Urea Price Increase Anticipated Prior to Tariff Hike

Fauji Fertiliser Company (FFC) has announced an increase in the price of urea by Rs634 to Rs4,286 per 50kg bag. This brings FFC’s rates closer to those of other branded products in the market, ahead of a potential hike in feed gas tariff by the government.

Earlier, FFC was selling urea at Rs3,652 per bag, while other manufacturers and marketers were selling it in the range of Rs4,300-5,500 per bag, according to Arif Habib Limited (AHL).

This price advantage for FFC came after the government left the feed gas tariff unchanged at Rs580 per million British thermal units (mmBtu) in February. However, the tariff was raised to Rs1,597 per mmBtu for other manufacturers receiving gas from Sui Southern Gas Company and Sui Northern Gas Pipelines Limited.

Government Considering Increase in Feed Gas Price for FFC

According to Tahir Abbas, AHL Head of Research, market speculation suggests that the government is considering increasing the feed gas price for FFC to Rs1,597 per mmBtu. This is being done to end the gas pricing anomaly and create a level playing field for all fertilizer manufacturers in the country.

This increase in FFC’s gas price will help stabilize the price of urea, as the disparity in prices was causing distortion in the market.

FFBL Revises Urea Price Down

In contrast, Fauji Fertiliser Bin Qasim Limited (FFBL) has revised its urea price down by Rs783 to Rs4,336 per bag. This decision was made because FFBL failed to attract fresh buying from farmers at the elevated rate.

Previously, FFBL and Engro Fertilisers increased urea prices from around Rs2,500 per bag after the government halted subsidized gas supply. The government had raised the feed gas price to Rs1,597 per mmBtu from Rs580 per mmBtu in February. Engro Fertilisers, on the other hand, has maintained its price at Rs4,435 per bag.

Price Adjustment and Farmers

Fertilizer manufacturers adjusted prices to keep their sales robust with fair profit margins ahead of the Kharif crop sowing season. However, Tahir Abbas believes that the price adjustment may remain neutral for farmers, as they were already buying urea at around Rs5,000 per bag due to stockpiling and smuggling to countries along Pakistan’s border.

Smugglers have been selling urea in markets abroad at significant profit margins, as the commodity was available at a subsidized price of Rs2,500 in Pakistan.

Government’s Efforts to Eliminate Subsidized Gas Supply

The government has revised gas tariff upwards twice for fertilizer companies since November 2023. This is to end the smuggling of urea and meet a major condition of the International Monetary Fund (IMF). The IMF has called for an end to the subsidized gas supply to fertilizer manufacturers.

According to Topline Research, the increase in gas tariff for FFC to match industry levels would enable the government to generate additional revenue of Rs80-100 billion. The research suggests that the government should equalize gas rates for the entire industry to avoid distortion and eliminate subsidies as suggested by the IMF.

FFBL has responded to the recent gas tariff increase and the lifting of imported urea by the government by raising its urea price to Rs5,489 per bag.

In the market, FFC’s urea is priced at Rs3,767 per bag, while Engro Fertilisers increased its price to Rs4,435 per bag after the gas tariff hike.

The gas price discrepancy has caused instability in the fertilizer market, with excessive profiteering and hoarding by middlemen. This has pushed urea prices to around Rs5,000 per bag for farmers.

Conclusion

The recent price adjustments in the fertilizer industry aim to create a level playing field and stabilize urea prices for farmers. The government’s efforts to eliminate subsidized gas supply and equalize gas rates have the potential to generate additional revenue while curbing smuggling activities. With farmers applying the required amount of urea to their summer crops, a bumper harvest of key commodities is expected.