Fertilizer Industry - Roydon D'Mello

8/2/2019 Fertilizer Industry - Roydon D'Mello

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Presented to:

SHAHID IQBAL

11

Fertilizer Industry

Analysis of Pakistans Industries


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Contents

EXECUTIVE SUMMARY ............................................................................................................ 4

INTRODUCTION .......................................................................................................................... 7

HISTORY OF THE SECTOR .................................................................................................... 7

IMPORTANCE........................................................................................................................... 8

TYPES OF FERTILIZERS......................................................................................................... 9

KEY PLAYERS IN THE INDUSTRY .................................................................................... 10

ENGRO FERTILIZER ......................................................................................................... 10

FAUJI FERTILIZER COMPANY ....................................................................................... 11

FAUJI FERTILIZER BIN QASIM LIMITED ..................................................................... 11

DAWOOD HERCULES CHEMICALS LIMITED ............................................................. 12

RATIO ANALYSIS FOR KEY PLAYERS ............................................................................. 13

WORKING UNITS .................................................................................................................. 14

RAW MATERIALS & ASSOCIATED PROBLEMS ................................................................. 15

FERTILIZER RESEARCH AND DEVELOPMENT .................................................................. 16

NATIONAL FERTLIZER CORPORATION (NFC) ................................................................... 17

GOVERNMENT POLICIES & SUBSIDIES ............................................................................... 17

FERTILIZER POLICY 2001 .................................................................................................... 17

NATIONAL GAS ALLOCATION AND MANAGEMENT POLICY 2005 .......................... 18

CURRENT POSITION ......................................................................................................... 18

GAS ALLOCATION CRITERIA ........................................................................................ 19

PROPOSED LOAD MANAGEMENT POLICY ................................................................. 19

NETWORK EXTENSION ................................................................................................... 19

IMPLEMENTATION OF POLICY ..................................................................................... 20

APPLICABLITY AND EFFECT OF THE POLICY ........................................................... 20


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INDUSTRY TRENDS .................................................................................................................. 20

DEMANDSUPPLY ANALYSIS ............................................................................................. 23

FACTORS AFFECTING DEMAND ....................................................................................... 23

CONSUMPTION PATTERNS ................................................................................................ 24

IMPORTS ................................................................................................................................. 25

FACTORS AFFECTING SUPPLY .......................................................................................... 27

PORTERS FIVE FORCES ANALYSIS ..................................................................................... 28

RIVALRY ................................................................................................................................. 28

THREAT OF NEW ENTRANTS ............................................................................................. 28

POWER OF SUPPLIERS ......................................................................................................... 29

THREAT OF SUBSTITUTES ................................................................................................. 29

BARGAINING POWER OF BUYERS ................................................................................... 29

ISSUES & PROBLEMS FACED BY THE INDUSTRY ............................................................ 30

SOLUTIONS AND RECOMMENDATIONS ............................................................................. 31

FUTURE OUTLOOK ................................................................................................................... 32

REFERENCES ............................................................................................................................. 34


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Fearing the shortfall of fertilizer its expected that the import bill would increase to about 1.75

billion dollars in the next 10 years requiring an investment of at least one billion dollars.

Government intervention in price control may help boost availability of fertilizers to the farmers.

This would basically mean increasing local produce and reducing dependency on imports, this

again is a problem with the prevalent political and financial situation of the country.

Recently to discuss the problems of the fertilizer policy of 2001 by the official of the ministries

of finance, commerce, industries, Board of Investment and the chairman of CBR. The panel in

question concluded that setting up the industries locally would not be feasible due to the highly

lucrative incentives offered by the Middle Eastern countries. It is important to note that fertilizers

are not seasonal products theyre required all throughout the year. Also since urea is the cheapest

supported by government subsidy, uneducated farmers use it in excess which is invariably

unhealthy for the soil, which eventually increases the demand for fertilizers.

In terms of crop wise consumption, wheat and sugar cane require the use of fertilizers

extensively; rise maize and other crops also require some degree of fertilizers used. Even though

the demand and consumption of fertilizers has been increasing over the years, Pakistan is still not

self sufficient in fertilizers. Every year, a huge amount of fertilizers are imported so as to meet

the local demand.

The main factor that affects the supply of fertilizers in Pakistan is the price of inputs. The raw

materials for urea are locally available. This makes the production of urea a less costly project

and thus more amount of urea is manufactured locally and a very small volume is imported. This

is not the case for DAP. The raw materials for DAP, mainly phosphoric acid, has to be imported.

This makes the DAP production very costly. Thus a very small volume of DAP is produced

locally and most of it is imported.

Steps should be taken to educate the farmers so that they use the correct quantity and type of

fertilizers for their soil. Once the fertilizer use is balanced, not only will the product yield be

increased but also fewer fertilizers will be used. This would help reduce imports to some extent.

The government should provide incentives to the local manufacturers to produce DAP. This will

help reduce the import bills to some extent. And in addition to this it will help fill the DAP

demand supply gap as well.


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To deal with the black marketing issue, Punjab Agriculture Minister demanded the companies to

print the fertilizer prices on all fertilizer bags. This will reduce black marketing and will prevent

retailers from overcharging the poor farmers. The paper will provide empirical evidence in forms

of data collected over the research, provide recommendations and viable predictions.


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INTRODUCTION

Pakistan is a semi industrialized economy where more than 55% of the labour force is employed

in the agriculture sector. Pakistans manufacturing sector is also dependant on two agro-based

industries, namely textile and sugar. To achieve a high growth rate, both food and cash crops

have to be boosted. However the farming practices in Pakistan are old and traditional and the soil

is deficient in nutrients. Over the years the agriculture sector has seen growth with the advent of

new farming methods and technology. Amidst these advancements has been the increasing use of

fertilizers for better results. As the economy of Pakistan grows, the fertilizer consumption also

grows along with it. Overall this industry has been very profitable because of the low cost

subsidies it enjoys.

HISTORY OF THE SECTORAt the time of inception, there were no fertilizer plants present in the country. However today,

there are a total of 10 fertilizer units operating in the country, 6 in the private sector and 4 in the

public sector. But even with these units present we are unable to meet the local demand. Thus

every year a huge sum of money is invested in the imports of fertilizers leading to balance of

payment crisis.

The foundations of fertilizer manufacturing were laid down in Ayub Khans era with the Green

revolution. The first fertilizer plant was setup in 1958 by the National Fertilizer Corporation

(NFC). This was the first public sector plant. The first private sector plant was setup in 1965 at

Dharki by Exxon. Fauji Fertilizer and Dawood Hercules later followed. At that point in time,

NFC owned 6 fertilizer plants and this gave balance between the public and private sector.

In 1952, nitrogenous fertilizers were introduced in the country followed by phosphates in 1959-

60 and potassic fertilizers in 1966-67.

The fertilizer sector was highly regulated until 1986. The government had fixed the prices and

the profitability was capped at 20% ROE. This regulation proved to be stifling the private sector

which resulted in a huge demand supply gap. This gap was filled by expensive imports. In 1986

however urea prices were deregulated. But this price increase was unable to offset the loss that

the manufacturers had incurred by selling imported urea at low prices. By 1991, urea imports had

risen to a significant amount.


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A fertilizer policy was initiated in 1991, which gave incentives for setting up new projects and

expansions. All subsidies on nitrogenous fertilizers were abolished in 1986 followed by

phosphates in 1993 and potash in 1997. Provincial quotas were abolished and a 15% sales tax

was implemented on fertilizers in 2001. Apart from urea, the farmers had to pay the international

prices for all imported products.

Pak China Fertilizer was the first company to be privatized in 1992; it was bought by the Schon

Group. Pak Saudi Fertilizer was later purchased by Fauji Fertilizer in 2001. This was the second

plant that was privatized.

The government of Pakistans focus shifted to the power sector in the 1990s. It all started with

the fertilizer policy in 1989 that exposed old fertilizer plants to increasing feed stock prices. The

gas subsidy provided to this sector was also gradually decreased during this decade.

IMPORTANCE

Pakistan is an agrarian country where agriculture and livestock account for about 22% of its

GDP. This sector provides employment to over 55% of the countrys labour force. The key issue

that our country faces is the fact that the cultivable land in the country has nutrient deficiency.

These deficiencies can be overcome by the proper use of fertilizers. The country has a population

of 170 million people, with a growth rate of 2.2% per annum. This means that an addition 3.5

million people require a nutritional diet every year. In such a scenario, the fertilizer sector is very

important to the economy in the short and long run.

The proper use of fertilizer on nutrient deficient soil can really help increase crop yield and

productivity by a significant amount. For the fertilizer off-take to increase substantially, proper

farmer education and increased awareness is needed. However if these nutrients are applied in

the right amount, they can help increase farm productivity, thus helping our country to reduce the

poverty levels.

In Pakistan, there was a 101.3% increase in the fertilizer usage on farms in the period 1989-90.

This led to a corresponding increase of 57.4% in the production of food with the area under

cultivation increasing by only 8.2%.


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TYPES OF FERTILIZERS

There are a total of eight different types of fertilizers, which broadly fall into the following three

categories:

Nitrogenous fertilizers Phosphate fertilizers Potassic fertilizers.

Urea is the main type of nitrogenous fertilizer that is used in the country. The domestic urea

production in the fiscal year 2009-10 was 5,154,883 tonnes. Other types of nitrogenous fertilizers

include Ammonium sulphate and Calcium-ammonium nitrate. The local production of CAN was

345,546 tonnes. Ammonium sulphate however was not produced in the FY 2009-10. The

production of urea along with CAN accounted for approximately 82% of the total domestic

fertilizer production.

Phosphatic fertilizers include Di-ammonium phosphate (DAP), Triple super phosphate (TSP),

Single super phosphate (SSP) and Nitro phosphate (NP). Domestic production of DAP was

started in 1999 by Fauji Fertilizer. Since then DAP is being produced in the country. In the year

2009-10, DAP production amounted up to 625,889 tonnes. This was a 17% increase in DAP

production since the previous year. NP production was 304,464 tonnes, whereas total SSP

production in the year 2009-10 was 150,360 tonnes. The production of phosphatic fertilizer was

around 16% of the total domestic production in 2009-10. Phosphates not only help the plant to

use water effectively but they are also involved in seed germination.

Potassic fertilizer production and usage in the country is very negligible. These fertilizers

improve the plant durability by providing protection against diseases and parasites. The Pakistani

soil is mostly deficient in nitrogen, as a result of which urea and other nitrogenous fertilizers are

the most commonly used ones. DAP is used to counter the acidic affect of urea and to maintain

the fertility of the soil. NPK fertilizer is a blend of nitrogen, phosphate and potash fertilizer.

There are numerous different blends of NPK available in the market.


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KEY PLAYERS IN THE INDUSTRY

The key players in the fertilizer sector are:

Engro Fertilizers Fauji Fertilizer Company Fauji Fertilizer Bin Qasim Ltd Dawood Hercules Chemicals Ltd

ENGRO FERTILIZER

Engro fertilizer is a wholly owned subsidiary of Engro Corporation. This company was

incorporated in June 2009, following the demerger of fertilizer division from the parent company

Engro Chemical Pakistan Limited. Their manufacturing facility at Dharki is continuously

undergoing expansion as a result of which Engro is now ready to become the leading urea

manufacturer in the country. The urea manufacturing capacity was expanded with the installation

of ENVEN 1.3, which went into production in November 2010. This company sells fertilizers

like Engro Urea, Engro DAP, Engro Zarkhez, Zingro and Engro Zarowar. Engros urea marketshare in September 2011 was 23%, whereas the phosphates market share was 29%.

Engros overall market share is expected to increase to 27% in the year 2011. Engro fertilizer has

the biggest fertilizer manufacturing facility in the world. This plant is expected to produce 1.3

million tons of urea.

78%

5%

0%9%

5%

2% 1%

Production (tonnes)

Urea

CAN

AS

DAP

NP

SSP

NPKs


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FAUJI FERTILIZER COMPANY

Fauji fertilizer was incorporated in 1978 as a private limited company. It was a joint venture

between the Fauji Foundation, which was a leading charitable trust in Pakistan, and Haldor

Topsoe A/S of Denmark.

The company initially started with a share capital of Rs. 813.9 million. Today, almost 33 years

later, the share capital of the company is above Rs. 8.48 billion. In addition to this the company

also has Rs. 8.3 billion in long term investments. These include stakes in FFBL, FCCL and

FFCEL. Commercial production commenced in 1982, with an annual capacity of 570,000 metric

tons. This capacity was later increased to 695,000 metric tons through the De-Bottle Necking

program. A second plant was set up in 1993, with an annual production capacity of 635,000 tons

of urea.

The company is a major shareholder in the DAP/urea manufacturing complex of FFBL. In 2002,

FFC also acquired Pak Saudi Fertilizers Ltd.

FAUJI FERTILIZER BIN QASIM LIMITED

The company was initially started as FFC-Jordan Fertilizer Company in 1993. Commercial

production commenced in 2000, but till 2001 the company continued to face financial and

managerial crises. The DAP plant was suspended in 2001, due to a loss of Rs 6.5 billion.

Production on this plant resumed in September 2003.

In 2003, the company was renamed Fauji Fertilizer Bin Qasim Ltd after Jordan Phosphate Mines

Co. sold off its entire share in the company. Following this the phosphoric supply agreement

with JPMC was also terminated. The company turned out to be profitable in 2004 and the

profitability has been on the rise since then.

To ensure continuous raw material supply at the DAP plant, Office Cherifien des Phosphates,

Morocco and Fauji Group entered into a joint venture. The company Pakistan Maroc PhosphoreS.A. was established in Morocco. It costed $250 million. It started commercial production and

shipment in April and May 2008. The plant has a production capacity of 375,000 MT per year.

This is able to meet the FFBL demand as well. Any surplus will be sold in the international

market. Through this project FFBL ensured a means of acquiring long term raw material supply

in an extremely turbulent international market.


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FFBL is the only company in Pakistan that produces DAP and Granular Urea. Together FFC and

FFBL have a 51% market share in the urea market and 65% market share in the phosphates

market, as of September 2011.

DAWOOD HERCULES CHEMICALS LIMITED

Dawood Hercules Chemicals Ltd was incorporated in 1968, as a public limited company. It was

a joint venture between the Dawood Group of Industries and Hercules Inc. USA. Initially the

company had a capacity of 345,000 metric tons of urea per year. This plant was later revamped

in 1989 and 1991.

The company has made significant amounts of investments to incorporate the latest technology

in its production processes. It also constructed the tallest industrial structure in Pakistan, the

Prilling Tower. Dawood Hercules was the first fertilizer manufacturer to obtain ISO-9000:2000

certification. The company has a 5% market share in the Urea market.

Dawood Hercules Fertilizers Limited was incorporated on August 2, 2010 after a demerger. The

demerger became effective since January 1, 2011.

Fertilizer Market Share as of September 2011.


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RATIO ANALYSIS FOR KEY PLAYERS

The following graphs give the financial ratios for the key players for the year 2010.

As it can be seen from the graph, the return on equity for FFC and FFBL is nearly twice that of

Engro Fertilizers and Dawood Hercules. Return on equity is a measure ofthe companys

profitability and it shows the amount of profit the company generates on the money invested.

Clearly FFC and FFBL have generated more profit on their equity as compared to the other two.

But the reduction in Engros ROE can be attributed to the Dharki urea project.

0

10

20

30

40

50

60

70

80

ROE ROCE ROA GP Margin Net Profit

Margin

Engro

FFC

FFBL

Dawood Hercules

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Engro FFC FFBL Dawood

Hercules

Current Ratio

Quick Ratio


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The return on assets value for FFC and FFBL is higher than those for Engro Fertilizer and

Dawood Hercules, but the differential is not as high as it was for ROE. Return on assets indicates

how efficient a company is at utilizing its assets and converting them into profits. It is also

referred to as return on investment. As the graph shows, FFC has the highest ROA value. Again

the ROA for Engro Fertilizer is extremely low as compared to the others. And this may again be

attributed to the increased expenses that resulted from the urea project at Dharki.

The gross profit margin is the highest for Engro Fertilizer. This indicates that Engro is

minimizing its costs and producing goods at a lower cost than the rest. That is why it has the

highest gross profit as compared to the other three firms. However when we look at the net profit

margin figures, we realize that Dawood Hercules has the highest net profit margin. Increased

earnings arent always good for a company because most of the time increased earnings are

accompanied by increased costs as well. By looking at the gross and net profit margin figures we

can find out whether the cost of production for the companies is high or is it the overhead

expenses. As we can tell that in this case, the overheads for Engro are very high. This is evident

in the huge differential between the gross and the net profit margin.

WORKING UNITS

Currently there are 10 fertilizer units operating in Pakistan. Four of them are in the public sector,

while the other six are in the private sector. The public sector units include Hazara PhosphateFertilizer (Pvt) Limited, Lyallpur Chemical & Fertilizer Limited, Pak Arab fertilizer Limited and

Pak American Fertilizers Limited. The private sector fertilizer units include Engro Fertilizers

Limited, Fauji Fertilizer Company Limited, Pak China Fertilizer, Pak Saudi and Fauji Fertilizer

Bin Qasim Company Limited. Pakistan has not been able to meet the local fertilizer demand and

thus has to import fertilizers every year. The total market sales of urea in September 2011 were

4.24 million tons, out of which only 3.72 million tons were manufactured domestically. Similarly

the DAP sales were 668 kT out of which 429 kT were manufactured domestically. In spite of the

establishment of the Engro plant, local production levels have not reached their full capacity, due

to a variety of reasons, as a result of which every year fertilizer has to be imported. In the year

2009-10 a total of 2,694,000 tons of fertilizers were imported.


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RAW MATERIALS & ASSOCIATED PROBLEMS

The main raw material used in the production of nitrogenous fertilizers is ammonia. To produce

urea, ammonia is used along with carbon dioxide. To produce ammonium nitrate, ammonia is

combined with nitric acid. Further energy is provided in the form of steam and electricity. A

large amount of energy is required for ammonia synthesis. 80 percent of the energy consumption

for nitrogenous fertilizers is used in the synthesis of ammonia. In addition to this, energy is also

required for the conversion of ammonia into other fertilizers.

Pak-American fertilizers, established in 1950s, used the gasification technology for the

production of ammonia and other ammonia compounds. But later when gas reserves were

discovered at Sui and Mari, fertilizer production started using natural gas, which was both

efficient and economical. Most of the urea plants today use natural gas as feedstock. The plantswhich use natural gas as feedstock are more efficient than those that use other feedstock, thus

they operate at a relatively lower cost.

The demand for natural gas in Pakistan is high because it serves as the basic raw material for two

industries: fertilizer and electricity generation. The government sells natural gas to the fertilizer

industry at subsidized rates. This has created many problems for the government because it leads

to huge losses on the governments part. The natural gas that is used as feedstock for urea

production is sold at 50% of the market value. The government provides this subsidy in order tohelp the farmers and increase the agricultural output of the country. However, it has a negative

impact on the production. The farmers in Pakistan are uneducated and poor. Since urea is

available in the market at low rates, gas subsidy greatly reduces the cost thus the price; they use

excessive urea on their lands without conducting proper tests. This not only has a detrimental

effect on the soil but it also has health hazards. The excessive fertilizers may run off into streams

and canals and thus harm those who consume that water.

However due to the prevalent gas shortages, there has been a reduction not only in the gas

subsidy but also in the gas supply. As a result of this, the urea price has hiked by 43% over the

past one year. The hike in the fertilizer prices in the country, from Rs 750 to Rs 1800/bag, is way

more than the cumulative price hikes for the past 32 years. This hike is attributed to the limited

supply of feedstock gas.


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FERTILIZER RESEARCH AND DEVELOPMENT

In 1952, phosphorus deficiency was reported for the first time in the country. As a result of this a

Soil Fertility Research and Fertilizer Popularizing Organization was set up in 1958 under the

FAO auspices. It was under this program that intensive experiments were done on the field to

create awareness about how nitrogen, potassium and phosphorus affect soil fertility and thus crop

production. This not only led to the wide use of fertilizers on the farms but also increased

investments in the fertilizer industry. In 1969, a zinc deficiency was found in rice and then later

boron deficiency in cotton was reported in 1970.

Once the various nutrient deficiencies were identified, the focus was then shifted to the balanced

use of fertilizer, integrating mineral fertilizer with organic sources, fertilizer recommendations

and soil test crop response for optimum fertilizer used based on how deficient the soil is. With

the passage of time policies began to change as well. In 1978 the government established the

National Fertilizer Development Centre, with the objective to study the issues of the fertilizer

industry. This company was involved in policy planning, marketing, monitoring supply and

demand of fertilizer, and fertilizer research and training.

Once the soil analysis was done, fertilizer research trials were carried out on the fields. Data on

the use of balanced fertilizer was obtained. Even today, NFDC maintains a huge database andissues monthly reports addressing all the issues of the fertilizer industry. It also provides the

farmers, the industry and the various research institutes with a platform where they can discus

and deliberate on the various issues that the industry is facing.

The focus of fertilizer research and development has is now focused on increased crop

productivity, improvement of efficiency and minimizing the impact on the environment. The

main goal is to attain sustainable agricultural growth that can match the 2.2% growth in the

countrys population per year and also promote economic growth.


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NATIONAL FERTLIZER CORPORATION (NFC)

The corporation with the help of subsidies provides fertilizers and agronomic services to

consumers. The product mix consists of calcium ammonium nitrate, urea, nitro phosphate, single

super phosphate and zinc sulphate in their plats situates at Multan, Iskanderabad, Jaranwala and

Hartipur under the banner of KISSAN fertilizer. The company was incorporated in 1972 at

Lahore. NFC is a successor of PIDC along with the local plant and expansion Projects of Pak-

Arab Fertilizer was added to the bunch.

Since the year 1974, in addition to the existing companies taken over from PIDC, NFC has

launched six new companies via Pak-Suzuki Fertilizer Limited for the Ammonia/Urea complex

at MirpurMathelo, Sindh, Pak-China Fertilizer Pvt Limited at Haripur, NWFP, National

Fertilizer Marketing in Punjab and a Fertilizer Research Institute close to Faisalabad. The NFCstechnical training Institute was situated in Multan and Hazara Phosphate Fertilizers Pvt. Limited

in Haripur NWFP. Another measure taken is building storage locations to reduce the existing

pressure on the transportation system and ensure the constant supply of fertilizer in consumption

areas.

GOVERNMENT POLICIES & SUBSIDIES

FERTILIZER POLICY 2001

Fertilizer policy initially announced on the 1st of July 2001which offers investors 70 cents per

mm but much lesser than the Middle Eastern benchmark. The withdrawal of prevalent subsidies

would begin from July 2001 beginning from 5 percent going up to 15 percent by the year 2006.

Fearing the shortfall of fertilizer its expected that the import bill would increase to about 1.75

billion dollars in the next 10 years requiring an investment of at least one billion dollars.

Many experts believe such a policy will help the industry, they believe on the contrary it will

discourage many local and foreign investment as well as bringing in inflation to the industry. The

government has also announced a 50 percent increase in gas tariff for the next 5 years starting off

at 7.5 percent going up to 15 percent gradually making the existing industry unattractive.

As the production of agriculture increases so will the demand of fertilizer proportionately.

Current production is approximately 4.2 million tonnes while consumption is close to 4.4 million


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tones which will gradually increase to 6.3 million tones. Removal of subsidy from gas will have

a detrimental effect on the industry but it is said this was done under IMF pressure which solely

the responsibility of the government.

This is was the reason for the low per acre yield, and the increase in the prices will furtherincrease the inefficiency in the industry. Although the new policy is in conformity with many

economic objectives, the problem is increasing demand and growing shortage. Fertilizer is an

essential input to ensure substantial output of all the wide range of crops which still needs to be

fully developed; this is also because scientific farming methods have not been explored which

could increase output.

Government intervention in price control may help boost availability of fertilizers to the farmers.

This would basically mean increasing local produce and reducing dependency on imports, this

again is a problem with the prevalent political and financial situation of the country.

Recently to discuss the problems of the fertilizer policy of 2001 by the official of the ministries

of finance, commerce, industries, Board of Investment and the chairman of CBR. The panel in

question concluded that setting up the industries locally would not be feasible due to the highly

lucrative incentives offered by the Middle Eastern countries.

NATIONAL GAS ALLOCATION AND MANAGEMENT POLICY 2005

Pakistan has a very limited gas deposits. Reserves stand at 32 tcf and the reserves to production

ratio is 3.7 BCFD in 23 years. With increasing population the energy supply mix has significant

increase by 2005. The government of Pakistan has concentrated on enhancing gas supplies

through zealous exploration efforts and importing natural gas and well as LNG from neighboring

countries.

Federal government on the other hand is making concerned efforts to increase supplies to meet

demand and this can be done by establishing a natural gas allocation and management plan topromote efficient utilization of a depleting resource. The following policies were recommended:

CURRENT POSITION

The pipelines that provide an efficient system of distribution, industrial and WAPDA/KESC

plants take about 52 percent load while only 15.6 percent share is allocated for domestic usage.


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Of the independent load fertilizer plants of 8.2 percent, at the present the load of peak winter are

met through the following management programme, which includes consumers getting a

continuous supply, fertilizer plans included. The power plants get gas after meeting the

requirements of domestic, commercial and other industrial units. Cement units were produced

when required.

GAS ALLOCATION CRITERIA

The provision for gas is going to follow a few criterias domestic supply will be determined by

yearly targets by the federal government; this will also include the consumers to the general

industrial sector depending on the supply, demand and usage patterns. Gas supply to the power

sector will be regulated by GSA under some utility company. For the purpose of new power

generation only plants which have a combined cycle dual fired technology to ensure constant

supply. These power plants will have capacity up to 50 MW which employ combined cycle, in

the case of industrial units the pipelines if required will be a cost to the sponsor. If the nature of

the project is strategic in nature then priority will be given. Payments will be made to the Federal

Government according to the GSA formula.

PROPOSED LOAD MANAGEMENT POLICY

To ensure the optimum use of gas this will lead to development the most priority will be given to

Domestic and commercial services while the least being given to the cement sector, in the

independent network the fertilizers plant get the most priority. The Federal Government plans to

make constant efforts to find a consistent supply of gas, to meet the growing demands the import

plans will be put into fast track, in the meantime the import of LNG will be utilized to regulate

supply in the market in the south and then eventually diverted to the north.

NETWORK EXTENSION

For the supply of gas to be economical in the backward areas , which dont really meet the cost

criteria prescribed by the Federal Government and Provincial Government will make theresources available to the extent over and above the limit. Other measures include conducting

expeditious lifting of gas from new fields to meet the urgent needs of the domestic market, many

of the utility companies will be given permission to construct and operate gas pipelines which

connect these fields to the transmission systems pending the approval of the Government. OGRA

will provide limits to all GSA submitted licenses for approval.


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IMPLEMENTATION OF POLICY

The implementation of all the above mentioned policies will be done by committee that will

review the allocation and management policy put in place in a document regularly.

APPLICABLITY AND EFFECT OF THE POLICY

The policy will be applicable to all consumer connected to the gas and independent network, the

policy will basically supersede all the previous issued by the Federal Government. OGRA will

look to amend the terms of license where necessary to make the policy as effective as it can be.

INDUSTRY TRENDS

As can be seen from the graph above, the fertilizer sales overall have increased over the past two

decades. There have been various ups and downs, but overall the demand and use has increased.

The dip in sales of fertilizers, both nitrogen and phosphates, has been because of the 2010 floods.

One of the main reasons for increase in the usage is the unbalanced use of fertilizers, which is

illustrated in the following picture.


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This picture shows that with the exception of nitrogen, there has been over usage of fertilizer in

Pakistan. This is mainly because of the fact that the farmers are not aware of how much fertilizer

to use on their land. This has led to increased demand levels.

Imports of phosphates have always been high because there is only one phosphate producing

facility in the country. Different companies import different volumes of phosphates.

The reduction in 2008 was because of the global economic crisis that prevailed at that time.

Imports picked up in the year 2009, with Engro Fertilizers importing 28% DAP. Engro Fertilizer

is one of the major providers of imported DAP in the country. In 2010, Engro imported 55% of

the total volume imported, but due to the floods the total volume of DAP imported was less than

the amount imported in 2009.

There is a significant difference in the local and international prices of urea. Both the prices have

been showing the same trends, but the difference in the amounts is there.


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Since December 2010, there has been a 20% increase in the local urea prices owing to the gas

curtailment problem that is prevailing in the country. International urea prices however fell from

December 2010 to March 2011. In April, however, the prices started rising again.

Similarly the DAP prices have been on the rise both locally and internationally.

The international DAP prices rose by 11% steadily in the first quarter of the year 2011. But the

local price hike was 30% from December 2010 to March 2011. Again the major reason for the

increased local prices was the gas curtailment issues.


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DEMAND SUPPLY ANALYSIS

FACTORS AFFECTING DEMAND

There are various different factors that affect the demand for fertilizer in Pakistan. As stated

before, Pakistan is an agrarian economy where agriculture and livestock accounts for about 22%

of the GDP. Agriculture is a means of support and sustenance for our country. But the major

problem that we face is that the soil in Pakistan is deficient in nutrients. Traditionally farmers

used cow dung and animal manure. But as production increased, the crops kept on exhausting the

soil and the manure was unable to provide the required nutrients. Even though animal manure is

a cheaper substitute for fertilizer, it is unable to provide the soil with the necessary nutrients that

are required for a healthy commercial crop. Thus the demand for fertilizers increased over time.

Pakistan has a population growth rate of 2.2% per annum. This means that every year there are

more people who need a nutritional diet. This means that every year the country has to produce

more food crops to feed the increasing population. Agricultural products are compliments to

fertilizers. When their demand/usage increases, the demand for fertilizers increases automatically

because fertilizers are an input for the production of these crops.

Natural calamities affect the amount of farming that is being done in a country, thus they also

affect the demand for fertilizers. Pakistan was hit by the worst floods in 2010 and 2011. After the

2010 floods, approximately 1/5thof the countrys land was underwater. It affected about 17

million acres of fertile crop land and destroyed crops too. This led to a decrease in demand for

fertilizer. The demand was expected to rise in 2011 but the country was once again hit by floods

in 2011. This time the province of Sindh was badly affected, with Badin being the worse of them

all. It destroyed about 4.5 million acres of land. As a result of these two consecutive floods, a lot

of cultivable land has been underwater. Thus the demand for fertilizer has been less.

The government has been providing subsidies on locally produced fertilizers so that the poor

farmers are also able to afford them. Since urea is available at low prices and the farmers are

mostly uneducated, they use excess urea. This does increase the demand but it is not healthy for

the soil and it leads to further nutrient degradation. This in turn increases the demand for

fertilizer. So the excess use of fertilizer by the farmers actually triggers a cyclical process where

the demand for fertilizers increases.


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Fertilizer is not a seasonal product. The demand for fertilizer is high in Pakistan all year round.

In our country, crops are sown twice a year. Once in the winters, rabi crops, and once in the

summers/rainy season, kharif crops. This ensures that fertilizers are used all year round.

CONSUMPTION PATTERNS

Crop-wise fertilizer consumption1

The above given graph shows the crop-wise consumption of fertilizers over the years. The

figures given are in thousand nutrient tonnes. As is obvious from the graph, the consumption of

fertilizer has increased over the years. Although the demand for fertilizer did fall in 2010 due tothe floods, overall the consumption has increased because of the increasing population. This

increase in population is followed by increase in food cultivation, thus an increase in fertilizer

usage. It can also be observed that there have been no extreme changes in the consumption

patterns over the years. The crop-wise consumption is showing a smooth growth over the past 5

years or so. There have been no drastic changes in the overall consumption of fertilizers.

1http://www.statpak.gov.pk/fbs/sites/default/files/other/yearbook2011/AGRICULTURE/1-12.pdf

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SugarcaneOthers
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IMPORTS

Even though the demand and consumption of fertilizers has been increasing over the years,

Pakistan is still not self sufficient in fertilizers. Every year, a huge amount of fertilizers are

imported so as to meet the local demand.

2

3

2http://82.71.141.50/_secondary/fmb-group/fmb-documents/archived/431Engro%20EXIMP%20-%20Eqan%20Ali%20Khan%20-%20Pakistan%20Fertilizers.pdf3http://www.nfdc.gov.pk/Web-Page%20Updating/imports.htm

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Urea Import ('000 Tonnes)

Urea Import
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The above figures show that Pakistan imports a very low volume of urea. This is because most of

the urea is produced locally and is available to the farmers at highly subsidized rates. Engros

new plant, which is considered to be the largest in the world, has a production capacity of 1.3

million tonnes of urea per year. However this plant has been facing gas curtailments as a result of

which it hasnt been operating on full capacity. The main reason for urea import is that the local

production is unable to meet the local demand. This gap is therefore filled by the urea imports.

Even today, despite the Engro urea plant, local demand for urea is not met. Trading corporation

of Pakistan is already importing 0.7 million tonnes of urea and is expected to import 0.2 million

tonnes more of urea.

4

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DAP Imports ('000 Tonnes)

DAP Imports
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Most of the local phosphate demand is met through imports. This is because production of DAP

is a costly process in which all the raw materials are also imported. As a result the final product

is more expensive and farmers do not buy it. DAP helps the plants in water usage and seed

germination therefore reduced usage of DAP will affect the crop production. It is because of this

reason that DAP is imported in such huge quantities despite the high prices. DAP imports fell

drastically in FY2008-09, this is because of a price hike in the international DAP prices.

However imports resumed to the previous level in FY 2009-10. Over the years however, local

DAP production has increased. It increased by 22% in the period July 2010July 2011. As a

result of this, the DAP imports declined by 29% during the same period.

FACTORS AFFECTING SUPPLY

Just like any other commodity, a large number of factors influence the supply of fertilizers in

Pakistan. The main factor that affects the supply of fertilizers in Pakistan is the price of inputs.

The raw materials for urea are locally available. This makes the production of urea a less costly

project and thus more amount of urea is manufactured locally and a very small volume is

imported. This is not the case for DAP. The raw materials for DAP, mainly phosphoric acid, has

to be imported. This makes the DAP production very costly. Thus a very small volume of DAP

is produced locally and most of it is imported. Another very vital raw material for the production

of fertilizer is feedstock gas. The government previously provided manufacturers the feedstock

gas at subsidized rates. For urea production feedstock gas was subsidized at 50% of the market

price. However the recent gas curtailment due to a shortage is proving to be very difficult for the

manufacturers. As a result of this curtailment, not only is the local production suffering but

consequently the prices are also rising. This curtailment has been affecting the supply and has led

to increased imports of urea.

Another factor that affects supply is the technology used in the production of fertilizers.

Previously Pakistan didnt have any local DAP producing facility. However with the FFBL DAP

plant, the country has been able to meet some of its local demand. DAP is imported even today,

but nearly half of the demand is met by local production. Similarly the Engro urea plant at

Dharki is capable of producing 1.3 million tonnes of urea per annum. It is the worlds largest

5http://www.nfdc.gov.pk/Web-Page%20Updating/imports.htm
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single-train ammonia urea plant. If this plant operates at full capacity, we would be self sufficient

in urea. But due to the gas shortages, this has not been possible.

PORTERS FIVE FORCES ANALYSIS

RIVALRY

The fixed costs in the fertilizer industry are too high. In addition to this, the products that are

supplied in the market are mostly the same. There arent many perceived differences between the

different brands. Price competition in the fertilizer industry is virtually impossible because the

prices of both urea and DAP are fixed by the government. Whichever brand you buy, a bag of

urea will cost you the same. The little rivalry that exists in the industry is between Engro

Fertilizers and Fauji Fertilizer Bin Qasim. This is mainly because FFBL is the sole manufacturer

of DAP in the country. Engro Fertilizers doesnt manufacture DAP locally, but has been

importing and selling DAP since 1996. It is because of this that some amount of rivalry exists

between these two firms. Other than that the level of rivalry in the industry is very low.

THREAT OF NEW ENTRANTS

The threat of new entrants in this industry is very low. The main reason behind this non-existent

threat is the high barriers to entry. The fixed costs in this industry are very high. First and

foremost is the cost of feedstock gas. Feedstock gas has been subsidized by the government in

order to encourage local production of fertilizers. However since the past year the country has

been facing gas shortages. As a result of this, gas supply to the fertilizer plants has been

curtailed. Because of the gas shortage prevailing in the country, it is difficult and time

consuming to obtain the approval from the government for gas allocation.

In addition to the gas issue, production of DAP is very costly. For local production of DAP, raw

materials have to be imported and thus the cost of production rises. If you import manufactured

DAP and then sell it in the market, the costs associated with the import of DAP are also very

high.

Thirdly the kind of infrastructure that is required for the manufacturing of fertilizer is very

costly. And also the existing companies have been operating since along time in Pakistan and
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they have created a brand name for themselves. In such a situation, it is very difficult for a new

company to start operations in the market and stay profitable.

POWER OF SUPPLIERS

The major raw material for the industry is natural gas. Gas prices and subsidies are regulated by

the government. The gas agreements are long term and are signed way in advance. So under

normal conditions these agreements provide stability and the supplier power is low. The situation

in recent times is however different. The country has been facing gas shortages. As a result of

which the gas supply to the fertilizer production plants has been curtailed. Without a gas supply,

the fertilizer plant is virtually useless because fertilizer production cant take place without the

gas.

The fertilizer firms do not have the ability to set the market prices or even influence them. The

market prices for fertilizers are set by the government and all the different brands in the market

have to sell at that price. Owing to all these factors, the supplier power in the fertilizer industry is

very low.

THREAT OF SUBSTITUTES

There is virtually no threat of substitutes in the industry. The Pakistani soil is deficient in

nutrients. The only other substitutes to commercial fertilizers are natural fertilizers like animal

manure. These are not suitable for commercial production. Even crop rotation doesnt replenish

the soil nutrients to the required level. Thus in any case, the farmers have to use fertilizers if they

want a good outcome.

BARGAINING POWER OF BUYERS

The buyers do not have any alternate available for urea. Thus they have to buy urea irrespective

of the increasing prices. Recently the prices of urea have increased due to the gas curtailment

issue. But this has not affected the sales of urea because the urea requirement is the same and

there is no alternative available.

Farmers in Pakistan treat urea as an alternative for DAP. Although these two fertilizers have

different uses, the uneducated farmers do not know this difference. When the DAP prices get
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high, buyers switch from DAP to urea. Thus in the urea market, the buyer power is very low.

However in the DAP market, the buyer power is relatively higher.

ISSUES & PROBLEMS FACED BY THE INDUSTRYThe major problem that the fertilizer industry faces is the reduced supply of gas. The government

of Pakistan has been providing the fertilizer manufacturers with a subsidy on gas. This reduced

the production costs and thus urea was sold in the market at prices which were very low than the

international prices. However due to a domestic gas shortage, the government has now reduced

the supply of feedstock gas to the fertilizer manufacturers. This gas curtailment is especially

applicable to the plants based on the Sui Gas network. Around 46% of the countrys urea

producing capacity is Sui based. The Sui based plants are likely to face a 20% gas curtailment

and those on the Mari network are likely to face a 12% curtailment. As a result of this fertilizer

production suffered greatly in the country. This swelled the price of fertilizers, which went from

Rs. 750/bag to Rs. 1800/bag in just 18 months. If there is an additional gas shortage of 15 days a

month, it is expected that the production will fall by 0.9 million tonnes.

As a result of this decline in production, increased amounts of urea had to be imported. Only

recently the Trading Corporation of Pakistan has approved import of 0.7 million tonnes of urea.

That too after the Engro plant at Dharki had started functioning, which was supposed to make

Pakistan self sufficient in urea. The imports increase our foreign exchange bills and affect the

balance of payments.

DAP is only produced by Fauji Fertilizer Bin Qasim locally. Apart from that, the rest of the local

demand for DAP is met through imports. This increases the countrys import bills by a

considerable amount. The raw materials for DAP production are very costly and the government

does not provide any incentives for local DAP producers. These two factors, when coupled

together, discourage local companies from setting up DAP production plants.

At the beginning of the third quarter of 2011, international DAP prices went up by 4%. Since

then the DAP margins have declined to $281/MT from $303/MT. the main reason for these

reduced margins was the depreciating Pakistani rupee. If the international prices keep on rising
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and the rupee keeps on depreciating, the profit margin that the companies have on the sale of

Dap will keep on reducing.

The government imposed high taxes on key agriculture inputs which are believed to raise the

prices of commodities by 5-6% in the year 2012. After the sharp price hikes that were observedin the 1st quarter of FY 2011, it is believed that the GST-led price hikes will limit the price

flexibility for domestic producers.

Another main issue that the industry faces is that the end consumers of fertilizers are mostly

uneducated. Pakistan does not have a formal farmer education system and most of the practices

that they follow have been taught from generations. The farmers are not aware of the new

farming techniques. They are not aware of which nutrients their farm soil is deficient in and

which fertilizer product to use and exactly how much to use. Since urea is subsidized, the

farmers end up using increased amounts of urea on soils that doesnt necessarily need that much

of fertilizer. As a result, the health of the soil deteriorates and to replenish that more fertilizer is

required. The imbalanced use of fertilizers leads to low crop yield. This increases the demand for

fertilizer and since production is falling, it has to be met through imports.

Amidst the fertilizer shortage and already soaring prices, the sector is also victim to black

marketing. Retailers sell fertilizers at prices higher than the ones agreed upon by the companies.

This has become a burden for the already poor farmers of the country.

SOLUTIONS AND RECOMMENDATIONS

First and the most important thing to be done is tackle the problem of gas shortage. Without

feedstock gas, the manufacturing of fertilizer is impossible. Thus to tackle this problem

geological surveys should be conducted so that new gas reserves can be exploited. Gas reserves

are present at Murree, Kohlu, Sanghar and Badin but no initiatives are taken by the government

to explore the reserves. If substitutes for natural gas are used for domestic purposes and in other

industries, more natural gas can be supplied to the fertilizer plants. Coal can be used instead of

gas in a power plant. Similarly cow dung, solid waste, industrial waste and rice husk can be used

to produce bio gas. This bio gas can be used for domestic purposes and as vehicle fuel. All of
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this combined will help take the load off natural gas and it can therefore be used in the fertilizer

plants.

In addition to this, steps should be taken to educate the farmers so that they use the correct

quantity and type of fertilizers for their soil. Once the fertilizer use is balanced, not only will theproduct yield be increased but also fewer fertilizers will be used. This would help reduce imports

to some extent.

The government should provide incentives to the local manufacturers to produce DAP. This will

help reduce the import bills to some extent. And in addition to this it will help fill the DAP

demand supply gap as well.

To deal with the black marketing issue, Punjab Agriculture Minister demanded the companies to

print the fertilizer prices on all fertilizer bags. This will reduce black marketing and will prevent

retailers from overcharging the poor farmers.

FUTURE OUTLOOK

Once Pakistan deals with the gas shortage problem, it is expected that the country will be self

sufficient in urea. This will reduce the increased imports of urea that we have seen recently. Due

to the capacity expansion, Engros market share will rise to 35%. Once this issue is solved, it

would help attract investments to the fertilizer sector and will help the industry grow.

The fertilizer demand did decrease in the aftermath of the 2010 floods, but it is expected that the

demand will rise. This has been evident in the history of the country when Pakistan was hit by

floods and the fertilizer demand picked up after some time.
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Assessment.pdf

3. http://82.71.141.50/_secondary/fmb-group/fmb-documents/archived/431Engro%20EXIMP%20-%20Eqan%20Ali%20Khan%20-

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bijarani.html

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Fertilizer Industry - Roydon D'Mello

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