A recent hike in gas prices for the fertiliser manufacturers using gas from the Sui Northern Gas Pipelines Limited (SNGP) and Sui Southern Gas Company (SSGC) networks has impacted 60% of the industry’s production capacity.
This decision was aligned with the International Monetary Fund’s (IMF) demands to address the rising gas circular debt and remove subsidies, however, it created an anomaly in the fertiliser sector.
As per the Pakistan Institute of Development Economics (PIDE), the federal government spends approximately Rs 200 billion annually on fertiliser subsidies to maintain lower prices.
The new feed gas rate for SNGP and SSGC has escalated from Rs580/mmbtu to Rs1,597/mmbtu. In contrast, rates for fertiliser companies relying on gas from the Mari network remain unchanged at Rs580/mmbtu.
Notably affected companies include Engro Fertilizers (EFERT), Fauji Fertilizer Bin Qasim, and Agritech, which operate within the SNGP and SSGC networks.
Meanwhile, Fauji Fertilizer Company (FFC) and Fatima Fertilizer, which use the Mari network, are not subject to the price increase.
Following the gas price adjustment, Fauji Fertilizer Bin Qasim announced a significant urea price increase to Rs5,331 per bag.
Engro Fertilizers is anticipated to reveal its new urea prices shortly, as the new gas price becomes effective from March 1st.
Urea prices for both Engro Fertilizers and Fauji Fertilizer are currently at Rs3,767 per bag, 30% lower than Fauji Fertilizer Bin Qasim price. However, in the market, Urea is being sold at around Rs5,000 per bag, which is higher than the prices of EFERT and FFC.
According to a note by Topline Pakistan Research, the market has observed a discrepancy in urea pricing, with dealers and middlemen reportedly pocketing significant margins over the listed prices of companies like Engro Fertilizers and Fauji Fertilizer Company.
The price disparity benefits companies on the Mari network, potentially leading to an incremental annual profit for Fauji Fertilizer Company if the current situation persists.
However, equalizing gas rates across the industry could eliminate this distortion, aligning the margins of companies like Engro Fertilizers with those on the Mari network and stabilising urea prices for farmers while generating additional government revenues.
The government faces a critical decision to address this industry anomaly and adhere to IMF recommendations for subsidy elimination, which could have far-reaching effects on the fertiliser sector and agricultural pricing.
