The State Bank of Pakistan (SBP) has urged the government to eliminate price gap between locally produced and imported urea as domestic producers are facing trouble in selling their stocks, besides this is creating incentives for black-marketing and market manipulation. State Bank Pakistan, in its recent report on fertiliser industry, has shown concern over the high import of urea, which, according to SBP, was not timely.
According to SBP, there has been a strange turn of events in the domestic fertiliser industry over the past few months, as the shortage of urea in the Kharif season of 2011 has morphed into a glut this year, when opening inventory for April 2012 at around 800,000 tons of urea more than a month of sales for the entire industry.
In addition, recently Economic Co-ordination Committee (ECC) of the Cabinet has also decided to import more urea for domestic consumption despite the facts that country has a sufficient stock of urea. As per decision of ECC, another 300,000 tons of urea is due to be imported for this year's Kharif season, when the domestic manufacturers are struggling to sell their produced urea.
SBP said that domestic urea industry is facing many challenges including gas shortage and extra burden of Gas Infrastructure Development Cess (GIDC). These both things are badly hurting the cost and sales of urea. "The cost of natural gas to old fertiliser plants rose by around 200 percent, after the imposition of the GIDC in December 2011, although manufacturers partially passed on this increase in cost in the form of higher prices and initially it did not affect demand", it added. However, following the collapse in some of leading agricultural products like cotton and potato and the expected reduction in wheat prices, farmers held off on buying fertiliser at the end of this Rabi season, resulted demand for urea has gradually fallen.
"For the Rabi season, the government had already imported 1.2 million tons of urea and the import itself was ill-timed as its shipment was started in at the end of December 2011, the month during which demand for fertiliser had historically been the greatest and after that gradually declined", SBP pointed out.
Furthermore, the government's official sale price for imported urea was Rs 1,300 per bag earlier in the fiscal year, which was raised to Rs 1,600 per bag in mid-March 2012 on the demand of ministry of finance as the huge amount was being paid on account of subsidy. While, price of domestic produced urea still stood at Rs 1,700 per bag after a cut of Rs 50 per bag.
Sale of imported price at lower price is effectively undercut the local industry and because of price difference domestic manufacturers were priced out of the market at the end of the Rabi season and secondly the price arbitrage created incentives for black-marketing and market manipulation, SBP said. In the middle of April 2012, when the country has surplus urea, the government is importing of another quantity of 300,000 tons of urea for the Kharif season, another frustration of the fertiliser industry, SBP mentioned.