed
Deregulation of prices of all fertilizers
If price controls are imposed by the government, prices are to be set in such a manner that ex-factory prices guarantee a ROE of 20%
Duty-free import of phosphoric rock.

The Fertiliser Policy of 1991 proved to be very beneficial to not only the fertiliser companies but also to the fertiliser industry as a whole. With a major input material being subsidized, the fertiliser companies expanded heavily. Engro Chemicals and FFC reacted by expanding their production capacities and securing 10 years agreement (ending 2003) which guarantee feedgas supply at concessional rates of Rs. 9.75/kilo cubic feet (kcf). Engro also availed the tax holiday while FFC chose not to do so. In 1993, Engro set up a new plant to double its capacity to 600,000 tonnes and FFC also got a new plant of 635,000 tonnes in 1992. This increased local production reduced our costly imports and helped to develop this crucial industry.

AGRO-ECONOMICS:

With agriculture continuing to be the mainstay of the Pakistan economy, the need to improve crop productivity and quality has assumed significant proportions over the year. To that end, the government has pursued a policy of supporting the industry in the form of feedgas subsidies and increasing support prices for commodities (which increase farmer’s purchasing power for fertilizers).

Over the years, fertilizer manufacturers have respond timely to farmer demands and in the process reaped handsome profits. This is not extraordinary considering the fertilizer, by itself contributes nearly 25-75% in raising yields, depending on the crop and soil type. Better marketing, product development and prudent management have led to good return on equities for the local fertilizer players. However, whereas past industry trends show that corporates focused on core fertilizer activity, the next decade is likely to witness companies branching out into other products to cushion against commodity cycles and the possibility of gas subsidy termination within the next 5-6 years.

Nonetheless, the demand for fertilizer is unlikely to subside significantly in the longer term simply because limited arable land should continue to demand better crop production as population grows at current levels of 2.3% p.a.

However, the continuation profits would depend greatly on the extent of the fertilizer manufacturer ability to pass on costs, as well as operational efficiencies, weather conditions, and the purchasing power of farmers. Together, the latter two factors are largely responsible for annual fertilizer demand.

FERTILIZER PRODUCTION MATERIALS

NATURAL GAS

The principal raw material for the manufacture of anhydrous ammonia, and therefore, fertilizers, is natural gas. In fact, fertilizer industry is the second largest consumer of Pakistan’s total gas availability (26% for fertilizer consumption vs. 33% in the case of energy). Natural gas used as feedstock, which is an essential input in the production of ammonia, average roughly over 30% of fertilizer production costs and around 75% of total gas requirement. Used additionally for fuel purposes (fuel stock), natural gas generally accounts for over 55% of production costs.

Two main natural gas suppliers are Sui and Mari gas fields. Sui Gas is located in Balochistan and caters to the needs of Dawood Hercules, Pak Arab, and Pak China fertilizer plants. Mari Gas on the other hand is located at Dharki, Sindh (site of Engro Chemical) and supplies gas to the three big urea manufacturers – Fauji, Engro and Pak Saudi. Mari Gas users typically operate well above design capacity, whereas Sui users have to face gas shortages.

Besides pricing, gas from Mari Gas differs from SSGC in its chemical content. Because Sui has a higher energy content (94.4% methane by volume) as compared to Mari (74% methane by volume), a greater quantity of Mari gas is required to manufacturer one ton of urea as compared to Sui. Sui is supplied to both industrial and domestic users. In contrast Mari, consumption is strictly industrial. The fertilizer units preference for non-pipeline (hence Mari gas) over pipeline gas is explained by the fact that they do not have to share the former with domestic consumers.

Gas pricing is an important aspect of the manufacturing costs. Pakistan has an abundant supply of natural gas and thus it is somewhat cheaper for us. However in the future, we face severe price threats from the Middle East and the Former Soviet Union. Our comparative prices and prices to the local companies are given below.

International Gas Prices $ per MBTU

*Western Europe*	*2.5 – 3.1*
*USA*	*1.7 – 2.4*
*Pakistan*	*1.4 – 1.7*
*Indonesia*	*1.5*
*Canada*	*1.3 – 1.5*
*Arabian Gulf*	*0.5 – 0.75*
*Former Soviet Union (FSU)*	*0.4*

From this we can clearly see that we get quite cheap gas. But the fact that Middle East and FSU have very low gas prices – as compared to ours – they can use this to bring down the international urea prices and harm our local industry as well as chances for any exports that we might have.

Feedstock Rates for Domestic Fertilizer Companies Rs per kcf

Company	Gas Supplier	Base Rate	Expansion
FFC	Mari	42.845	9.75
Engro	Mari	42.845	9.75
Dawood	SNGPL	62.298	–
Pak-Arab	SNGPL	62.298	–
Pak-Saudi	Mari	42.845	–
Schon	SNGPL	12.4	–
FJFC	SSGC	56.78	–

The expansion rates are the ones which the Mari Gas offers to the companies which set up additional manufacturing facilities under the Fertiliser Policy of 1991. These are fixed until 2003. However the base rates are the pre-policy rates which are adjustable. In the last year, they rose by almost 78%.

PHOSPHATE ROCKS

This is the principal raw material used in the manufacture of DAP and accounts for almost 65% of production costs. In comparison, anhydrous ammonia represents up to 28% of manufacturing costs. The need to import phosphate rocks will commence with the commissioning of Fauji Jordan in 1998 (DAP capacity: 445,000 TPA) and the Al-Noor plant in 1999 (DAP capacity: 390,000 TPA), which will pioneer the local manufacturer of DAP.

Initially we also had production through imported phosphate rocks (Lyallpur Chemicals) but we could not sustain the burden for too long and discontinued it. Then the set up of Pak Arab Company and Hazara Phosphate used our own phosphate rocks. However we ran out of them and thus the need to import expensive DAP fertiliser. With the set up of FJFC, the import of Jordanian Phosphate Rocks will rise but we will at least cut down on the more expensive DAP Fertiliser.

FERTILIZER PRODUCTION PROCESS

Natural gas can account for 65-75% of the cost of manufacturing ammonia. This process consumes 35-40 MBTUs

UREA MANUFACTURING PROCESS

DAP MANUFACTURING PROCESS

TYPES OF FERTILIZERS

NUTRIENTS CLASSIFICATION

To date, 14 different elements or nutrients have been found to be essential for crops. These have been categorized under Organic (3), Primary (3) and Secondary (3). The rest are Micro-nutrients (5).

The Organic Nutrients (which includes carbon, hydrogen and oxygen) are obtained directly from the air and water. Commercial fertilizers generally provide for the Primary Nutrients, which include nitrogen, phosphates and potash. Farmers have been replacing these of the last 20-30 years.

The Secondary Nutrients – magnesium, calcium and sulphur – play an equally significant part in plant development. Calcium is one of the main elements that increase the plant weight, while sulphur forms part of a plant’s enzymes and proteins. Magnesium is required for photosynthesis and protein synthesis. The remaining Micro Nutrients comprise iron, manganese, zinc, copper, boron and molybdenum.

Fertilizers are sold in three forms – liquid, dry and gas. The effectiveness of the forms is largely the same, provided similar nutrient doses are applied.

COMMERCIAL CLASSIFICATION

These are classified into three categories according to their element (nutrient) structure:

Nitrogen (N): Increases the protein content of plants, gives them color and accelerates growth
Phosphorous (P): Promotes strong, healthy root development and helps plants mature more rapidly and thus aids in blooming and seed formation. It is critical for the synthesis of energy regulating substances in plants
Potassium (K): Raises the resistance of plants to diseases and promotes growth from root to stack. It increases the plumpness of grains and seeds, and provides winter hardiness to legumes and other crops.

These fertilizer which come in a myriad of mixes and composition, are regularly applied according to soil conditions, weather conditions, crop type and the desired productivity.

Nitrogen Fertilizers

Of the three nutrient type (NPK) nitrogen fertilizer have shown the strongest growth trend in Pakistan primarily because of their proven ability to improve plant yield, produce green coloring and to accelerate growth through protein injection. Since anhydrous ammonia is the raw material required for formulating the nitrogen fertilizer, more than 80% of its application is toward fertilizer manufacture (anhydrous ammonia is itself produced from a reaction between nitrogen and natural gas).

The leading nitrogen based fertilizer derived from ammonia is Urea (other includes sodium nitrate, ammonium nitrate and calcium nitrate). Urea is the most concentrated form of dry nitrogen and is synthesized by the reaction of ammonia and carbon dioxide and then solidified. Urea holds the advantage of being easy to transport and handle, and contains around 46% nitrogen (therefore its nutrient name, 46N). Urea in its granular form, is preferred over anhydrous ammonia gas because of the ease of granular use, transport and storage.

Phosphate Fertilizers

Generally denoted by the chemical symbol P₂O₅, phosphatic fertilizers help facilitate metabolic processes such as photosynthesis. The types of Phosphatic Fertilizers are Single Super Phosphate (SSP) and Triple Super Phosphate (TSP). These can be combined with nitrogen (in the form of ammonia) to obtain commercial fertilizers such as Nitro Phosphate, Di-Ammonium Phosphate (DAP: 46% P₂O₅) and Mono–Ammonium Phosphate (MAP: 50% P₂O₅). DAP and MAP have won preference over other phosphate fertilizers in the last 10 years because of their easy shipping, handling and application.

Potash Fertilizers

The potash nutrient is essential for various activities ranging from photosynthesis to fruit formation, plant hardiness and protein formation. Other benefits of potash fertilisers also include resistance to diseases, growth enhancement and legume growth. Potassium Chloride (or potash) is the most common potassium fertilizer and is referred commonly as K₂O (however the proper chemical symbol is KCl). Other forms of potassium fertiliser which are used are Potassium Sulphates. These are fully imported into the country.

Current NPK Ratio

The NPK ratio refers to the consumption (ratio wise) of the different nutrient types of fertilises. Our current NPK consumption ratio is a pathetic 3.8:1:0.04. This means that for every 1 part of Phosphatic Fertiliser, we use 3.8 units of Nitrogenous Fertilisers and only 0.04 units of Potash Fertilisers. The internationally recognized NPK ratio is 4:2:1. Thus we lag appropriate consumption of both the Phosphatic and Potash Fertilisers. The reasons for these abnormal consumption are detailed later on (they are high prices of others, low education and awareness levels, past usage norms etc).

Recommended Method Of Cultivation And Usage Of Fertilizer For Major Kharif And Rabi Crops

RICE

The young crop should be cultivated in fertile lands. If this young crop (seedling) looks weak, then at least 10 days before its transfer to the rice fields (from the paddy fields), put 250g urea per marla.

Nitrogenous Fertilizer

Our lands are extremely deficient in Nitrogen. For better crop results, it is necessary to put on average 125-150 kg of Urea fertilizer per acre for the Irri variety. For Basmati rice, it is advisable to put 50-60 kg of urea fertilizer per acre. Urea should be used twice during the plantation. One should be before the transfer of seedling and the second should be 30-35 days after this on the standing crop.

Phosphorous Fertilizer

Pakistani lands are also deficient in phosphorous. For better results, it is advisable to put on average 75 kg of DAP fertilizer per acre for the Irri variety. For the Basmati variety of rice, it is advisable to put on average 50 kg of DAP fertilizer per acre. For best results, it is advisable to put Phosphorous fertilizer before transfer of seedling and then mix it thoroughly with the soil. Before using phosphorous fertilizer, get the soil tested from the agents of the Fertilizer Company, as the needs differ from region to region and soil to soil.

Potassium Fertilizer

Most often agricultural productivity is best improved by using 50 kg of SOP per acre. The method of usage is that the entire SOP is mixed with the Phosphorous Fertilizer and then put in the soil and mixed with the soil thoroughly.

Some Other Fertilizers and Chemicals

For better rice productivity, Zinc is also a necessary ingredient. The deficiency of Zinc is seen from the brown spots on the lower and upper leaves of the rice plant. To counter this, 35% Zinc Sulphate solution 5 kg per acre and 18-22% Zinc Sulphate solution 10 kg per acre is mixed with the soil and used 7-10 days after transfer of seedling on the standing crop.

Best agricultural productivity results when the soil has been tested by the laboratory and then the appropriate fertiliser is used based upon the soil analysis and the deficiencies it contains. In general the following table can be followed:

Table xx : Type of Fertiliser to be used, Time of use and quantity per acre.

Type	At time of transfer of young seedlings	After 30-35 days
Irri	1.5 bags of DAP + 1 bag of Urea + 1 bag of MOP or SOP	1.5 bag of Urea
Basmati	1 bag of DAP + 0.5 bag of Urea + 1 bag of MOP or SOP	0.75 bag of Urea

COTTON

For better plant growth; appropriate land fertility, sufficient air and water and better care is absolutely necessary. The land is the most important since the plant derives its food and all other nutrients from the land. In most cases, the land is deficient in providing all the basic nutrients that the plant requires for its better growth. This is when the use of fertilizer is must – so that the plant can get all its nutrients from the land. To use the best and most appropriate fertilisers, it is best advised to get the soil tested and then use the recommended fertilisers. Land fertility and the fertiliser use are indirectly proportional – if the land is more fertile, then use less fertiliser and vice versa.

Nitrogenous Fertiliser

Our lands are most deficient in nitrogen. Cotton needs nitrogen more than it needs phosphorous or potassium. For better productivity, it is necessary to put on average 50-80 kg of Nitrogenous Fertiliser per acre in Punjab and 40-60 kg nitrogenous fertiliser per acre is Sindh. The following cotton varieties need more fertiliser – Karishma, Niab 78, CIM 448, CIM 443, CIM 446 and Rehmani. The following cotton varieties do not need that much fertiliser – FH 634, BH 36, FDH 53, CIM 1100, MNH 93, MNH 147, FH 87 and Qalandri.

Nitrogenous Fertiliser is normally given on time of sowing, on first Aab Pashi (watering), at time of flowering and continuing till 2-3 weeks after flowering. In addition to this, whenever the cotton crop starts to become yellow, immediately put 20-40 kg Urea per acre. If it is possible then use 10 kg of Urea, mix with 500 litres of water and then spray the solution onto the crop. Usually when the fertiliser is put in the fields, it is also essential to water the fields immediately or else the entire fertiliser can go to waste. Fertiliser should be put on the standing crop after the overnight dew has dried so that no pellets are formed and the fertiliser can be used effectively.

Phosphorous Fertiliser

Pakistani lands are also deficient in phosphorous. For better agricultural productivity, it is also essential to use phosphate fertilisers. On average 20-25 kg Phosphorous Fertiliser (P2O5) per acre should be used. It is most effective when the phosphorous fertiliser is mixed thoroughly with the soil.

Potassium Fertiliser

Normally the potash level in the soil is sufficient for the cotton crop. But still the use of SOP and MOP can increase productivity. Therefore it is best advised to have the soil tested for any potash deficiency.

Other Fertilisers and Chemicals

Better plant growth and agricultural productivity is most affected by Gandhak. If this is deficient, then even the use of Nitrogenous Fertiliser cannot prevent the plant from becoming yellow. This is when the Gandhak Fertiliser should be used. In some cases, the use of Boron can also increase growth and productivity. In these cases, use 0.75 kg of Boron per acre.

Type of Fertiliser to be used, Time of use and quantity per acre.

*Level of Fertility*	*At time of Sowing*	*First Water*	*At Flowering Time in one or two steps.*
Weak Fertility	1.5 bags of DAP + 1 bag of MOP or SOP	1 bag of Urea	2 bags of Urea
Medium Fertility	1 bag of DAP + 1 bag of MOP or SOP	0.5 – 1 bag of Urea	1.5 bag of Urea
High Fertility	0.5 bag of DAP + 0.25 bag of Urea	0.5 – 1 bag of Urea	1.5 bag of Urea

WHEAT

For better plant growth; appropriate land fertility, sufficient air and water and better care is absolutely necessary. The land is the most important since the plant derives its food and all other nutrients from the land. In most cases, the land is deficient in providing all the basic nutrients that the plant requires for its better growth. This is when the use of fertilizer is must – so that the plant can get all its nutrients from the land. Experience has shown that for every Rupee spent on appropriate fertilise use, there is a profit of 3-4 Rupees. To get the most out of chemical fertilisers, it is also advised to put in appropriate quantities of desi fertilisers. This betters the water absorption of the soil and makes the soil moist and good for roots and ease in getting the nutrients.

Nitrogenous Fertiliser

For best use, it is most appropriate to put in 2-3 bags of Urea per acre. Urea should be used twice during the crop time. First it should be used at time of sowing and the second should be before first Aab Paashi (first water on the crops) on the standing crop. In stony (Raitili) lands, the use of nitrogenous fertiliser can be decreased by using nitrogenous fertilisers in 3 steps – at sowing, first Aab Paashi and then at 2^nd or 3^rd Aab Paashi.

Phosphorous Fertilisers

To get better wheat productivity, it is best to put on average 1.5 – 2 bags of DAP or TSP per acre. Using Phosphorous Fertilisers along with the Nitrogenous Fertilisers improves the effectiveness of both fertilisers. Ideally, Phosphate Fertilisers should be used before the seeds are sown and then thoroughly mixed with the soil and then the soil should be watered.

Potassium Fertilisers

Potash fertilisers should be used after proper testing of the soil. However, if the land is stony (Raitili), or wheat is being sown after sugar cane or rice, then on average put 1 – 2 bag of SOP per acre. Ideally SOP should be used before the seeds are sown and then mixed thoroughly with the soil.

Type of Fertiliser to be used, Time of use and quantity per acre.

*Degree of Land Fertility*	*Time of Bawai*	*First or second Aab Paashi*
*Weak Fertility*	2 bags of DAP + 1 bag of Urea + 1-2 bags of MOP	1.5 bags of Urea
*Medium Fertility*	1.5 bags of DAP + 1 bag of Urea + 1-2 bags of MOP	1 bag of Urea
*Fertile Lands*	0.25 bag of DAP + 0.75 bag of Urea + 1 bag of MOP	1 bag of Urea

SUGAR CANE

For better sugar cane growth and productivity; appropriate land fertility, sufficient air and water and better care is absolutely necessary. The land is the most important since the plant derives its food and all other nutrients from the land. In most cases, the land is deficient in providing all the basic nutrients that the plant requires for its better growth. This is when the use of fertiliser is must – so that the plant can get all its nutrients from the land. Ignoring other factors – on less fertile lands use more fertilisers and on medium fertile lands use the average amount and decrease this for more fertile lands.

Nitrogenous Fertilisers

For better sugar cane productivity, it is best to put on average 3 bags of Urea per acre in Punjab and Southern Sindh. In Northern Sindh, put 4 bags of Urea per acre. Since at sowing, DAP is used, the use of Urea should be spread over 3 stages. First it should be used 4 weeks after sowing, then 8-10 weeks after sowing, thirdly 14-16 weeks after sowing. In Northern Sindh, nitrogenous fertilsers should be stopped after May-June. In other areas, the use of nitrogenous fertilisers should be stopped after June-July. This is to prevent the level of sugar in the sugar cane from decreasing.

Phosphorous Fertilisers

The phosphate fertilisers should be used according to the table given later on.

Potassium Fertilisers

Sugar Cane needs potassium much more than other since potash makes the plant stronger and increases sugar content. In Punjab, use on average 2 bags of SOP or MOP per acre. In Sindh, use 3 bags of SOP or MOP per acre. Ideally potash fertilisers should be used before sowing and mixed with the DAP fertilisers. On less fertile lands, use potash fertilisers in 2 stages – 1/2 at sowing and the other 1/2 14-16 weeks after sowing.

Type of Fertiliser to be used, Time of use and quantity per acre.

*Degree of Fertility*	*Time of Bawai*	*4-5 weeks later*	*8-10 weeks later*	*14-16 weeks later*
Weak fertility	2 bags of DAP + 1.5 bags of MOP or SOP	1 bag of Urea	1.5 bags of Urea	1.5 bags of Urea + 1.5 bags of MOP or SOP
Medium to High Fertility	1.5 bags of DAP + 1 bag of MOP or SOP	1 bag of Urea	1 bag of Urea	1 bag of Urea + 1 bag of MOP or SOP

FERTILIZER DEMAND

Fertiliser demand in the country has always outstripped supply. Although local production capacity has increased, demand has always been more than supply. However in this year, the supply is poised to exceed demand by 8%. Despite the efforts of the government and extensive promotional campaigns by the manufacturers the usage of fertiliser in the country has remained low. The low consumption of nutrients has been affecting the yield of different crops. Fertiliser use per hectare in Pakistan is very low — just 98 kg as opposed to 600 kg in the Netherlands and 312 kg in the US. This implies that there is a great potential for increase in demand.

Consumption of fertilizer (including urea) has recorded substantial increase over the years. The government has deregulated the trade and price of nitrogenous and phosphoric fertilizers, which are now freely importable. Total Fertiliser Usage has increased by a CAGR of 4% p.a. over the last 15 years.

Total Fertiliser Offtake and Growth Trend

PERIOD	Total	Growth Trend
1985/86	3425.88
1986/87	3929.41	12.8%
1987/88	3779.47	-4.0%
1988/89	3903.44	3.2%
1989/90	4195.14	7.0%
1990/91	4179.04	-0.4%
1991/92	4155.74	-0.6%
1992/93	4675.51	11.1%
1993/94	4567.43	-2.4%
1994/95	4782.76	4.5%
1995/96	5496.29	13.0%
1996/97	5161.96	-6.5%
1997/98	5521.64	6.5%
CAGR		3.7%

However despite the growth, Pakistan’s fertilizer usage / hectare of about 98kg remains far below that of other countries (600kg in Netherlands; 321kg in the US; 405kg in Egypt; 77kg in India). Consequently, Pakistan’s fertilizer consumption per capita of 14 nutrient kg is well below the global level of approximately 20kg p.a.

The potential for growth, in turn, implies the Pakistan is far below the fertilizer demand level where the economics of diminishing returns set in (current consumption levels are estimated to be more than 60% below prescribed levels). Thus total fertilizer demand (predominantly urea) is projected to grow by 4-5% p.a. in the coming years.

While all fertilizers are used in both seasons, the larger consumption of DAP takes place in Rabi due to its application on wheat which is cultivated on more than eight million hectares (20mn acres). Total fertiliser off take is the highest in the months of July and December.

Fertilizer demand cycles will generally exhibit a pair of peaks (July and December) and troughs (April and October) during the calendar year. While global fertilizer cycles last about five to nine months, Pakistani fertilizer cycles tend to exhibit shortest durations.

Considering a compound annual growth rate, the demand for urea has grown at a rate of 5% and DAP at 6% in the last 10 years. Previously we used to have urea shortages and thus imports but no longer so. As far as DAP is concerned, the entire demand is met through imports but this will change drastically with the commercial production starting of Fauji Jordan Fertiliser.

Demand is affected by crop seasons with the second half of the year typically accounting for at least 60% of sales. This is because of the difference in consumption during sowing and planting times of the various crops. The Kharif season is for cotton and rice with sowing in April to June and harvesting in September to December. The Rabi season has sowing in September to December and harvesting in February to May for both sugarcane and wheat. Since the largest amount of fertiliser is used at the time of sowing and since the fertiliser use in Rabi crops is higher, therefore the offtake is greatest in the year end months.

Main Market for Fertilisers

The main market for urea is wheat growers, followed by cotton growers, rice and sugarcane cultivators. Wheat has the highest acreage under cultivation and therefore has the highest demand while sugarcane requires the highest application of fertilizer.

TOTAL FERTILISER OFFTAKE

The Total Fertiliser Offtake in Pakistan is around 5.5 million tonnes and around 2.7 million nutrient tons. The yearly data is shown in the following tables :

Total Fertiliser Offtake in Pakistan ‘000 Tonnes

*PERIOD*	*Urea*	*DAP*	*Others*	*Total*
1985/86	1728.12	494.62	1203.14	3425.88
1986/87	2174.3	642.24	1112.87	3929.41
1987/88	2103.9	549.26	1126.31	3779.47
1988/89	2186.87	481.36	1235.21	3903.44
1989/90	2523.93	540.31	1130.9	4195.14
1990/91	2552.95	573.67	1052.42	4179.04
1991/92	2552.58	609.93	993.23	4155.74
1992/93	2849.37	752.99	1073.15	4675.51
1993/94	2977.96	806.42	783.05	4567.43
1994/95	3151.58	672.72	958.46	4782.76
1995/96	3648.16	622.45	1225.68	5496.29
1996/97	3642.81	699.15	820	5161.96
1997/98	3801.85	1015.69	704.1	5521.64

Total Fertiliser Offtake in Pakistan ‘000 Nutrient Tonnes

Year	Nitrogen	Phosphate	Potash	Total	NPK Ratio
1985/86	1128	350	33	1511	3.22:1:0.1
1986/87	1333	409	43	1784	3.34:1:0.1
1987/88	1282	393	45	1720	3.26:1:0.11
1988/89	1325	391	25	1740	3.4:1:0.06
1989/90	1468	382	40	1890	3.84:1:0.10
1990/91	1472	389	33	1893	3.8:1:0.11
1991/92	1463	398	23	1884	3.7:1:0.06
1992/93	1635	488	24	2148	3.35:1:0.05
1993/94	1659	464	23	2147	3.6:1:0.05
1994/95	1738	428	17	2183	4.06:1:0.04
1995/96	1991	494	30	2515	4.03:1:0.06
1996/97	1985	419	8	2413	4.73:1:0.02
1997/98	2088	551	20	2659	3.8:1:0.04

The average growth rate in Urea and DAP has been around 6% p.a. and 5% p.a. respectively while the average growth rate of all the fertilisers has been around 4-5% per annum.

Talking in terms of the Nutrient Tonnes Content, the average growth rate of the Nitrogenous Fertilisers (which include Urea, CAN and AS) has been around 5%. The average growth rate of Phosphate Fertilisers (which include SSP, DAP, TSP and NP) has been 3%. The average growth rate of Potash Fertilisers (which include SOP and MOP) has fallen by 24% with a massive fall of 275% in 1996-97.

It is important to note that there is no fixed conversion rate between nutrient tonnes and normal tonnes. They depend on the type of product. Eg. Urea is 46% Nitrogen and therefore 1 tonne of Urea equals to 0.46 nutrient tonnes of N

DEMAND BY MAJOR CROPS

The Pakistani agriculture sector is comprised of Kharif (April – October) and Rabi (October – March) crops. Their annual fertiliser demand is illustrated in the following table :

Fertiliser Offtake for Kharif Crops ‘000 Tonnes

*PERIOD*	*Urea*	*CAN*	AS	*SSP (18%)*	*DAP*	NP	*TSP*	*SOP*	*Total*
1985	727.5	242.3	38.55	52.98	109.34	136.19	7.06	16.34	1331.93
1986	906.43	207.4	46.92	34.85	117.88	172.48	0.65	18.57	1536.78
1987	982.69	174.8	48.54	11.49	211.05	151.96	17.95	35.03	1693.45
1988	1000.59	177.93	49.17	15.32	123.19	210.94	20.72	29.65	1666.53
1989	1054.62	167.59	48.8	55.78	145.35	239.94	4.44	21.16	1782.62
1990	1208.27	159.21	46.01	56.87	181.39	222.77	0.12	18.01	1922.62
1991	1260.57	157.75	45.44	87.54	218.54	193.52	0.03	27.69	2015.13
1992	1343.91	156.13	49.28	83.31	175.84	154.78	21.49	16.28	2015.9
1993	1473.52	131.36	39.55	101.75	357.46	240.16	0.39	11.54	2361.13
1994	1329.85	163.55	26.22	50.88	125.38	165.73	0.05	12.44	1876.48
1995	1596.53	190.91	59.52	71.37	166.26	130.75	77.59	9.73	2342.83
1996	1941.66	181.31	50	27.58	319.98	178.87	33.11	9.82	2745.7
1997	1831.94	177.79	26.01	0.33	226.86	196.2	6.79	4.33	2481.22
1998	1841.42	182.3	9.77	0	334.62	166.91	10.99	1.31	2548.48

And the acronyms stand for :

CAN = Calcium Ammonium Nitrate

AS = Ammonium Sulphate

SSP = Single Super Phosphate

DAP = DiAmmonium Phosphate

NP = NitroPhosphate

TSP = Triple Super Phosphate

SOP = Potassium Sulphate

Fertiliser Offtake for Rabi Crops ‘000 Tonnes

*PERIOD*	*Urea*	*CAN*	AS	*SSP (18%)*	*DAP*	NP	*SOP*	*Total*
1985/86	969.78	257.3	52.81	61.1	386.16	225.88	31.66	2029.1
1986/87	1156.33	206.58	53.64	56.56	451.54	180.57	33.63	2183.91
1987/88	1075.68	179.19	48.37	45.49	389.57	226.96	24.52	2071.02
1988/89	1193.81	184.15	59.98	34.88	339.24	255.75	25.29	2177.3
1989/90	1289.66	171.45	51.76	51.95	392.12	231.44	53.01	2295.26
1990/91	1304.38	153.49	48.54	59.72	394.32	168.25	29.84	2185.44
1991/92	1309.85	138.42	42.36	78.27	424.51	168.65	25.65	2212.29
1992/93	1403.48	156.43	43.44	84.01	513.81	165.25	19.52	2438.1
1993/94	1546.73	92.85	36.89	75.94	525.87	99.88	25.29	2415.38
1994/95	1740.93	137.68	40.57	128.38	534.86	173.06	21.01	2786.06
1995/96	1955.3	191.32	32.51	62.46	407.04	169.36	20.92	3021.62
1996/97	1695.66	161.27	35.09	0.79	413.37	160.47	3.42	2487.91
1997/98	1962.22	121.07	10.2	0	701.37	111.61	9.56	2955.31

And the acronyms stand for :

CAN = Calcium Ammonium Nitrate

AS = Ammonium Sulphate

SSP = Single Super Phosphate

DAP = DiAmmonium Phosphate

NP = NitroPhosphate

TSP = Triple Super Phosphate

SOP = Potassium Sulphate

Analysis

As can be seen from the above tables, the demand for Urea is fairly constant amongst both the crops – outlining the fact that our soil is highly deficient in Nitrogen and that our demand for Nitrogenous Fertilisers is high and will remain so. The Rabi crops used 1,962,220 tonnes of Urea while the Kharif crops used 1,841,420 tonnes of Urea. Other types of Nitrogenous Fertilisers are also fairly common – CAN at 182,000 tonnes for Kharif and 121,000 tonnes for Rabi crops.

The demand for Ammonium Sulphate (AS) has been very steady amongst both Rabi and Kharif crops with matching fluctuations. The overall usage of AS has been fluctuating constantly from a high of 50,000 tonnes to a low of 9,000 tonnes in 1997-98. The reason for the enormous decline of almost 65-70% is due to 2 factors. One being the fact that there is no local producer of AS and the second being the higher international prices which has been substituting its demand for the more popular DAP.

SSP 18% has also shown a matching trend as has AS. The offtake in the Rabi and the Kharif crops has been pretty much similar although they both fell drastically by 60% in 1995-96 and then by 100% in 1996-97. The complete wipe-out of the offtake for 1997-98 for SSP is due to closure of SSP producing factories because of lack of the raw materials (Hazara and Lyallpur).

The major difference in the use of fertilisers is in DAP. Rabi crops such as Wheat require a higher amount of DAP to cater to the deficient nutrients in the soil. The total DAP offtake for Rabi crops in 1997-98 was 701,000 tonnes against 334,620 tonnes for Kharif crops. On less fertile lands, the amount of DAP required is almost double the amount required of Urea (for Wheat). The total DAP offtake for Pakistan has almost doubled from 492,000 tonnes to 1,019,000 tonnes. The average growth rate of DAP offtake for Rabi crops is 3% while that of Kharif crops is –5%. The growth rates of DAP for both crops has frequently touched double digits but the low overall growth rate is due to the heavy fall in offtakes in 1988 and 1994. In 1987 the agricultural growth rates was 2% which was a drastic fall – thus affecting DAP demand. In 1992-93, the agriculture sector had a negative growth rate of 5% affecting future fertiliser demand. This further proves our point that the demand for fertiliser is heavily dependent on the performance of the previous crops. The overall increase in DAP can be attributed to increase in support prices of wheat, balanced demand and stable prices of DAP and favourable weather for the Rabi crops.

Another major difference is in the usage of TSP. While Kharif crops use a substantial amount of TSP – almost 11,000 tonnes – there is hardly any TSP used in the Rabi crops. Except for 2 years 1988-89 and 1995-96 when quite a substantial amount of TSP was used due to its low international prices where private importers used the price differential to make heavy profits.

Overall the demand for fertilisers amongst the Rabi and the Kharif crops are fairly evenly distributed with just a slightly larger share going to the Rabi crops – Kharif using 2.5 million tonnes and Rabi using 2.95 million tonnes of fertilisers in 1997-98. However CAGR for Kharif crops is higher at 5% and that for Rabi is at 3% making the overall CAGR of 4%.

CURRENT OFF TAKE SCENARIO

The urea off-take in December 1999 recorded a phenomenal growth of 68 percent compared to same period a year ago. The off-take in December 1999 was 732,349 tonnes which was 68 percent higher than 427,000 tonnes in the same month a year ago.
This increase in urea off-take is a major breakthrough in the recent fertiliser consumption trends. For the last two months the fertiliser consumption had been declining at faster pace in line with the uncertainty shrouded by the slow cotton picking by the ginners.
On the other hand the positive momentum in the upward growth in DAP fertiliser has finally been marred by the prices as well availability of the produce during the month of December. The phenomenal increase in urea consumption could not trigger any price increase owing to huge inventory pile-ups with the local manufacturers.

Reasons for High Off Take

There are certain reasons due to which the offtake in December 1999 was so high. These are briefly examined as follows :

The abnormal urea consumption growth was due to 8.2 percent improvement in the cotton crop size. Despite lower prices, farmers cash flows have seen significant improvement and this would lead to more spending on the farm inputs. It is important to note here that fertiliser accounts for more than 50 percent of the farm input costs.

Another factor was 25 percent increase in the wheat support prices. The increase has changed the crop economics for the farmers and eventually they are ready to spend more on the fertiliser consumption.

In line with the government’s stated agenda, the Agricultural Development Bank of Pakistan has increase its loan disbursements for the farmers for the winter crops. The higher loan disbursements would add fuel to the fertiliser consumption growth.

As the fiscal year end nears, the fertiliser manufacturers have also tried their best to sell their produce, to reduce their piling inventories. Few companies have also ventured into credit sales thus reducing their inventories significantly. The bad loan ratio in the fertiliser business is very low so there would be no quality issues in credit sales.

FUTURE DEMAND OUTLOOK

In 1999-2000, the bumper cotton crop is likely to increase the fertiliser demand growth by around 6%. However the average growth in fertiliser demand is poised to remain steady at around 4-5% per annum in the long run.

The off-take of Urea in Kharif season (April 2000-September 2000) will be around 2.05 million tonnes while the off-take in Rabi (October 1999-March 2000) is expected to be 2.157 million tonnes. Thus, it has been pointed out that the total off-take of urea will be 4.207 million tonnes during 1999-2000. As against this the supply is estimated to be around 4.761 million tonnes and thus we have a good enough export potential and at prices lower than that in the international market, the respective fertiliser companies should be able to make handsome profits.

Further increases in offtakes can come about as the support prices of different crops have been raised. This includes wheat – the prices of which has risen by 33% to Rs. 320 per 40kg bag. With this higher prices, the farmers will tend to spend more on the fertilisers and we project a 2% increase in demand in the coming years – due to this factor alone.

The most obvious way to increase demand is through increasing the acreage of land under cultivation. If this is not the case, however, the only way to get a higher yield is through a more widespread use of fertilizer; and as discussed earlier this is probably a likely case since fertilizer application is at a very low level. The future growth rate of fertilisers is expected to be around 4-5%.

The demand for DAP is likely to remain higher than urea, because of greater marketing efforts by the local producer-FJFC, which is likely to make the farmers more aware of the importance of DAP for different crops. DAP is likely to remain the most important of the phosphoric fertilizers, because of local production and easy handling benefits.

The present crises if solved, can also help to stimulate the demand for various types of fertilizers. The government is expected to continue the subsidy, which means for the next years, the fertilizers (urea), is likely to be at a discount to the international market, another reason for an increase in demand.

FACTORS AFFECTING DEMAND

The projected demand for fertilisers is around 4% per annum. Fertilizer demand is driven by several factors:

INCOME OF THE FARMER

The quantity of fertiliser purchased by the farmers has a direct relationship with their incomes as do major products. This is due to the fact that fertiliser accounts for more than 50% of the total farm input costs. With fertiliser accounting for such a high share of the total cost of the farmer – he will only use it if he has the sufficient income to do so. Thus higher selling prices and ultimate profits from crops affect the demand for fertiliser for the future crops.

PURCHASING POWER OF THE FARMER

The quantity of fertiliser (urea, DAP, or any other types) demanded by the farmer in any given year is directly related to the selling price of the crop in the previous year. If the farmer gets a bumper crop one time around, then he has the cash to invest in fertilisers for his next crop. The use of fertilisers tends to make the crop yields higher giving the farmer more profits and cash to buy fertilisers for his nest crop and so on. The cycle can also be reversed if there is a bad first crop which will then lessen fertiliser demand for the nest crops and so on. Thus there is a vicious circle of past profits that will ultimately affect the fertiliser crop.

A major reason for the higher offtake of fertilisers for the 1999-2000 Rabi crops is due to the fact that the Kharif crop of cotton was quite high – an increase of almost 8%. Even though the prices were low but still the cash flows from these crops were quite high and thus the farmers were able to spend more on fertilisers for the next crop.

SUPPORT PRICE FOR CROPS

As stated above that the demand for fertilisers has a direct relation with the prices. With higher support prices, the income rises and hence so does fertiliser consumption. The government of Pakistan has had a tendency to fix support prices for various crops. Since the prices of the crops are fixed, then the farmers look to get the most out of their crops by increasing productivity. A constant review of support prices will continue to be made to provide farmers adequate incentive to increase productivity. In the agriculture package announced last year, the GoP raised support prices of wheat from Rs. 240/40 kg bag to Rs. 320/40 kg bag – a 33% increase. Support prices for other agricultural commodities were raised as well.

The increase has changed the crop economics for the farmers and eventually they are ready to spend more on the fertiliser consumption.

AVAILABILITY OF RURAL CREDIT TO FARMERS

Since fertilisers account for more than 50% of the total farm input cost, this means that the farmer has to invest a substantial amount of money into fertilisers in the hope of getting good results and not befallen by natural calamities. For most crops there is a time lag of around 6-7 months between use of fertilisers and the return achieved from them.

This working capital financing is a major area in rural credit. Most of the Nationalised Commercial Banks and the Agricultural Development Bank of Pakistan (ADBP) are involved in the rural credit programme with private sector and foreign banks making only a 5% part of the total rural credit.

The total agricultural requirement during the 8th five-year plan (1993-93) is estimated at Rs. 303 bn against the total estimated disbursement of Rs. 72 bn during the 7th Plan. Measures to achieve this target include:

The establishment of Kissan Banking Windows Operations which are credit windows set up to cater to the growing credit needs of small farmers having subsistence holdings up to 12.5 acres in Punjab and NWFP, 16 acres in Sindh and 32 acres in Balochistan (note: out of the 20 mn hectares of cultivable land, 81% of farms are less than 12.5 acres while 47% are less than 5 acres)
The provision of rotating limits for production loans
The provision of credit against hypothecation of stored commodities and saleable assets such as livestock. In April’s agricultural package, the government stated in intention to raise total agriculture credit to small farmers by an additional Rs. 3 bn to Rs. 15 bn in FY 1997-98.

Most of the credit provided to the farmers is short term working capital financing credit also called as production credit.

Fertiliser Credit Advanced by Various Agencies (Million Rs.)

Year	Production Credit	Total Credit
1985-86	9960	12681
1986-87	12364	15839
1987-88	12725	15911
1988-89	11721	14452
1989-90	10844	13834
1990-91	12048	14859
1991-92	11673	14423
1992-93	12972	16147
1993-94	12578	15674
1994-95	18134	22373
1995-96	15491	19187
1996-97	15779	19548
1997/98	26941	33393

The above table clearly indicates that the majority of the credit advanced by all the donor agencies of Pakistan was for short term production credit. This was around 75-80% of the total credit advanced. Low amounts disbursed for development (long term credit) means that the industry is not able to develop and undertake the massive technological and educational investment that is sorely needed in the agriculture sector. There have been numerous schemes and avenues launched for facilitating the disbursement of more long term credit but as the following graph shows that, historically, production credit has lagged total credit disbursed at a constant rate of 70-75%.

There is currently a program for micro-credit. A bank with a capital base of Rs. 1 billion has been set up. HBL has already started a micro credit scheme with a capital base of Rs. 2 billion and NBP with a base of Rs. 1.5 billion. The expected interest rate charged on this will be 16%. Others such as modarabas and leasing companies, are planning to start up these schemes.

The amount of credit increased substantially in 1997-98 due to the above credit providing measures introduced by the Nawaz Sharif government. The amount of credit disbursed in 1997-98 jumped 70% from Rs. 19.5 billion to Rs. 33.4 billion. The increase was totally in the production credit, which also rose by 70% from Rs. 15.7 billion to Rs. 26.9 billion.

Even these high amounts of working capital credit are sometime not used for fertiliser but some of this is also used to buy seeds and other production materials. The following table shows the amount (out of the total working capital credit that has been disbursed) used to buy fertilisers. The amounts used to buy fertilisers has historically remained at 2/3 rds of the credit disbursed and this is shown by the table and the following graphs.

Production Credit and Amounts used for Fertilisers (Million Rs.)

Year	Used in Fertilizer	Total Production Credit
1985-86	6589	9961
1986-87	8149	12364
1987-88	8494	12725
1988-89	7895	11721
1989-90	7237	10843
1990-91	8104	12048
1991-92	7825	11672
1992-93	8688	12972
1993-94	8434	12579
1994-95	12234	18133
1995-96	10396	15492
1996-97	10610	15778
1997/98	18159	26941

The lag between the fertiliser credit and the production credit has remained at a standstill of 67% for almost 13 years now. With the prices of fertiliser rising each year and the cost of fertiliser being almost 50% of the total farm input costs, it is not surprising to note that 2/3 rds of the credit given to the farmers is being used for fertilisers.

In our opinion, Rs. 33 billion is too low a disbursement for the agricultural sector. To promote increasing yield and better crop growth, fertiliser use – in the right quantities – is very vital. The high cost of fertiliser for the farmers means that we should increase the amount of credit to facilitate the farmers to buy more and more fertilisers, thereby increasing yield and quality of our crops.

CREDIT SALES

In addition to rural credit facilities that are available to farmers, another potential source of credit for them is the credit advanced to them by the fertiliser companies themselves. In our discussion with officials at Engro Chemicals, they told us that very often they sell the fertilisers to distributors at cash and they then sell them on credit to the farmers.

With increasing emphasis on credit sales of fertilisers, and the low default rate on them, this form of credit can turn out to be quite a boon for both the farmers and the fertiliser companies themselves. The farmers can get fertilisers readily, use them efficiently, increasing yield and thereby profits which will in turn increase fertiliser demand for the next cycle.

AVAILABILITY OF WATER

Adequate water supply in the form of timely rainfall and / or irrigation (reservoir) is a prerequisite for crop growth. Sufficient water availability (among other variable) promotes urea demand. Agriculture’s primary water source is the Indus Basin, which provides 120 million acre-feet (MAF) of water. Underwater resources are estimated at 38 MAF. Unfortunately, upto 40% of the water is lost through seepage in canals and distributors, and by inefficient use. The water resources development program is designed to provide additional 8.16 MAF of irrigation water at the farm gate. Around 50% of the additional water will be used for increasing crop intensity, while the remainder will be utilized for irrigating an additional 0.7 MAF. The additional irrigation water should result in increasing crop quality. Included in the FY 1997-98 budget was the launch of an integrated National Drainage Program at an estimated cost of Rs. 31 bn over the next six years. This would be the largest irrigation program after the Indus Basin works.

Impact on Fertilizers

The increase in the water available to crops has two positive impacts on the demand for fertilizers. One is that the increase in water will make the crop better and will leave the farmer with more cash to invest in fertilizers (cost saving as the cost spent on getting water privately is avoided). The second is that this will increase yields for the farmer and higher yields turn into higher profits which translates into greater fertilizer demand for the next crop.

MECHANIZATION

The use of machinery for cultivation, deep ploughing, ridging, sowing and harvesting of crops is vital for intensifying production. The rate of down payment has been reduced from 15-25% (depending on the size of land holdings) to 10% with a 5% rebate to farmers on timely tractor loan repayments. Future emphasis on shallow and deep tube wells installation is also expected. The government recently announced a reduction in import duties on second hand and reconditioned harvesters from 35% to 10%, and the abolition of the GST on harvesters, tractors and other agricultural machinery.

Impact on Fertiliser Demand

The higher use of technology in agriculture will have the same impacts on fertiliser demand. The increase in mechanisation and higher awareness of the farmer will increase fertiliser demand as well as better crop performance, which will continue to increase fertiliser demand in the future.

NUTRIENT REQUIREMENT

Assuming a constant amount of arable land, the need to improve nutrient mix is becoming significant if food production is to adequately balance consumption. NPK consumption ration for Pakistan in 1997-98 was 3.79:1:0.04. The N stands for Nitrogenous Fertilisers, P for Phosphate Fertilisers and K for Potash Fertilisers. The ratio indicates that for every 1 nutrient tonne of Phosphate Fertilisers we use 3.79 nutrient tonnes of Nitrogenous and 0.04 nutrient tonnes of Potash Fertilisers.

The internationally recommended nutrient consumption ration (NPK Ratio) is 2:1:1 and we have targeted a ratio of 4:2:1. The NPK target for 1998 as stated in the 8th Five Year plan (1993-98) is 3:1:0.12.

Thus greater emphasis is on increasing the use of P – Phosphate and K – Potash Fertilisers. This envisions stronger growth in Phosphate Fertilizers usage (CAGR of 7.6% p.a.) over Nitrogenous Fertilizer (4% p.a.).

Historically we have been using greater amounts of Nitrogenous Fertilisers due to its low prices as compared to those of DAP and MOP etc. The low prices of Urea induces farmers to buy Urea (Nitrogenous) more than they would buy DAP or MOP or SOP. The low literacy and awareness level (as to the right type of fertilisers that their soil needs) is responsible for this unbalanced demand. Thus our crops remain deficient in those areas which are filled by Phosphate and Potash fertilisers. Due to this reason we have an abnormally high offtake of urea fertilisers and very low ones of other fertilisers such as DAP and MOP.

Some areas of the country and some crops use a greater quantity of Non – Nitrogenous Fertilisers such as Wheat which uses a higher quantity of DAP. With more awareness and more such crops being sown, the demand for Non – Nitrogenous fertilisers will increase. As high usage of Urea causes acidity in the soil, more DAP will be needed to counter the affects of this acidity.

PRICES

The prices of the fertilisers also has a great impact on the offtake. Current prices of Urea are around Rs. 300-330 per bag (of 50 kg). The government has capped this in place – indirectly – through gas subsidies which are aimed to keep the prices low so as to avail affordability. There being no difference between imported and local fertilisers as to their content and quality, if there are imports, these too are sold at local prices. However the price differential is borne not by the farmers but by the fertiliser companies themselves since they import fertiliser. Thus they can either get profits or losses due to price variations.

FERTILIZER SUPPLY

Fertilizer supply has generally lagged demand. Although nine fertilizers units are currently in operation, the largest two (FFC and ECPL) account for more than 48% of installed capacity, which indicates the oligopolistic structure of the industry. Furthermore, of the 5.6 million tones of fertilizer installed capacity, 75% is due to urea production. And out of that 75%, 63% of installed urea capacity is collectively due to Fauji Fertilizer and Engro Chemical. With the initiation of Fauji Jordan Fertilizer (FJFC), coupled with Engro’s 100,000 tonne expansion, local urea capacity should grow by 21% by 4Q99. Urea supply has temporarily exceeded demand in 2000, depending on the timely commission of new projects. FJFC is preparing to commission 445,000 tonnes of DAP capacity by end of 1999. The local fertiliser supply will be sufficient to meet the fertiliser demand for at least the next 2 years.

STRUCTURE

The five private sector players (all urea manufactures) account for over 63% of total domestic fertilizer production and 80% of domestic urea capacity. However the fertiliser companies even though they are in the private sector still face a number of government regulations – major ones being gas prices and cap on fertiliser prices.

Graph Showing Public and Private Sector Urea Shares

With the expected commission of FJFC, the private sector stake in domestic fertilizer production should jump to 74% by 1999E. This figure could be as high as 82% if Pak Saudi Fertilizer’s intended privatization comes through by that time. In exchange for receiving subsidized feedstock gas, private sector manufacturers are obligated to import fertilizer for sale in domestic market to quench the supply deficit. These companies import a certain quantity which is based on this formula – (imported quantity = excess demand over production x market shares of the respective companies).

IMPORTS

Every year we have seen that our Fertiliser Production has remained below the demand. Due to this we have to spend precious foreign exchange on the import on fertilisers. This is even more important for Non – Nitrogenous Fertilisers, since we produce no DAP – which is a major fertiliser import product. Last year we imported fertilisers worth Rs. 10 billion.

Restriction on fertilizer imports was listed with the government decision to deregulate the urea industry in 1986 and phosphate fertilizers in 1993. Deregulation was followed by a hike in fertilizer prices and quantity manufactured as subsidies were removed and the private sector giants, FFC and ECPL, undertook significant expansions.

Import policy dictates that private units purchase directly a quantity of imported fertilizer for local distribution, or from the GoP (at international prices) according to their market share. Most prefer the latter option of purchasing the required quota from the government to circumvent and red tape involved in direct international transactions. However, given that international prices are currently at a 40% premium to local prices, fertilizer manufacturers are obligated to bear the brunt of the loss themselves. However, the government cushions the loss by offering the private fertilizer industry concessional gas rates for feedstock purposes (roughly 75% of total gas needs). Moreover, to soften the blow, manufacturers tend to raise the import setback through the clever pricing adjustment method. Private units will continue testing the purchasing power of the farmer with similar increments in prices if international fertilizer prices continue to trend higher on the back of strong demand (however, expectations are for enhanced supply, hence, capped prices in the intermediate term).

Recently, government has imposed a 10% of regulatory duty on the import of urea due to the argument given by the local manufacturers that central Asian countries are dumping fertilizers. This will help to contain imports and make the local prices more competitive.

The following table shows the major imports by products.

Fertiliser Import ‘000 tonnes

*Period*	*Urea*	*DAP*	*Others*	*Total*
1985/86	1	323	119	444
1986/87	152	722	163	1036
1987/88	164	512	326	1002
1988/89	0	560	224	784
1989/90	371	529	169	1069
1990/91	541	499	208	1247
1991/92	570	554	69	1193
1992/93	525	755	190	1470
1993/94	206	1162	95	1463
1994/95	0	480	109	589
1995/96	389	598	367	1353
1996/97	704	828	44	1576
1997/98	265	870	121	1257

The above 2 figures clearly shows that we import more of DAP than Urea. This is consistent with the expectations since we have no production of DAP and thus we have to import it completely. During the past 10 years, we have also imported Urea since we were deficient in Urea production. Other fertilisers are mostly SSP, NP, SOP, MOP etc.

FUTURE OUTLOOK

In the recent future, we are projected to have a Urea Surplus of 550,000 tonnes and thus we do not see any urea imports (rather there are government intentions to allow urea exports of 100,000 tonnes). Even if the Urea consumption were to increase dramatically, we have sufficient extra production to cater to it.

As for other imports we will need to import 420,000 tonnes of DAP (about 1/2 of the total requirement). This is because with the start of FJFC, which will produce 450,000 tonnes, of DAP, its import requirement will reduce. This will augur well for our foreign exchange reserves. The Al-Noor project (of DAP) which was expected to start commercial production in 1999 has been indefinitely delayed due to gas supply problems. Therefore in this year we will have 1/2 of DAP requirement imported but we might see even this reduce to a minimal level once the Al-Noor project is given the go ahead for commercial production.

EXPORT POTENTIAL

In the recent past, Pakistan has exported urea fertilizer to India; China, Iran and Bangladesh. It is suspected that India, among others, will remain a viable market for Pakistani urea in years to come given India’s prevailing supply deficit. Schon (Pak China) and FFC have been active exporters in the past. The government has recently allowed the private sector to export 100,000 tonnes of urea fertilizer. Historically, local urea manufacturers have had little trouble in marketing additional urea after production increases. This lends support to the economic theory that supply creates its own demand. Fiscal policy is likely to be the sole administrator for urea fertilizer exports in any given period.

CONTROVERSY BEHIND EXPORT OF FERTILIZERS

As part of the deregulation policy, the government of Pakistan allowed the manufacturers of fertilizers to buy gas used as feedstock at subsidized rates. This move was initiated by the government to encourage local manufacturers to increase their production. The two main manufacturers responded by almost doubling their production capacity. With time the increments in the production of fertilizer, together with annual imports, the demand for fertilizer was fulfilled. The expectation of the government was that the benefit of subsidy would be passed on the domestic farmers who had limited credit on their hands to buy fertilizer and other farming inputs.

Last year the supply of urea exceeded demand by 550,000 tons. The manufacturers wanted to export 100,000 tons to neighboring countries and earn valuable foreign exchange. Whilst the government is of the view that by exporting local fertilizer the subsidy which was initially meant for the local farmers would be passed on to the international farmers and in the end the government would suffer losses worth billions of Rupees on subsidies. Eventually the government agreed on the demands of the manufacturers proving the fact that there is very limited government regulation in this industry.

FACTORS AFFECTING DOMESTIC FERTILISER SUPPLY

The projected supply growth is 5% in the next 2-3 years. This is to cater to the 4-5% demand growth rate as well as higher supply due to FJFC and Pak – American manufacturing facilities. Some of the factors, which may affect supply in the future, are…

AVAILABILITY OF NATURAL GAS

Currently most of the companies get uninterrupted gas for their production – except for those which are supplied by Sui Northern which supplies gas 9 months of the year. In the future, if no new substantial gas fields are discovered then there is a possibility of shortfall in gas supplied to the fertilizer manufacturing companies. This will reduce the fertilizer supply in the market and cause higher imports.

PRICE OF NATURAL GAS

If the price of the natural gas is increased the supply would be effected as none of the fertilizer manufacturers would be willing to produce any fertilizer at such high gas prices. The better option for the manufacturers, in terms of feasibility, would be to move to the Gulf countries where the price of natural gas is much lower as compared to Pakistan, thus reducing the cost of production for the manufacturers. Thus, an increase in prices of natural gas would not be a good idea and the government would therefore not opt for this alternative. Instead the subsidies are likely to remain in place.

CRASH IN INTERNATIONAL PRICES

The effect of a crash in the international prices would have a negative effect on the local fertilizer production. The domestic fertilizer manufacturers would stop or reduce fertilizer production because it would no longer be feasible for them, as the imported fertilizer would be much cheaper. Certain private small scale importers would import high quantities – reaping high margins in the process and destroying the local industry. Thus the imports would increase tremendously, as they would be cheaper, destroying local production of fertilizer.

INCREASING PRODUCTION CAPACITY

Previous government policies have been very favourable towards the fertilizer companies. This has caused massive investment in capacity additions. This policy is to continue in the future and the government will look to allow and encourage further capacity additions to these plants. Thus we might see more capacity increases and therefore lesser imports.

PRICING

Local urea is available at a slight discount to the international prices. Although the international prices are lower than the domestic prices, but the imposition of 10% import duty by the government, coupled with the high freight charges has made it higher than the local prices. In the past, the manufacturers have met with little resistance in passing higher input costs to their consumers. However, the government has put a cap on rising urea prices to reduce the cost impact on farmers. Besides with rising input costs, the brunt of the cost increase is being borne by the manufacturers (since they cannot pass on the higher prices to the farmers).

It is projected that gas prices will climb by 20% p.a. in the international feed prices, and abolish the industry’s gas subsidy (worth around Rs. 3 bn) in the process.

FERTILISER PRICE TRENDS

The current prices of the major fertilisers are shown in the following table.

Fertiliser Price Trends Rs per bag of 50 kg

*Effective Date*	*Urea*	*CAN*	AS	NP	*TSP*	*DAP*	*SOP*
*25-02-80*	93	50	42	78	–	100	30
*13-04-80*	93	50	42	78	–	100	30
*27-10-81*	93	50	42	78	–	100	30
*15-03-82*	103	55	47	84	–	105	30
*6/10/82*	118	58	54	97	–	121	35
*11/6/83*	128	60	59	110	–	133	40
*8/12/83*	128	60	59	110	95	133	40
*20-05-86*	128	65	60	110	95	146	50
*18-09-87*	130	74	65	119	111	161	60
*10/10/88*	135	78	70	137	128	185	72
*31-08-89*	150	80	78	149	147	203	85
*17-2-90*	165	90	85	150	161	217	107
*27-03-90*	165	90	85	150	161	217	107
*29-10-90*	180	95	90	173	185	249	150
*13-04-92*	200	100	95	196	196	272	195
*4/11/92*	205	109	96	196	196	264	195
*20-11-92*	218	132	134	196	196	264	195
*21-08-93*	223	145	150	220	196	305	195
*1993-94*	228	154	155	231	196	328	196
*1994-95*	253	177	176	279	368	439	298
*1995-96*	285	185	171	322	439	515	344
*1996-97*	339	209	197	384	450	552	532
*1997-98*	344	222	209	412	466	574	538
*1998-99*	348	232	274	448	500	656	537

UREA

Local urea prices have grown at a 10-year CAGR of 10.58% p.a. since deregulation in 1986, from Rs. 128 per bag to Rs. 350 bag (Note: a bag is of 50 kg). Between 1980-86, prices firmed from Rs. 100 per bag to Rs. 350 per bag. Between 1980-86, prices firmed from Rs. 100 per bag to only Rs. 128 per bag. This implies a 6 year CAGR of 4% p.a. (crop support prices were raised to partially offset the increased cost to farmers). In comparison, international prices (currently at a 40% premium to local prices) raced at a CAGR of 19.80% p.a. during the same period. The prevailing local urea price is Rs. 7000/- tonne (Rs. 350 per bag) against the international price of Rs. 7050/- tonne (Rs. 353 per bag). The cost structure of the international urea prices is shown in the following table …

COST STRUCTURE OF IMPORTED UREA:

	$/TON	Rs/ton
Urea Price(FOB)	85	4410
Freight & Insurance	38	2000
Import Duty	12.3	640
Urea Price (C&F)	135.3	7050

Considering that the government is likely to pursue a policy of improving farmer’s purchasing power, one can expect still official resistance in the future against further urea price increases. While industry does not forces drastic price reductions from present levels, urea price growth rate will be contained to 5% p.a. over the next five years. But in the immediate future the prices are expected to slightly decrease (from about PKR 350 to PKR 330) as the manufacturers try to reduce their inventory levels in view of sluggish demand because of the water crises.

CHEAP IMPORTS WILL CAP DOMESTIC PRICES

Furthermore, given the global projects worth more than $26 billion are scheduled to be commissioned by 2000, international prices will weaken in the future. This raises a concern over dumping. High gas reserves provide Middle Eastern producers with lower fertilizer production costs and hence accentuate their ability to sell fertilizer in the local market at less than domestic prices to capture market share.

Though the 10% import duty will give some relief to local producers but it is only short-term and not sustainable and putting a cap on the prices and declined margins. But given the importance of this sector to the economy, the government will not hesitate in further increasing the import duty by 7% to nullify the effect of reduction of international prices of nearly 12-14% by 2001.

DAP

The government has historically remained the largest DAP importer but this will change once DAP imports are curtailed by almost ½ due to the 450,000 tonne Fauji Jordan project.

The retail price of DAP has increased over the last 10 years by a CAGR of 14.7% p.a. (16 years CAGR: 11.5% p.a.) against a 10 years CAGR for urea (nitrogenous fertilizer) and Potassium sulphate (potassic fertilizer) of 10.6% and 14.5% p.a. respectively. The current retain price is Rs. 655 per 50kg bag.

Since we are to start local production of DAP, the prices of DAP in the local market (available to farmers) are forecasted to come down. This will not only increase demand but also give relief to the customers.

As a result of deregulation and low levels of local production, local DAP prices closely follow international trends. Due to technological advantages in the wet-process technique, the United States is the dominant international producer of phosphatic fertilizers. It also accounts for roughly 10% of global consumption (around 70 mn tones in 1996). The current international FOB DAP prices are fluctuating between US$ 174-176/tonne, against the average of $ 190/tonne in 1996.

The international phosphate prices (particularly DAP) will be only modestly higher in the intermediate term. This is due to the possibility of renewed Chinese DAP purchasing amidst modest global capacity growth (1.7% in 1997) and largest imports by India (perhaps the largest DAP consumer in the world) and Pakistan. However, with new projects in Jordan, Pakistan, Syria and India (capacity growth of 5.8% in 1998), price weakening pressures are expected to kick in. Cost push price pressures are expected to remain minimal.

GAS PRICING

Natural gas, which is the main input used in the production of fertilizer, is required for two purposes: feedstock and fuel. The former accounts for on average, three quarters of total gas requirements of fertilizer producers, while the latter accounts for the balance. In accordance with the government’s intent to enhance fertilizer usage by retailing fertilizer at a discount to international rates, Mari offers a 10 years subsidized rates.

The Government regulates prices of feedstock. Current prices levels per cubic feet are Rs. 9.75 for fixed feedstock until 2003 only applicable for recently expanded capacity and Rs. 23 kcf for variable feedstock i.e. for original capacity and / or future expansion. Gas prices are generally considered to be lower than international prices. In addition, gas prices per unit of calorific value are also generally lower than the comparative price per unit of calorific value obtained from furnace oil. The government has equated the prices of different fields, including coal and gas, to the level of furnace oil based on calorific value. Based on these considerations, gas prices applicable to the industry are expected to increase over the next few years. This increase will likely be in the shape of normal annual increase due to inflation as well as increments as a result of bringing gas price up to par with international furnace oil.

FEEDSTOCK RATES FOR DOMESTIC FERTILIZER COMPANIES

Rs/kcf	Gas Supplier	Base Rate	Expansion
FFC	Mari	42.845	9.75
Engro	Mari	42.845	9.75
Dawood	SNGPL	62.298	–
Pak-Arab	SNGPL	62.298	–
Pak-Saudi	Mari	42.845	–
Schon	SNGPL	62.298	–
FJFC	SSGC	56.78	–

Natural gas normally accounts for over 50% of production costs. Last year alone, gas prices rose over 18%. The big two urea producers, FFC and ECPL, are largely cushioned against the full impact of these prices increases because roughly 44% of the feedstock gas they receive is priced at concessional (field) rates. However we must bear in mind that the fixed portion of feedgas which is priced at Rs. 9.75/kcf can inch higher if production from Mari exceeds 700 Btu. For example with current production of ECPL gauged at 745 Btu, the field rate is temporarily adjusted upwards to Rs. 10.04/kcf. Natural gas for fuel purposes has been pegged to international prices (fuel oil parity). The government intends to eventually bring the price of feedstock gas (i.e. the variable portion) in line with international level in the near future (but unlikely before 2000). Local producers maintain that even in the unlikely event that gas subsidies are removed, they will still remain competitive provided they are allowed to pass-on the higher costs.

PHOSPHATE ROCK

DAP prices will (currently hovering between $172 – $174) to remain intact in the intermediate term on the back of stable Chinese demand for phosphates (estimated at 0.5 – 1.0 mn tones in 3Q99). Consequently, large demand swings in phosphoric acid are unlikely for the rest of the year. Hence, prices are expected to remain stable over the next 6-12 months. However, phosphoric acid prices are vulnerable to price swings. Its principal inputs – phosphate rock (usage: 1.56 tonne of phosphate rock to 1 tonne of DAP) and sulfuric acid (usage: 0.44 tonne of sulfur to 1 tonne of DAP).

There is likely to be a 5-10% price increase for Sulphuric Acid. This raises the potential for cost-push increases in H₃PO₄ price. However this increase is likely to be largely offset by expectations of further decrease in ammonia price (usage 0.23 tonne of ammonia to 1 tonne of DAP).

GOVERNMENT STANCE

While the government has deregulated urea prices, it continues to indirectly regulate urea prices through its control over gas distribution. No sales and excise tax are levied on fertilizers because fertilizers are considered a vital agricultural input. However in 2H 99, the government tried to impose GST on Fertilisers but then they later backed down on pressure lobbying from the farmers’ lobby. However GST on Gas has been imposed which increases costs to the fertiliser manufacturers.

While the government supports the manufacture of fertilizers, nevertheless it seems to discourage producers from testing the purchasing power of the farmer. This is understandable given that Pakistan is largely an agriculture economy where the farming lobby enjoys considerable political clout.

FUTURE OUTLOOK OF THE GOVERNMENT POLICY

Given the past focus on improving domestic supply of urea, it would not be logical to assume a complete turnaround in government policy.

Strategic political importance of fertilizers

Ensuring adequate domestic supply of fertilizers is vital to stable agriculture output, which in turn means stable prices for staple items like wheat, rice, etc. Hence, the availability of fertilizers on a consistent and reliable basis is of strategic political importance for successive governments in Pakistan. It is very difficult for the government to substantially raise prices for these items and keeping in view the food requirements it is essential for the government to maintain a rational policy towards encouraging domestic fertilizer capacity on a long-term basis.

Import bill for food items

Another reasons for focusing on sufficient fertilizer supply is the import bill for food items, primarily wheat. Moreover, Pakistan’s low foreign exchange further augments this reason.

SWOT ANALYSIS

STRENGHTS

IMPORTANCE FOR THE PAKISTAN AGRO-BASED ECONOMY

The sector’s main strengths lie in the strategic-political importance to agriculture growth. Till the time Pakistan reaches self-sufficiency in agriculture production, they will continue to be the beneficiaries of supportive steps and protection by the government. Since there is a lot of room for improvement in our agricultural statistics, we can expect sustained profitability in this industry.

INDEGINOUS RAW MATERIAL:

Secondly, the sector has a clear advantage over other industries in raw material procurement, as the main raw material, natural gas, is indigenous. Thus the sector-input costs are hedged against the threat of devaluation.

HIGH ENTRY BARRIERS:

The industry players enjoy high entry barriers and thus protection from new competition. This is because of:

The industry is highly competitive in nature. Any new party will need to invest a substantial amount as is apparent from the recently commissioned FJFC project. The total cost of the production is estimated at US$ 370mn.
A strong distribution network is a pre-requisite. Since it takes time to establish one, the already well established networks of the market leaders are a great impediment.
The brand loyalty of existing products is strong in the customers increasing the risks for the new brand.
Customers are price sensitive, while the large producers enjoy economies of scale.

GOVERNMENT SUPPORT:

The consistent support of the government has helped the local producers to increase their production capacities in order to meet the growing demand. These policies have assured continuous ROE in the past, cheap gas, and fixed gas rates to encourage domestic producers to enhance fertilizer capacity. They also help the producers to encourage fertilizer use among the farmers. They provide:

Agricultural credit
Subsidized gas supply
Farm support prices

WEAKNESSES

STATE-OF-TECHNOLOGY:

The technology of the fertilizer sector is quite old. Most of the plants are 15-20 years old, which may lead to decreasing efficiencies with the passage of time.

VOLATILE DEMAND:

Dependence on agriculture results in volatile demand for the fertilizer sector. Uncertainty in various factors led to sharp fluctuations in the fertilizer demand. These factors include:

Weather conditions
Pest attacks

DEPENDENCE ON GOVERNMENT SUBSIDY:

In the long run, the government policy of gas subsidy for the local manufacturers will shift from an advantage to a disadvantage. This is because there will be a major decrease in the profitability of the firms if this subsidy is removed. This is evident from the fact that the profitability of Engro Chemicals has gone down because of the gas price hike of about 70%.

VOLATILITY IN THE SUPPLY OF GAS:

In the past, the production of the local manufacturers has been adversely affected due to disruptions in the gas supply. This is a major weakness because any disturbance in the supply in the peak season will affect the firms. For example the users of Sui gas operate well below optimum capacity at the time of peak demand for gas because Sui gas supplies natural gas to domestic users as well. Hence it reduces its supply to the manufacturers during the peak demand season.

POOR INFRASTRUCTURE:

Due to our deteriorating infrastructure especially the transportation system, the producers incur high costs to supply the products to the farmers on time.

ILLITERACY:

One major cost for the local producers is the costs incurred on educating their consumers, who are mainly illiterate, and making them aware of the uses of the application of the fertilizers. This is not easy because providing them with the relevant literature is not enough since they can’t read, have traditional views and ideas about farming and are quite reluctant to adapt to new concepts.

OPPORTUNITIES

MARKET SHARES CAN BE INCREASED:

Long term fertilizer demand is far from saturated. Future demand increase will provide opportunities for higher profitability through increased production. The domestic producers can increase their production either through efficiency improvements, like Engro recently did, or through buying out fertilizer plants put up for sale by the GoP under its privatization policy.

Moreover, the production of DAP is definitely a worthwhile opportunity since the FJFC’s capacity do not meet the demand.

EXPORTS:

With the expansion of 400,000 tons of Engro chemicals in the pipeline the supply of fertilizer is expected to outrun the demand in the years to come. This represents an ideal opportunity for local manufacturer’s to export urea to the international market where the prices are around 40% premium to the domestic prices. Also in the current year, the companies have an export surplus of 550,000 tons out of which the GoP has given approval for export of 100,000 tonnes.

DEVALUATION:

The principal raw material for the production of urea, natural gas, is produced locally. Hence, the threat of higher input costs because of devaluation of the local currency is minimized. In fact devaluation would benefit the local manufacturers as their export potential of urea is realized.

THREATS

The sector faces a number of threats both in the long and short run. The threat of private imports, increase in gas prices and foreign exchange crunch are significant threats facing this sector. Each of these threats are discussed in detail below:

PRIVATE SECTOR FERTILIZER IMPORTS:

The possibility of large-scale imports of urea of private traders is a significant threat to the domestic fertilizer industry. However, in the past, the industry and analysts, for two reasons have always dismissed it: firstly it was not feasible, given the high international price of urea, and secondly, the heavy capital investment in distribution infrastructure and credit to retailers would act as an effective entry barrier. Because of the South East Asian crisis in 1997-98 the demand for fertilizer in the international market had collapsed to such an extent that the international prices were at a 10-15% discount to the local prices. This increasing gap between international and domestic urea prices allowed the private sector fertilizer imports to become a regular feature. The continuation of this treat would depend upon the following factors:

Margins available to the importer
Future trends in domestic and international urea prices
Capital requirements
Brand awareness in farmers
Retaliatory measures by domestic urea manufacturers
Government policies aimed at protecting the local industry.

Margin for the Importer

Essentially the margin for a prospective importer result from the difference in domestic and international urea prices. International urea prices started to decline in October 96 and now (before the levy of 10% import duty) stands at a C&F price of Rs. 6410/ton. The ex-depot price of locally produced urea stood at Rs. 7000/ton. A further 10% import duty levied by the government increases the C&F prices of imported fertilizer to Rs 7050 rendering it completely unfeasible for the private importers to continue the imports.

Cost Structure Of Imported Urea:

	$/TON	Rs/ton
Urea Price(FOB)	85	4410
Freight & Insurance	38	2000
IMPORT DUTY	12.3	640
Urea Price (C&F)	135.3	7050

A fall in the rupee value reduces the competitiveness of imported urea as it becomes more expensive even at the C&F level. Given this constraint on the importer’s margins and distribution radius, we do not see any competitive edge for private importers against the well-established domestic urea manufactures. Private sector urea producers like FFC and Engro will benefit from this by increasing their own private imports.

Efforts to Counter Threats from Imports

Retaliatory measures from the domestic manufacturers would be driven by their perception of the threat posed by private imports. So far they are treating it lightly for reasons discussed above. The retaliatory measures may include predatory pricing to fortify the barrier to entry. A temporary, coordinated reduction in price (which could attract accusations of anti-competitive practice) would serve to further reduce the attraction of imports.

VOLATILE INTERNATIONAL UREA PRICES

The threat of private imports of urea emerged as a direct result of decline in the price of urea internationally. The international price of urea nose-dived from a high of $ 200/ton in August 96 to the existing level of $ 85/ton. Given the forecast, and the bare margins currently available, we judge this threat to be a temporary one for the domestic industry. Furthermore, with the volatile nature of international urea prices and the 10% import duty applicable on fertilizer imports , local traders will have to keep moving in and out of the market as windows of opportunity open and close. This will deter most traders given the high fixed and working capital (inventory financing) requirements of handling large-scale imports. In short, the fertilizer trading business presents more risks than are justified by the returns available from it.

GOVERNMENT POLICIES AIMED AT PROTECTING THE LOCAL INDUSTRY:

In response to the threat on the local industry imposed by the continuous imports of fertilizer by the private importers, the government agreed to levy 10% impost duty last August. This made it unfeasible for the importers to continue this trend.

GAS AVAILABILITY AND PRICE OF GAS:

The output growth is restricted by the limited supply of gas. This is because of the government monopoly on gas supplies that it can use to limit the number of fertilizer manufacturers and control the domestic supply of fertilizer. The industry is also facing

the threat of a gradual elimination of the price subsidy on natural gas and this will lead to reduced profitability in the future years. Hence, those companies are most efficient in terms of production will lead the way for the industry in the future.

ENGRO CHEMICAL PAKISTAN LIMITED

PROFILE

Engro Chemical Pakistan Limited is the second largest producer of urea fertilizer in the country and is well positioned to take advantage of the growth and challenges in the agricultural sector. Apart from selling its own manufactured urea, Engro also markets imported Di-ammonium phosphate (DAP) and other potassic and phosphatic fertilizers.

The Company has been expanding its urea manufacturing capacity and in the past seven years the company has increased its annual production capacity from 268,000 tons to 850,000 tons. Currently it is also considering expansion to 1,200,000 tonnes.

HISTORY

Engro can trace its roots back to 1957 when the search for oil by Pak Stanvac, an Esso/Mobil joint venture led to the discovery of Mari gas field situated in the vicinity of Dharki – at the time a small town in upper Sindh province. After a few years of studies, Esso developed a proposal to build a urea plant. The government, eager to promote the use of fertilizers in Pakistan, approved the proposal and Esso Pakistan Fertilizer Company Limited was incorporated in 1965, with Esso owning 75% of the shares and the Pakistani public the remaining 25%. Shortly thereafter, commenced the construction of a urea plant of 173,000 tons annual capacity. The plant was commissioned on December 4, 1968, at a cost of US dollars 43 million. Esso’s investment at the time represented the largest foreign investment in the private sector of Pakistan.

PRE-SETUP MARKETING EFFORTS

Prior to start-up of the plant, a full-fledged marketing organization was established which pioneered modern marketing and agronomic programs to educate the farmers of Pakistan on the proper usage of fertilizer. These efforts held significantly in increasing the fertilizer consumption in Pakistan, and in launching the Company’s own branded urea called “Engro” – an acronym of “Energy for Growth”.

RE-NAMING

Even after the name change to Exxon Chemicals, the Company continued to prosper as it relentlessly pursued productivity gains and attain professional excellence. The plant capacity was de-bottlenecked in low cost steps to 268,000 tons, high standards of operational safety attained and Engro Urea enjoyed a premium in the market.

Early in 1991, Exxon announced their intention to sell their 75% share of Company’s equity. An employee led buy out, enabled 28% of the equity to be acquired by the employees and their Trust. Several financial institutions, like International Finance Corporation, Commonwealth Development Corporation, Asian Finance and Investment Corporation, National Development Finance Corporation, etc., acquired the balance 47% of the company’s shares that were previously held by Exxon Corporation. It enabled the ownership to be restructured and the Company was renamed Engro Chemical Pakistan Limited.

The employee-led buyout of Exxon’s equity was the first of its kind in the corporate history of Pakistan. As part of the buyout, agreements were signed with Exxon for technical and project management support and for the continued use of the Engro brand name.

ENGRO’S EXPANSIONS

The company proceeded with an expansion project to more than double its capacity to 600,000 tons in 1993. During 1995 the plant capacity was further increased to 750,000 tons per annum. In 1998, the Company successfully implemented an expansion cum modernization that enhanced the urea capacity to 850,000 tons per annum and appreciably improved the environmental performance of the plant site. The company is currently reviewing up its next de-bottlenecking step to take the capacity to 950,000 tons per annum. Studies indicate that the existing facilities at Dharki can be cost effectively de-bottlenecked to 1.2 million tons urea production per year.

ENGRO’S MANAGEMENT

Engro’s strong presence in the fertilizer industry and its endeavor to cautiously diversify and pursue opportunities in petrochemicals has attracted the attention of several international venture partners. The future prospects look promising as the organization is effectively managed by a highly professional team totally committed to preserving its core values and adhering to highest standards of safety, business ethics, integrity, etc.

Though a local managed company, Engro has the professionalism and work ethic of a multinational to stay ahead of the field. Engro’s growth orientation and performance has gained recognition from local and international organizations.

STRATEGIC MANAGEMENT

Engro’s long term vision is focused at diversifying and becoming a leading player in Pakistan’s petrochemical industry in addition to diversification in the fertilizer sector. In line with the vision, the company established a new division – New Ventures Division (formerly Technology and New Ventures Division) whose sole responsibility is to identify potential ventures for diversification. At Port Qasim, Engro has set up the Engro Paktank as well as a PVC manufacturing company Engro Asahi.

MANUFACTURING AT ENGRO

The Company’s original plant was commissioned on December 4, 1968, and since then, except for short maintenance shutdowns, the plant has been in continuous operation. With technological support from Exxon, and local innovation, the initial capacity of the plant was de-bottlenecked from 173,000 to 268,000 tons per annum.

In 1993, Engro relocated an ammonia and a urea plant from USA and UK respectively and increased its capacity to 600,000 tons per year. In 1995, the capacity was further expanded to 750,000 tons per year. In 1998 another innovative and modernization project called the Engro Conservation and Expansion Step (ECES-850) was successfully implemented. The project was constructed at a cost of US $72million and has increased Engro’s annual urea production from 750,000 to 850,000 tons. Additionally, it has made 13% improvements in efficiency and has enhanced environmental measures. This technologically complex project was developed and implemented in-house by Engro’s own team in 30 months.

AN ENVIRONMENT FRIENDLY PLANT

Protection of the environment around the plant also receives considerable management attention. Liquid effluents and gaseous emissions from the plant are continuously monitored and over US$ 5 Million of pollution abatement projects have been implemented to preserve the environment.

QUALITY OF THE HUMAN RESOURCES

A key to the success of the manufacturing operations has been the extensive training provided to its engineers, technicians and operators. Starting with a base of high quality resources that go through a rigorous selection process, the employees continuously receive training to further enhance their technical and managerial skills. Thus with increasing output from the plant, the demand for highly skilled technicians will increase boosting our employment rate.

A Job Qualifying Program is offered to technicians and operators who are encouraged to learn new skills in return for additional salary increments. The Company also operates an apprenticeship program wherein intensive technical training is imparted to the youth of the surrounding areas. Qualifying apprentices either get absorbed by the Company or add to the national pool of skilled manpower.

MARKETING TECHNIQUES AND EFFORTS

Engro’s marketing team pioneered chemical fertilizer marketing in the private sector of Pakistan. A unique program was developed and delivered which has been highly successful in achieving company’s sales objectives and has become a trend-setter and role model for others. The marketing program was built around two basic concepts. These were as follows :

Selling an agricultural package and not just a product
The development of a market as opposed to selling into a market.

The market development program included many first-of-its-kind features such as soil testing, crop demonstrations, farmer meetings, and training its marketing manpower and dealers. Large-scale agronomic research was carried out on the newly introduced high yielding wheat and rice varieties. This led to establishing proper fertilizer recommendations for profitable farming and brought out the potential for usage of Nitrogen, Phosphorus and Potash in the country. In later years, the program also included collaborative research with universities and research institutions & seminars on important crops irrigation management.

Further, the Company completed a new soil-testing laboratory in Multan to help farmers optimize the use of fertilizers. This is the third soil-testing laboratory of the Company; the other two are in Hyderabad and Daharki.

In 1967-68, nutrient off take was around 11 kg/ha. Today it is 114 kg/ha. Similarly, Pakistan’s total nitrogen consumption was around a 100 thousand tons, with urea occupying a negligible share of this market. Today, the Nitrogen market in Pakistan stands at around 2 M tons with urea constituting about 85% share. Engro’s efforts in the early years provided the push to increase the use of chemical fertilizers, which became one of the catalysts in triggering off the green revolution in the country. For example, the yield of wheat increased from 1000 kg/ha in 1967-68 to around 2100 kg/ha at present.

Engro also developed the country’s first fertilizer dealer network has been to ensure product availability near the farmer’s doorstep. The promise was that a farmer should not have to travel more than 10-12 Kms to get his fertilizer supplies. Starting with about 190 dealers in 1968, they now have about 1100 dealers in our marketing area of Sindh, Punjab and Balochistan. Over the years, advertising program has introduced modern techniques of mass education to help farmers choose an optimal package for profitable crop production.

The brand preference that Engro has created for itself is highly visible in Sindh where a bag of Engro Urea is sold for Rs. 335 as against Rs. 300 for others.

Of course, Engro is not the only factor responsible for increasing agricultural productivity. Other factors are better seeds, water availability and better crop protection.

CUSTOMER SERVICES

The following table will summarize the various services that are offered by Engro to its customers.

*TECHNICAL*	*OTHER*
Soil testing & sampling	Dealer Network: Training & development
Crop Demonstrations	Products Supplies & Distribution
Field Days	Warehousing
Farmer Meetings	Balanced Product State
Farm Visits & Group Discussions	Product Quality Monitoring
Agronomic Literature	Information Dissemination

The most important are the technical services that Engro provides to the farmers for it is these services that determine the fertiliser awareness levels and thus are directly responsible for fertiliser offtakes and increasing crop yields.

ENGRO’S COMPETITIVE ANALYSIS

The SWOT analysis of Engro Chemical Pakistan Limited (ECPL) is summarised in the following table

STRENGTHSü Location

ü Brand Awareness

ü Dealer network

ü Capacity Additions

WEAKNESSESü High maintenance costs

ü High financial costs

ü NWFP and Baluchistan

OPPORTUNITIESü Higher production

ü Higher international prices

ü Other areas

THREATSü Exchange rate risk

ü Diversification risk

ü Middle East and FSU supply

ü Lower international prices

STRENGTHS

Engro Chemicals – being the earliest of the fertilizer companies – used to get gas at concessional prices. Under the Fertiliser Policy of 1991, the government had locked the prices of feedstock gas to these companies for 10 years ending in 2003. Thus the major cost to these companies was subsidised. However, the prices of feedstock gas and fuel gas for the old units remain under threat as they rose by 78% and 18% respectively in 1999.

The Manufacturing Plant of Engro is located at Daharki about halfway between Karachi and Lahore. The national railway line and the highway run adjacent to the plant. The facilities occupy over 500 acres and are linked via pipelines to the neighboring Mari field for supply of natural gas. Thus this site is an strategically suitable for the company resulting into lower costs of transportation both for the supplies and the finished products and thus greater profitability.

As compared to others brands, the brand of ENGRO is well known among the customers. A bag of Engro Urea sells for Rs. 335 in Sindh against Rs. 300-325 offered by the other players – this is because Engro has a solid customer base/loyalty in Sindh.

Another major strength of Engro is the vast distribution/dealer network that it has which allows it to cater to approximately 90-95% of the market. Another strength that they have especially over FFC is that they have had numerous capacity additions due to which they have been able to increase production, cut input costs and make higher profits.

WEAKNESSES

Engro’s old plant is of 60’s technology and thus needs higher maintenance costs. This is however offset by the various BMR projects that they have undertaken to maintain their units in a viable condition.

Another weakness for them is the high financial cost that they have to bear due to heavy loans ($59 million) undertaken for their expansion and BMR projects. Some of these loans are denominated in foreign currency against which Engro has maintained no hedge.

Then another weakness in our point of view is the inability of Engro to target the markets in Baluchistan and NWFP. While these account for only 5% of the total market and may not contribute that highly to revenues, they have the potential to increase in the years to come.

OPPORTUNITIES

The possibility exists for increased production through expansion projects base on efficiency improvements and through the privatization of public sector plants. Studies show that Engro can increase its plant capacity from 850,000 tonnes to 1.2 million tonnes in a very cost effective manner.

Another opportunity for Engro lies in international prices. If the international prices of Urea are higher than those in Pakistan, then imports will not substitute local demand – leading to higher profitability. Another potential opportunity for Engro lies in expanding their reach into the 5% area that they do not cover – NWFP and Baluchistan.

THREATS

Interest payments on foreign currency loans of US$29mn are not hedged against rupee devaluation, exposing Engro to currency risk. Then Engro has also diversified into petrochemicals and polymers markets where it is exposed to risks such as small size of its business, international slump in prices etc.

A major risk of Engro is lower international Urea prices. If they fall substantially then Engro will have to cut its margins to make the local prices comparable with the imported costs or shut down the plant or relocate to the Middle East where the gas is the cheapest. International prices are currently in the range of Rs. 5400-6400 (FOB) per tonne against local prices of Rs.6400 per tonne. If international prices fall further, then small scale importers may be able to undercut the demand of Engro.

FAUJI FERTILIZER COMPANY

HISTORY

During the mid 70’s the Government of Pakistan expressed desire that Fauji Foundation should look into the possibility of establishing a urea manufacturing plant to fill the projected gap in demand and indigenous production. The shortfall was being met through imports at a high cost in foreign exchange. The project was sanctioned in 1977.

INCORPORATION & COMMENCEMENT

Fauji Fertilizer Company Ltd was incorporated in May 1978 as a public limited company in the private sector. It was established through collaboration between Fauji Foundation and M/s Haldor Topsoe A/S of Denmark as a joint venture of Pakistani and foreign shareholders. The first urea plant was located at Goth Macchi near Sadiqqabad in Rahim Yar Khan district and was completed at a cost of Rs. 3,300 million and commenced its commercial production in June 1982.

In its first year of production the plant operated at its designed capacity of 570,000 tonnes which was a record achievement for any plant of this size anywhere in the world. As a result of highly efficient operations, maintenance and strong technical support the production of Sona urea kept improving. Many improvements were made in the process and equipment to increase production. As a result the plant continued to produce well above the designed capacity attaining 115% of capacity in 1990.

EXPANSIONS

To achieve still higher production and efficiency a major modification step was accomplished in March 1992, which brought the yearly production from this plant to 695,000 tons which is 122% of the original design. While this level of production was being attained, the quality of the product was being maintained at the highest level in accordance with international specifications.

FFC’s MARKETING

FFC has its own marketing division. This organization is responsible for all marketing activities such as sales, distribution, field warehousing, planning, farm advisory services, finance, advertising/ sales promotion and administration.

With the commencement of production, FFC started its commercial operations with the marketing of SONA urea and also imported phosphatic and potassic fertilizers allocated to the company by the government from June 1982. From the very beginning a growth oriented marketing strategy was adopted keeping in view future expansion. FFC operates in all the four provinces and Azad Kashmir.

The marketing area has been divided into ten regions and fifty-seven sales districts with a network of 3000 dealers. Over the years the dealers have been trained in fertilizer use, basic agronomy and salesmanship. This network is spread over 1400 sales points. This is supplemented by a large number of cooperative societies and direct sales are made to sugar mills, cotton ginners, rice millers and large farmers. In addition to direct shipments of Sona urea from the plant and imported fertilizers from Karachi, customers are being supplied from 100 field warehouses spread all over the country. The selling effort is effectively supported by good advertising and sales promotion.

FFC’s MARKET DEVELOPMENT

Market development is and important and integral part of FFC’s marketing strategy. A strong farmer advisory service with qualified agronomist was established in 1981, almost a year before the first plant started production. This service has continued to expand and improve during the last 16 years. It provides soil-testing facility to the farmers in addition to conducting crop demonstrations, field days farmer meetings, group discussions and farm visits. Technical material related to various crops is printed and distributed. In short, FFC’s Market Development programme is based on the same objectives and principles that Engro has for its own plant.

FFC’s EXPANSION

In 1988 the company embarked upon another project to set up another urea plant for the manufacture of 635,000 tonnes of urea per year at a cost of 7 billion rupees. FFC project II which comprises of ammonia and urea plant commenced production on March 21, 1993. The new plant has been running well at its designed capacity and producing good quality Sona urea. With a combined production of 1.512 million tonnes from both the plants FFC achieved a market share 0f 46% in 1997.

FFC – JORDAN

To meet the growing requirement of fertiliser in the country and to reduce dependence on imports, FFC with JPMC of Jordan has set up a new company under the name of FFC-Jordan Fertiliser company Ltd (FJFC) which will be producing 460,000 tonnes of DAP a and 550,000 tonnes of granular urea. This will be very beneficial in saving precious foreign exchange that is spent on DAP imports.

FFC’s COMPETITIVE ANALYSIS

The SWOT analysis of Fauji Fertilisers is summarised as follows…

STRENGTHSü Market Leader

ü Investment in FJFC

ü Stable Financial Health

ü Newer Plants, Higher Capacity

ü Dealer Network

ü Low Supplier Power

WEAKNESSESü Higher exposure to import costs

ü No Tax Holiday

ü Too much cash.

OPPORTUNITIESü Expansion

ü Earnings from FJFC

ü No debt requirement.

THREATSü Exchange rate risk

ü Middle East and FSU supply

ü Lower international prices

STRENGTHS

FFC is the market leader in fertilisers and despite coming on late has a market share of almost 43% in the urea market. Then it has made substantial investment in FJFC which should turn out to be a star performer in the future. Investments in FJFC should pay-off post-2000 and contribute to long-term earnings growth. This is confirmed due to the confirmed demand of the product (DAP).

FFC enjoys a high liquidity with the fourth largest market capitalisation on the Karachi Stock Exchange. It has cash reserves of almost Rs. 5 billion compared to Rs. 300 million of Engro. Excellent capacity utilisation record of more than 100% puts FFC in prime position to exploit growing urea demand in Pakistan. The higher production meant that it is able to achieve economies of scale; because of greater efficiency and large size. FFC has lowest production costs in industry. Variable cost of production is 21% below competitors.

This is very important in the future when gas prices may be deregulated. Parent Fauji Foundation owns 40% of Mari Gas Communication, FFC’s sole natural gas supplier. This reduces supplier power for the company. Similar to Engro, 48% of capacity is insulated against increase in feedstock gas prices until 2003.

Again, there is strong brand loyalty for FFC in Punjab and as described above, FFC also has a vast dealer network to cater to the high demand.

WEAKNESSES

FFC being the largest fertiliser importer in the country is more exposed to international price differentials than is Engro. Also, FFC has not utilised the tax holiday clause given in the fertilizer policy and thus they have higher tax rate. Besides this, Fauji Fertilizer has too much idle cash lying in banks, which is yet to be invested. Hence, the stockholders are losing out on their true share value.

THREATS

FFC is exposed to the same threats that Engro is exposed to such as the risk from lower international fertiliser prices, threats from the Middle Eastern and Former Soviet Union Fertiliser producers and the lack of suitable hedging against exchange rate risk.

OPPORTUNITIES

Since FFC has so much surplus cash (almost Rs. 5 billion), it is a safe bet to assume that they may go for putting in a bid for the privatisation of the State Owned Fertiliser company – Pak Saudi Fertiliser Company. This will increase their capacity and lead to greater market share and higher profitability.

Another excellent opportunity also exists for their subsidiary Fauji Jordan Fertiliser Corporation which has started commercial production in 2Q 99. Since the demand from that unit is pretty much fixed and potential for further increases present, it is safe to assume higher profits from this venture.

ISSUES FOR THE INDUSTRY

WATER CRISIS MANAGEMENT

The agricultural sector of Pakistan solely depends on irrigation system for the production of various crops. Water resource availability is the most important requirement for their survival of our country. The main sources of water are the monsoon rainfalls and the melting of snows in Skardu and Himalayas. Recently because of the changes in the weather system patterns and global warming, the monsoon season in the summer has been delayed. Similarly, the melting of snow in Skardu, which usually starts in the beginning of April, has also been delayed. This has resulted in severe water shortage crisis at a time when the Kharif sowing season has just begun.

Water levels at Tarbela and Mangla have touched record lows as the inflow of water in Indus and Jehlum is very low. These two rivers receive their inflow of water from the ice-capped mountains in Skardu.

REACTION OF THE FARMERS

The farmers of Sind and Punjab have decided to delay the sowing season because of the losses they have suffered in the Rabi season due to lack of water. The sowing season for rice would begin in May, when the water shortage should be ending. This move has been taken up by the farmers to minimize the losses that they might other wise suffer.

EFFECT ON DEMAND FOR FERTILIZER

Due to the delay in the sowing season the off-take of fertilizer remains sluggish in the first quarter of 2000. This was evident from the fact that the off-take in the 1Q99 and the 1Q2000 showed no change. This is despite the fact that the farmers have received higher cash flows from the recent cotton crop. The manufacturers of fertilizer are anxious about the possibilities of piled up inventories if this crisis does not end soon. This would result in higher inventory related costs to the manufacturers.

Fauji fertilizer sensing this crisis has already adjusted its prices from Rs 338 per bag to Rs 327 per bag in the hope that this would stimulate the demand.

ALTERNATIVES

The ratio of local production to local demand had risen to 97% in 1999, this has already fallen to 87% because of the crisis. The probable remedial measures, which the fertiliser manufacturers intend to take, are:

Reduction in the sales prices of the fertilisers
Export of excess supply

The government on the other had can take a number of measures to improve not only the current situation but to avoid such a situation in the future. They can…

Correct the mismanagement in the distribution of the water

According to an estimate about 10-15% of the canal water is wasted due to mismanagement of the distribution of the water. Because of low transparency in the distribution of water, the small farmers in Sindh are never given their due share of water. They then resort to illegal means such as breaching canals to divert water to their crops. If the distribution system is streamlined, the mismanagement can be controlled to a great extent.

Reduce the loss of canal water due to seepage

The laid back attitude of the government in the repairs and maintenance of the canals has resulted in high seepage in the irrigation system. According to an estimate 15% of the water is lost through seepage in the irrigation system. Hence the actual supply is at least 30% greater than the requirement. This is one of the major causes for the recent water crisis. If the canals are suitably maintained, then seepage can be effectively controlled and any further water crisis can be averted.

Increase the reservoir capacity of the dams and barrages

Although the cost associated with building new hydel plants are huge but they have the advantage of not only increasing power capacity but also irrigation water. To minimize costs, we can increase the reservoir capacity of the Tarbela and Mangla Dams. This will relieve the burden on our power sector as well as provide more water for irrigation in the long run.

Encourage farmers in Punjab to dig up wells

A research study suggests that there is approximately 1500 MAF of underground sweet water in Punjab, as compared to only 300 MAF of sweet water in Sindh. If the government takes effective measures such as giving interest free credit for digging up wells to the farmers, this water can serve as an alternative source in times of water crisis.

Rationalize the distribution of irrigation water in the different provinces

The Sindh-Baluchistan Rice Miller’s Association claims that since the past few decades, Punjab has been attempting to usurp the water in the River Indus. An example of this is that 3000 cusecs water which is supposed to be released to Chasma-Jhelum link canal to feed the fields of Sindh is never released. Hence if issues like this can be solved and the water distribution rationalised, it can lead to efficient utilisation of water resources.

Develop a suitable water monitoring system

The Ministry of Agriculture should develop a national water management and monitoring authority to monitor and control the outflow of water from various sources. In this respect, they should install a tele-metric system at all the barrages of the country for monitoring water releases to each of the provinces, which would allow them to quantify and rationalise the distribution of water.

ISSUES RELATED TO GAS SUBISDIES

Gas Prices Rs. per Kcf/ton

	5/12/94	14-6-95	16-5-96	1/1/97	30-4-97	1/1/99	1/7/99	Jul-99	Aug-99
SNGPL System
Feed Stock	22.5	27.9	29.57	34.01	34.01	34.01	34.01	57.817	62.298
Fuel	66.22	84.05	89.09	102.46	102.46	102.46	112.71	112.71	121.44
Mari Gas
Feed Stock (New)	9.75	9.75	9.75	9.75	9.75	9.75	9.75	9.75	9.75
Feed Stock (Old)	23.39	23.39	23.39	23.39	23.39	23.39	23.39	39.763	42.845
Fuel	52.56	66.61	70.61	81.21	81.21	81.21	89.331	89.331	96.254

The government of Pakistan had allowed a gas subsidy in feedstock, used in the manufacture of fertilizers, as part of the fertilizer policy of 1991. According to this policy, the manufacturers of fertilizers were to receive feedstock gas at PKR 9.75 kcf/ton on any plant expansions made at that time, for the next ten years. This move was part of the deregulation move initiated by the government in the fertilzer sector. The aim of this move was to two-fold :

To increase the domestic production of fertilzer and minimize imports in order to save valuable foreign exchange and
To pass on the benefits of subsidies to the farmers so that they can purchase a greater quantity of fertilizers at lower cost and increase the yield and output of the crops.

Because of the subsidy, the government ends up losing billions of rupees every year, and ends up with large fiscal deficits. Consequently, the government then turns to the international donors for loans and grants. The IMF and the World Bank recently advised the government to reduce the fiscal deficits by removing all kinds of subsidies and make all the sectors of the economy competitive. The government as a result of this decision has fallen into a dilemma. This is because if it removes the subsidies in feedstock after the end of year 2003, the companies may no longer find it feasible to produce fertilizers and may either move their operations elsewhere or may shut the plants down. Any severe decision taken by the manufacturers can distort the balance of the economy, because fertilizer is a direct input in agriculture and the agricultural sector contributes 25% to the GDP.

FUTURE OUTLOOK OF THE FERTILIZER SECTOR

The government, under the pressure of the IMF, has repeatedly made increments in the fuel and variable feedstock gas prices as shown in the table above. Despite the increments, the feedstock (both fixed and variable), continue to be at a discount to the international gas prices, there by protecting the local industry. This is solely to provide benefits to the fertilizer industry, which plays a key role in the growth of our country. The repeated increments have severely reduced the profitability and attractability of the industry, because the rise in costs cannot be transferred completely to the farmers, as shown in the graph below.

The graph shows the trend line for both the % changes in Net Revenues per ton as well as the % change in Net Profit per ton. The trend clearly indicates that while the % change in NR per ton have remained fairly constant, there has been a continual decrease in the % change in NP that the fertiliser companies get – thereby reducing their profits.

According to reliable sources, the GoP of Pakistan in an effort to please the international finance agencies, intends to gradually remove the subsidies once contracts have expired, and bring the feedstock and fuel stock prices at par with the international prices. This move would greatly reduce the profitability of the major players who have at least 45% of their existing capacities at subsidized rates and might even force some inefficient players out of the industry. Hence, the manufacturers need to find alternative sources of inputs to keep on producing fertilizers.

ALTERNATIVES FOR THE MANUFACTURERS

Efficiency in the production of fertilzers is the need of the hour for the management of the fertilizer industry. The company, which manages to minimize costs, would be able to gain the edge. Having said that, there are a few alternatives that the industry can pursue.

The manufacturers of urea can pursue production of fertilizer where the cost of raw materials is minimum. Countries in the Middle East and Saudi Arabia provide such an opportunity where the gas prices are at a discount of 300% to the domestic gas prices. Hence, if the manufacturers instead of expanding their local plants can develop a fertilizer plant in e.g. Qatar they can minimize their variable cost by 300%. Here Fauji Fertlizer, with plenty of cash reserves can actively tap this opportunity.

The manufacturers can discuss the consequences of removal of subsidies with the government and highlight the impact of such a step on the economy as a whole. They should agree in reduction of subsidy to an extent where they can still achieve economic profits. This factor is realistic given the fact that since the past decade this industry has witnessed tremendous growth in sales and profits and should be willing to sacrifice some of it for the country in the time of need.

ISSUES RELATED TO PHOSPHATIC FERTILISERS

Phosphatic Fertilisers are used to improve the plant strength and reduce soil alkalinity which is caused by heavy usage of Nitrogenous Fertilisers. Historically, phosphatic fertiliser have been more expensive than Urea – almost 80% higher than the prices of Urea. Since the farmers in Pakistan do not have much money and due to low awareness level (and past usage norms), farmers have tended to use only Nitrogenous Fertilisers. Thus the optimum usage of NPK has not been attained.

With knowledge about proper fertiliser use becoming more widespread, phosphatic use has slowly gathered momentum. Pakistan, which was producing SSP – Single Super Phosphate through Hazara Phosphate and Lyallpur Chemicals discontinued these when we ran out of indigenous phosphatic rock. To continue the consumption of phosphatic fertiliser, we started to import DAP. With higher demand, international DAP prices started to rocket upward placing undue pressure on Pakistan’s forex reserves.

Fauji Fertiliser Company sensing the high potential of Phosphatic fertilisers entered into a collaboration with Jordan to set up a DAP Processing plant in Karachi. For this facility, phosphatic rock was to be supplied by Jordan. With DAP facility being set up here in Pakistan, a production of approximately 445,000 tonnes of DAP is expected in this year. This will have certain effects on our fertiliser and agriculture industry. These are as follows :

Lower (More Stable) Prices
Improve Crop Quality

Lower (More Stable) Prices

Since the international prices of DAP are quite expensive, this facility of FJFC will help in stabilizing and lowering the local prices of DAP. With lower prices coupled with extensive marketing and distribution strength of Fauji, the outlook for future offtake of DAP fertilisers looks very bright.

Improve Crop Quality

Since DAP is very beneficial to the soil, it will not only improve the crop quality but it will also affect the future offtake of all types of fertilisers. The balanced intake of Urea and DAP will cause the crop quality and yields to go up. Better crop conditions will improve farmer cash flows and higher income which will lead to higher fertiliser offtake in the future.

BIO – FERTILISERS

Another good fertilizer that we can use in our crops is Bio – Fertilizer. At present there are no companies producing this nor are we importing this for internal use. Bio – Fertilisers have a higher degree of nutrient content and stabilize the bio degradation of the soil.

The Islamic Development Bank (IDB) has approved $335,000 of financing for a bio-fertiliser project in Pakistan. The project titled “Use of bio-fertiliser for increasing sustainable crop production in Muslim countries and establishment of bio-fertiliser resource centre (BIRCEN)” will be set up at National Institute for Bio-technology and Genetic Engineering (NIBGE), Faisalabad. This is a multi-country project with the objective to exploit bio-fertiliser technology for development of sustainable agriculture in Muslim countries. The participating countries are Pakistan, Bangladesh, Egypt, Senegal and Uzbekistan.

IDB will provide US $300,000 for purchase of equipment for BIRCEN project. Another US $35,000 will be provided for networking, publications and communication / information. IDB board of executive directors (BED) has approved the funding for the project under its Technical Assistance (Grant) Programme. As far as training of the scientists from other IDB member countries is concerned it would be financed under IDB’s Technical Cooperation Programme.

OBJECTIVES OF THE PROGRAMME

The objective of the project is to identify constraints to the utilisation of bio-fertiliser technology as applied to the cropping systems prevalent in Pakistan. It will also plan out research on both basic and applied aspects to overcome these constraints. In addition, strategies will be developed for using all the already available information for field application of Bio-fertiliser technology. The Bircen will facilitate dissemination of this technology by up scaling its production and conducting demonstration trials on the farmers field and by organising outreach activities. This Technology can in future be incorporated into cropping and farming systems of not only Pakistan but of the region as well.
The project objectives will be met by strengthening the research capabilities and supporting research and development on bio-fertiliser in the participating laboratories. In addition, large scale bio-fertiliser production technology and quality control protocols and standards will be developed. Assistance will be provided for setting up small business establishment and commercialisation of bio-fertilisers. The project was prepared by Dr Kausar Abdullah Malik as Principal Investigator. He is the former director general, NIBGE and the incumbent Chairman, Pakistan Agriculture Research Council (PARC). It was submitted for funding to IDB through OIC Ministerial Committee on Science and Technology (COMSTECH) with its headquarters here in Islamabad.

IMPACT ON THE INDUSTRY

With use of bio – fertilisers, chemical fertiliser usage may decrease thus affecting the companies’ production and sales. At the same time, the more advantages of Bio – Fertilisers make it more beneficial to the soils and crops quality and yields. Thus we may see increases in crop quality and yields which will be better for the farmers and their incomes.

Then we can also export this type of fertiliser to other Muslim countries. The OIC gave us the grant so that we could develop a good model of it in the fields which could then be applied elsewhere in the Muslim world. With this, we can increase our exports and our industry can make a worldwide name for itself.

With future predicted gas price increases, our fertiliser companies can also switch to producing bio-fertiliser which will have low costs and higher profit margins.

NEW PRODUCT (BLENDED FERTILISERS)

The main problems that our fertiliser industry faces are low intake of fertiliser and unbalanced usage. To counter this problem, Engro Chemicals has come up with a unique product which they hope (and we think they will be quite successful in it) will correct these fundamental consumption flaws.

In the beginning the farmers started putting in N fertilisers when the lands became deficient in N and then they put in P when the land needed it and then K when it was reducing in the soil. This involves considerable effort. The farmers had to put in 3 bags of varying prices and usage requirements plus follow all sorts of instructions for proper use. All this proved to be very hassling and caused the farmers to just leave P and K fertilisers to when they are necessary. This caused an unbalanced ratio of fertiliser offtake and did nothing great for our soil and crop growth.

In the international market, a solution for it exists. It is called as Blended Fertiliser. This is one fertiliser which has ALL the nutrient ingredients in certain optimum ratios in them. Thus instead of using so many fertilisers, the farmers had to use only one bag. E.g. right now if a farmer is supposed to use 1kg of Urea per acre on a certain crop and 0.5kg of DAP per acre on it, then instead of putting 2 bags of fertilisers, the farmer will buy one unit/bag of fertiliser which will have these nutrients in an optimum ratio. For our example they will have a nutrient ratio of 2:1:0. Thus a major input hassle for the farmers will be reduced.

After a lot of in-house research, Engro has decided to enter the Blended Fertiliser Manufacturing market. Blended Fertilisers are a special type of fertiliser which contain all the nutrients in a certain ratio in them. An important point to note about NPK Blended Fertiliser is that these are highly customized for a particular crop and a particular area.

What Engro Chemicals is proposing is a Blended Fertiliser which will cater to some specific crop and particular area in the nearby areas of their plant. This is because this is still an experiment for them and they want to make sure they make the best product.

ADVANTAGES OF BLENDED NPKs

Blended NPKs (as Blended Fertilisers are popularly called) possess a number of advantages. These are …

Overcomes Soil Deficiency
Minimises Input Hassles
Minimises Cost of Production as well as Retail Cost
More Balanced Inputs of Nutrients
Better Crops (Quality and Yields)

IMPACT ON THE COMPANIES

Engro is poised to reap the benefits from this project since they have though up of this idea. At the same time, the major threat is to FFC – their market share can also come under threat from NPKs. But the important point to note is that the introduction and usage of this fertiliser will take some time – during which FFC can also come up with a similar product.

LONG TERM ISSUES OF THE FERTILIZER INDUSTRY

OVER INVOICING IN THE SECTOR

Like many other industries of Pakistan, the fertilizer industry is also being blamed for possibilities of over invoicing in the capital expenditures. The obvious purpose of these over invoicing schemes was to earn large sums of money through these means. As it is difficult to prove the possibilities of over invoicing, these industrialists can get away with it. Besides, as the government machinery is full of corruption, these industrialists manage to sneak out with these illegal gains by offering kickbacks. These kickbacks are not only offered to the local government officials but also to the international fertilizer plant suppliers. Since the amount of money involved is huge, it becomes very easy for the plunderers to leave the field without a trace.

ENGRO CHEMICALS

When the Mari Gas field was discovered, Engro (then Esso) decided to set up a fertiliser plant to take advantage of the ‘cheap’ natural gas. Soon after this, the construction of a urea plant of 173,000 tons annual capacity was proposed. The plant was commissioned on December 4, 1968, at a cost of US dollars 43 million. This was the first private sector investment in the Pakistani fertilizer sector.

At this point in time, because of lack of experts in the fertilizer sector, the company managed to get an approval for setting up the plant at such a high cost. To prove that there was an obvious involvement of corruption and kickbacks, we present the following case study…

Engro Chemical was established in 1968 at a cost of $43 million with a capacity of 173,000 tons. At today’s prices, this would come to about $ 300 million. In 1996, China set up a fertilizer manufacturing plant with a capacity of 780,000 tons of urea at a price of only $ 337 million using the state-of-art technology. In comparison it is clear that China set up a 4.5 times more productive plant at a cost increase of only 12.3%.

Further more in 1998, Engro Chemical undertook a BMR project of $ 72 million. The result was the increase in production capacity from 750,000 tons to 850,000 tons. A $72 million investment (that too BMR) for an increase of only 100,000 tons. This comes to around $ 720 per ton in expansion costs. On the other hand, the Chinese plant started from scratch at a cost of only $ 432 per ton.

This further proves our point that there is heavy corruption and inefficiency in our fertilizer manufacturing industries.

	Engro Chemical	Chinese Company
Year of set up	1968	1996
Initial Capacity	173,000 tons	780,000 tons
Initial Cost	$ 43 million	$ 337 million
Today’s prices	$ 300 million	$ 337 million

BMR	$ 72 million	–
Production increase	100,000 tons	–
Cost per ton	$720	$432

WEAKNESS AT THE INTERNATIONAL LEVEL

The Pakistani Fertilizer industry has been quite un-competitive with the international fertilizer producers. This is despite the fact that the local fertilizer manufacturers have the major input costs subsidized, i.e. natural gas. The comparative gas prices for the major fertilizer manufacturing companies of Pakistan with respect to international gas prices are as follows :-

International Gas Prices $ per MBTU 2000

*Western Europe*	*2.5 – 3.1*
*USA*	*1.7 – 2.4*
*Pakistan*	*1.4 – 1.7*
*Indonesia*	*1.5*
*Canada*	*1.3 – 1.5*
*Arabian Gulf*	*0.5 – 0.75*
*Former Soviet Union (FSU)*	*0.4*

As far as the Pakistani market goes, the local fertilizer companies are subsidized by around 52% on the cost of the natural gas. Even with such low gas prices, our local production cost is somewhere around $ 118 – $ 125 per bag of Urea. In the international market, the urea prices are fluctuating between $ 100 – $ 130 per bag of fertilizer depending on the company and the supplying market. With low international prices, it is not feasible for the consumers to buy the fertilizers from the manufacturers at such high prices.

The product in itself is highly price elastic. Since the product is targeted to the low-income earners, high prices of fertilizers tend to decrease demand and low prices tend to increase demand. This is proven by the past facts that the offtake for DAP has always remained lower than the recommended level because of the high DAP prices.

If we were to import ALL fertilizers rather than the government spending money on subsidizing the natural gas cost (the issue of the use of Foreign Currency will follow later), the lower international cost could be passed onto the consumers. Low fertilizer prices will increase fertilizer offtake, which is beneficial for our crops (discussed in the previous sections of the report). The higher fertilizer use improves agricultural output and thus has a substantial impact on our GDP.

Since the international prices of fertilizers are likely to remain under pressure in the international market in the long run (due to intense competition between Middle Eastern and Russian fertilizer manufacturers), the future international prices look well set to be below the local prices. International agencies are predicting price cuts of 10-13% in the international markets.

This is also influenced by the fact that the local manufacturing costs are projected to increase over the next few years due to the rise in the gas prices. With higher local costs, possibility exists that the local manufacturing companies will pass on a major portion of the increment onto the consumers. Higher local costs will have an adverse affect on the fertilizer offtake in the country.

Given the above scenario that entails higher local prices and bleak international scenario, the Pakistani fertilizer industry is highly un-competitive at the international level. If the government were to import all the required fertilizer from the cheaper international market, it would result in savings of approximately Rs. 17 billion, which it presently provides to fertilizer industry. This of course is a welcome sight, given the state of the economy and the debt burden on the government.

Common Economics suggest that only that industry survives in a perfect market, which is competitive. But, because of the reasons discussed above, the Pakistani fertilizer industry continues to be highly incompetitive. Although at present, the industry is being protected through various forms of subsidies, but this also results in losses to the government. Besides, in the next three or four years, when the World Bank and IMF pressure would force the government to open up its domestic market to the international market and to remove all kinds of subsidies, the weakness of the industry will be exposed. Then there would not be any other way out except shutdown.

This proves one point for sure; it would be advisable to eradicate such industries like the fertilizer industry, which is bringing losses to the government without giving anything extraordinary to the consumers and divert the resources presently being utilized for the fertilizer industry into more productive uses like power generation, as discussed below.

The Rs. 17 billion savings which the Government of Pakistan can mobilize – due to the removal of the subsidy provided to the fertilizer companies – can increase substantially if the gas which the industry uses can be diverted into more productive avenues such as power generation. This reduces oil import costs and as further discussed below gives us net savings or around Rs. 500 billion.

REMOVAL OF THE ENTIRE FERTILIZER INDUSTRY

The fertilizer sector of Pakistan has survived and prospered all these years in the face of rising international prices and low local costs due to subsidized natural gas. However, in the future years, the international prices are projected to remain under pressure within the range of $85 – $100. However the local costs are projected to rise due to increasing gas costs. These are expected to be passed to the consumers thus affecting offtake of fertilizer.

Since we have already come to the conclusion that the Government of Pakistan should not give gas subsidies to the fertilizer manufacturers, the key issue is whether the industry should even continue in Pakistan or should we completely scrap it and resort to importing the fertilizers.

In the following parts of this section, we will review the impact on the economy of Pakistan of the closure of the fertilizer industry and the savings and costs associated with such a move.

GOP SUBSIDY

The amount of subsidy given to the fertilizer industry from the Government of Pakistan ranges between Rs 16 – 17 billion annually in respect to the policy of 1991, whereby the feedstock was to be supplied at a rate of Rs. 9.75 kcf, for the expansions made during that time. Besides this, subsidy has also been provided to the industry for the variable feedstock and fuel stock gases. The government had initiated this move in order to encourage the production of fertilizer in the country. If this subsidy is removed then the savings that we can realize can range from Rs. 16 – 17 billion easily (just the gas subsidies). This amount can then be used for deficit financing or be channeled into more productive channels as the policy requires.

GAS CONSUMPTION

The current production of gas in the country is around 0.7 TCF which comes to 1.7 Billion Cubic Feet per day (BCF). The estimated net reserves (at present) are about 17 TCF while another 18 TCF are expected to be discovered in the next 10 – 15 years. At the present consumption growth rate levels, we should be able to meet the demand till only the next 10 years after which the demand is expected to outstrip the supply of natural gas forcing us to importing gas from Iran etc.

Annual gas consumption of the fertilizer industry is around 0.18 Trillion Cubic Feet (TCF) which is about 26% of the total gas consumption. The estimated growth rate in this area will range around 5-6% per annum to cope up with the increased production.

OIL IMPORTS AND USES

The total oil demand in Pakistan is around 130 million barrels annually out of which 16.7% is met through local production while the rest is imported. At the current import prices of $28 per barrel, the total oil import for this year alone comes out to $3 billion. In the long run, this is projected to increase as the demand for oil increases at around 6% p.a and there is no major headway in the local production of oil.

32% of the total oil consumed in the country is used by the power generating industries. This comes to around $ 1 billion worth of oil imports which are used by the power generating sector. With the demand for power to increase in the long run (since we have at present one of the lowest power consumption ratios in the world), these figures are also projected to go up to 35-40%.

COST BENEFIT ANALYSIS

The fertilizer industry uses 26% of the total gas consumption in the country or about 180 Billion Cubic Feet (BCF) per day. One Trillion Cubic Feet (TCF) equals to 130 million barrels of oil equivalent (BOE). If the entire fertilizer industry is removed, then we save around 0.18 TCF of gas per annum which comes to 24 million BOE (Barrels of Oil Equivalent). At the current international oil prices of $28 to a barrel, this comes to savings of around $700 million (more important since the local gas prices are now linked to the international oil prices).

Total Gas Consumption	0.7 TCF
Fertilizer Uses (26%)	0.18 TCF

One TCF = 130 millions of BOE
Fertilizer Uses	24 million BOE
Cost Savings on this at $28 per ton	$ 700 million

The gas saved will be used by the power sector (especially the IPPs). This will result in lower power generation costs and also cut down on the expensive oil imports. The power sector currently uses 30% of the total gas consumption, which comes to around 0.21 TCF annually. With the gas saved from the fertilizer sector, an extra 0.18 TCF can be utilized for power generation. This makes a grand total of 0.39 TCF, which the power sector can then use.

Power Sector uses (of gas)	0.21 TCF
Additions from the fertilizer savings	0.18 TCF
% increase	86%

Since the share of oil and gas in the power generation is roughly the same at 40%, this 86% increase in the gas contribution to the power sector will reduce the oil contribution by a similar percentage. This would give the economy savings of $ 860 million.

Power Sector uses (of imported oil)	$ 1 billion
Savings from switch over to gas	86%
New Oil Import costs	$ 140 million
Savings of	$ 860 million

Combined with the subsidy savings of Rs. 17 billion ($ 350 million), this gives us a grand saving of $ 1.2 billion. Additional savings can also materialize due to higher profits by the power sectors and other following industries.

Savings on oil imports	$ 860 million
Savings on subsidy	$ 350 million
Total Savings	$ 1.21 billion

FERTILIZER IMPORT

If we remove the fertilizer industry, then our annual fertilizer requirement will have to be fulfilled by imports and the estimated cost for this will be around $ 658 million. The cost breakup of imported fertilizers is shown in the following table…

Urea Demand	$ 380 million
DAP demand	$ 178.5 million
Others	$ 100 million
Total Fertilizer Import cost	$ 658.5 million

NET COST SAVINGS

This leaves us with net savings of USD 550 million that can be used for debt servicing, BoP support, FX Support and other productive channels. This is all the more beneficial for our economy as a whole. In the long run, these estimated cost savings are expected to remain within the $ 500 – 600 million range.

CONCLUSION

It is a proven fact that fertilisers are very important for our agriculture sector. While the Fertiliser Policy of 1991 was very good for the companies, they will face the threat of rising gas prices in the future. Other issues include water crisis which delays sowing seasons and can also reduce fertiliser offtake and future incomes. Some new fertilisers such as Bio-Fertilisers, Blended NPKs and Phosphatic Fertilisers will improve future offtakes and give us better crops. This will also be beneficial to the 2 main companies – FFC and Engro since they are exclusively involved in either one of them.

The local fertiliser industry has been around since 1965 and during all that time, the GoP has given massive support to the industry in the form of gas subsidies. With prices more or less remaining at par with the international market, the fertiliser companies have reaped huge profits from price differentials and at the same time causing the government problems due to the high subsidies given. Also the gas used by these companies have a massive opportunity cost since they could easily be used in more productive areas such as power generation which have a greater impact on our economy.

The short term issues for the industry remain but in the long run we have to do some serious thinking about whether we can even sustain this industry. As with all industries of our country, the fertiliser industry too suffers from the bane of over-invoicing as ECPL’s cost of producing a ton of Urea is more than that of new set up plants. Furthermore, the international prices look to be lower than the domestic prices in the long run making imports cheaper for our overall economy.

With alternative channel of use for feedgas available and the fact that removal of the industry yields us around Rs. 500-600 billion annually (net), removal of the industry seems to be a viable option. Or at least the GoP should remove the subsidy and force the industry players to be more competitive with the international market.

REFERENCES / BIBLIOGRAPHY

The following sources of information were tapped for our Research Report on the Pakistani Fertiliser Industry…

Engro Chemical Pakistan Ltd.
Fauji Fertiliser Company.
IP Securities
Khadim Ali Shah Bukhari
Taurus Securities
ABN AMRO Bank
Economic Survey 1998-99
Agriculture Statistics of Pakistan
Various Fertiliser Distributors
Fertiliser Import Department, Government of Pakistan
National Fertiliser Development Centre
Fertiliser Development & Distribution Network in Asia/Pacific
brecorder.com
fadinap.org
cyber.net.pk – Carr Mashriq Research Data Bank
dawn.com
engro.com
Economic & Business Review (EBR)

There were a number of people at these and other places who helped us and guided us and told us of the right place and names to contact. A lot of thanks to them as well.

EXECUTIVE SUMMARY

This report is on the Fertiliser Industry of Pakistan. Our product has a special linkage with the Agriculture sector (its various contributions to GDP etc.). Currently our agri sector faces a number of problems – diminishing quantity of arable land, water logging and salinity, and top soil erosion. This reduces crop quality & yield due to which we incur food imports. To solve these problems, greater emphasis should be on the proper and balanced usage of fertilisers.

Importance of Fertilisers

Fertilisers provide a number of benefits to the soil – they include better productivity, sustainable growth, and minimising nutrient losses. The Nitrogenous Fertilisers provide the plant with Higher Protein Content, Colour and Growth. The Phosphorous Fertilisers promote strong, healthy root development and helps plants mature more rapidly and thus aids in blooming. The Potassium Fertilisers raise the resistance of plants to diseases and promotes growth from root to stack.

Fertiliser Policy of 1991

GoP came up with a good Fertiliser Policy of 1991. It’s salient features were supply of feedstock gas at prices locked for 10 years, Duty-free imports of the plant and machinery, No sales tax or excise duty on the sale of fertilizer, Expansion of existing plants to be allowed the same concessions as new plants, Deregulation of prices of all fertilizers, If price controls are imposed by the government, prices are to be set in such a manner that ex-factory prices guarantee a ROE of 20%, Duty-free import of phosphoric rock. Engro and FFC reacted by increasing capacity and getting gas prices locked.

Production Materials & Process

Urea Fertilisers use Natural Gas as the principal Raw Material while the Phosphatic Fertilisers use Phosphate Rock as the main Raw Material (65% of cost). Fertilizer industry consumes (26%) of our gas. Two main suppliers are Sui and Mari. Sui has a higher energy content as compared to Mari, therefore a greater quantity of Mari gas is required to manufacturer Urea. The gas is currently subsidized but this may be reduced.

Types of Fertilisers

The fertilisers are either classified by nutrients or by their commercial classification. They are Organic (C,H,O), Primary (Nitrogen-N, Phosphorous-P, Potassium-K), Secondary Nutrients are (Magnesium, Sulphur and Calcium) while the micro nutrients are Iron, zinc, etc. Our current NPK consumption ratio is a pathetic 3.8:1:0.04. The internationally recognized NPK ratio is 4:2:1. We lag consumption of Phosphatic and Potash Fertilisers. The reasons for are high prices, low education and awareness levels, past usage norms.

Recommended Usage

Then we have also researched upon the recommended amount and type of fertiliser that should go into the soils for different crops. We have concentrated on the major crops such as Rice, Wheat, Sugar Cane and Cotton. These are detailed in the report.

Fertiliser Demand

The demand has always outstripped supply but in this year, our supply is greater by 8%. Last year we consumed 5.5 mn tonnes of fertilisers (or 2.08 mn Nutrient Tonnes)- a CAGR of 4% over the last 10 years. However despite the growth, Pakistan’s fertilizer usage/hectare (98kg) remains far below that of other countries. Pakistan’s fertilizer consumption per capita of 14 Nkg is well below the global level of 20 Nkg p.a.

The 2^nd half of the year accounts for 60% of the sales due to the highly fertiliser intensive Rabi crops. The main market for urea is wheat, followed by cotton, rice and sugarcane. Wheat has the highest acreage under cultivation and therefore has the highest demand while sugarcane requires the highest application of fertilizer. The average growth rate in Urea and DAP has been around 6% p.a. and 5% p.a.

Then we have also discussed the demand that the Kharif and Rabi crops have for different commercial fertilisers types. DAP has shown high growth in the past. The current offtake in Dec. 99 was 68% higher than in the previous years due to a number of reasons – high cotton output and better cash flows. In the future demand will grow by 5%.

Factors Affecting Demand

Some of the factors affecting demand are Income Of The Farmer, Purchasing Power Of The Farmer, Support Price For Crops, Availability Of Rural Credit To Farmers, Credit Sales, Availability Of Water, Mechanization, Nutrient Requirement And Prices

Fertiliser Supply

We have an oligopolistic structure with FFC and Engro having 48% of the installed capacity and around 60% of the Urea Market. Private sector has 80% share. Capacity is of 5.66 million tonnes out of which 4.89 million tonnes is Urea. The import quantity is determined by the formula (imported quantity = excess demand over production x market shares of the respective companies). Last year we imported 1.27 million tonnes of Fertilisers (DAP highest) worth Rs. 10 billion. In the future, due to 550,000 tonnes of Urea Surplus, we will export around 100,000 tonnes of urea but there is a controversy regarding this as the government subsidy will be transferred abroad.

Factors Affecting Domestic Supply

These are Availability of Natural Gas, Prices of Gas, Lower international prices and higher production capacity.

Pricing

Local prices are at discount to the international ones. However the import duty effectively makes it higher. The Price Trend show that prices have increased substantially after 1993-94 when deregulation was complete. Local urea prices have grown at a 10-year CAGR of 10.58% p.a. since deregulation in 1986, from Rs. 128 per bag to Rs. 350 bag. However we predict no further increases, and imports will also put a cap on them. The retail price of DAP has increased over the last 10 years by a CAGR of 14.7% p.a. The current international FOB DAP prices are fluctuating between US$ 174-176/tonne. DAP Prices are likely to stabilise due to FJFC.

As far as Gas Pricing is concerned, this is a major issue and the table shows the rates for different companies. They have risen by almost 78% in 1999.

The government continues to indirectly regulate urea prices through its control over gas distribution. No sales and excise tax are levied on fertilizers because fertilizers are considered a vital agricultural input. However in 2H 99, the government tried to impose GST on Fertilisers but then backed down.

SWOT ANALYSIS

The Strengths are Importance For The Pakistan Economy, Indigenous Raw Material, High Entry Barriers, Government Support.

The Weaknesses are State-Of-Technology, Volatile Demand, Dependence On Government Subsidy, Volatility In The Supply Of Gas, Poor Infrastructure, Illiteracy.

The Opportunities are Market Shares Can Be Increased, Exports, Devaluation.

The Threats are Private Sector Fertilizer Imports, Volatile International Urea Prices, Gas Availability And Price Of Gas.

Short Term Issues for the Industry

Water Crisis à The water crisis has delayed the sowing season. With sluggish offtake in 1Q00, they should reduce prices to jack up demand. GoP should prevent such crisis.

Gas Subsidies à In 99, prices rose by 78% (under deficit pressure). Since they cannot be passed on to the farmers – NP down.

Phosphatic Fertilisers à They are very good for the crops but around 80% more expensive. With FJFC, the prices look to fall, increasing offtake and thus yield.

Bio-Fertilisers à A research centre is being set up which will look at its feasibility. These have more nutrient content and export potential.

Blended NPKs à One unit which has all the nutrients in optimal ratios. Gives balanced nutrient intake, improves yield. No need to put different bags – just put in one bag of this.

Long Term Issues for the Industry

Over Invoicing à Our analysis shows that ECPL set up a very expensive plant as compared to those being set up recently (that too of higher capacity) and their BMR is nearly 2x as expensive as the cost of new plants.

International Weakness à Even with major subsidies, local prices are $20-30 more than the international ones. With this difference projected to grow, it would be best to remove the subsidy and put the Rs. 17 billion saved to better use.

Removal of the Industry à With removal, the gas can be used for power generation reducing oil imports by around $ 860 million and $ 350 million saved on subsidies gives us gross savings of $ 1.2 billion and net savings of $ 500 million.

End of Report.

Tags: Agriculture Industries Reports and Research