fertilizer policy

8/4/2019 Fertilizer Policy

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Ministry of Industries and Production announced Fertilizer Policy 2001. NFDC

supplied required information and technical support in the formulation of this

policy. For the information of national and foreign investors, policy planners and

general user this policy in toto is posted on NFDC website.

FERTILIZER POLICY 2001Whereas the Fertilizer Policy announced by the Government of Pakistan in 1989 wassuccessful, assuring reasonable prices of fertilizer to farmers below import price and inbringing substantive investment to enhance domestic production and has completed itsstipulated time frame, and whereas it is felt that further investment in fertilizer productionis required keeping in view the importance of fertilizers in increasing the countrysagricultural output, a need is felt to review and update the policy to encourage new andexisting investors to come forward to invest. Accordingly, the following policy isadopted, after due authorization by the Cabinet, with effect from 1 st July, 2001:

1. EXISTING PLANTS

1.1. a) To enable local fertilizer price to stay below imported fertilizer prices, theescalation of existing feed gas prices will be as follows:

Date Annual Increase%

1.7.01 Nil1.7.02 5.01.7.03 7.51.7.04 10.01.7.05 12.51.7.06 15.0

b) Therefore, the price is to be $1.10/MMBTU or prevailing Middle East pricedetermined in accordance with 2.1.2 whichever is higher, only for thoseexisting investors who bring in new plant (minimum Capacity 0.5MT/year) under clause 2.

c) Fuel gas price will be the same as for other industrial consumers in thecountry. Fuel gas will continue to be defined as gas which is used forgeneration of electricity and steam and for usage in housing colonies.

d) Concessional feed gas allowed under the 1989 Fertilizer Policy to

companies that undertook expansion will be continued until their 10 yearperiod is exhausted. Thereafter the feed gas price will be same as in 1.1(a)and (b).

2. NEW INVESTMENT

2.1 NATURAL GAS


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2.1.1 It is the intent of this policy to provide investors in new fertilizerplants in Pakistan a gas price that enables them to compete in thedomestic market with fertilizer exporters of the Middle East so thatindigenous production is able to support the agricultural sectorsrequirement by fulfilling fertilizer demand.

2.1.2 The price of feed gas will be the Middle Eastern Price prevailing onthe date of signing of the GSA or $0.77/MMBTU which ever ishigher (less the discount of 10% mentioned in 2.1.3) and shallremain fixed at such price till the expiry of 10 years from the dateof commissioning. The price will be determined by the GasRegulatory Authority of Pakistan, from the published internationaldata, in dollar terms, on the principle of general parity with theprice prevailing in Middle East.

2.1.3 A discount of 10% will be allowed on such determined price as at

2.1.2 to facilitate new investment. The discount price i.e. the pricefixed as per 2.1.2 and 2.1.3 will remain fixed, for a period of 10years from the date of commissioning, in dollar terms. The rupeeparity will be determined as defined in para 2.1.6. This price will be inclusive of all taxes, duties, levies, fees and chargeswheresoever, whether local, federal or provincial. However, GSTor similar duty may be imposed on such determined price providedit is adjusted against GST, payable on the fertilizer produced.

2.1.4 The investor may avail this opportunity to sign GSA (Gas SalesAgreement) as detailed in 2.1.2 & 2.1.3 by 30th June, 2005.

2.1.5 Fuel gas prices shall continue to be treated as at par with otherIndustrial consumers.

2.1.6 For billing purposes, the price fixed in dollars will be calculated inPak Rupees, at the average inter bank rate. The average inter bankrate shall be fixed twice in a year i.e. on 1st January, and 1st July,based on the average of the previous six months daily inter bankrate.

2.1.7 Gas Companies will build adequate safeguards in the GSA to ensure

that the investor proceeds without delay in installing the plantaftersigning of the GSA, so as not to pre-empt the use of available gasto another investor. The Government will ensure that GasCompanies donot cause undue delays in signing of GSA.


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2.1.8 Gas will be allocated to new fertilizer plants on the principle of firstcome, first served. Recognizing the expected growth in fertilizerdemand, the importance of steady supply and the suitability ofMari Gas production, the government has decided to dedicate theshallow

reservoir of Mari gas field to the Fertilizer Industry while the newdeep reservoir is to be developed for power sector as it is suitableforpower generation.

2.2 IMPORT AND LOCAL MANUFACTURE OF PLANTS

2.2.1 The Government of Pakistan encourages investment and anumber of concessions are available as per the Investment Policyand applicable Tariff Structure. Investors may avail theseconcessions with reference to import and local manufacture of

plant, equipment and machinery, including deferred duty payablethrough customs debentures.

2.3 IMPORT OF SECOND HAND PLANT

2.3.1 Investors will be allowed to relocate second hand plant,equipment and machinery, with the same concession/exemption asapplicable to new plants.

2.4 EXPANSION/BMR/DE-BOTTLENECKING

2.4.1.1 If an investor undertakes an expansion, major BMR or de-bottlenecking of an existing plant, which results in increase in theproduction capacity of the plant, such additional feed gas shall betreated at par with a new plant for 5 years for purposes ofconcessions/exemptions outlined in 2.1.2, 2.1.3, 2.1.4, 2.1.5 and2.2.1, 2.2.2 and 2.3.

2.5 EQUAL TREATMENT

All the fertilizer producers, domestic and foreign, public andprivate will be treated equally in commercial, fiscal, corporate and

contractual matters.

3. PHOSPHATIC FERTILIZER

3.1 Considering the importance of Phosphatic Fertilizer, the Government plans to continue to encourage its local production. For saidpurpose, the following measures shall be taken:


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3.1.1 Rock phosphate and phosphoric acid importable by manufacturers offertilizer shall remain importable free of custom duty.

4. N.P.K.

4.1.1 All raw materials required for NPK production i.e. Di-AmmoniaPhosphate (DAP), Mono-Ammonia Phosphate (MAP), TripleSupper Phosphate (TSP), MOP, SOP and micro nutrients areallowed to be imported free of duties & taxes.

4.1.2 Import and local manufacture of plant, equipment and machinery shallbe treated as per Section 2.2.1 for concession and exemptions.

5. GENERAL

5.1 Selling price of fertilizer shall remain deregulated on the

understanding that while manufacturers will allow free marketforces to prevail they will pass the benefits in the form of lowerprice of fertilizer to the farmers. In order to ensure this objective isachieved a Committee will be set up and shall meet as and whenrequired, but at least on a regular quarterly basis and takeappropriate steps as necessary. The Committee will be headed bythe Minister for Industries & Production and will include MinisterFood, Agriculture, Livestock as well as a senior representativefrom the Ministry of Finance.

5.2 Withholding tax collected at the time of import of fertilizer, shall be

adjusted against assessed income tax of the year during which suchimport takes place, in case the fertilizer is imported by amanufacturer of fertilizer.

POLICY

Fertilizer prices closely tracked the global commodity markets, governed by a number offactors. A classification of such factors was made in terms of:(i)economic and populationgrowth; (ii) integration of global markets; and (iii) development of fuel alternatives.However, judging by the nature of these factors, by and large, the forces that influenceglobal fertilizer prices fall within the parameters of free market mechanics. This being thecase, responsibility falls on the authorities to either regulate prices directly, providesubsidies or extend concessions in the process of production, primarily on feed-gas costor allow the market to function. The degree to which each of these measures apply variesacross countries, depending on the natural endowments each country (orregion)possessesorthepressuresthateachcountryfaces,theprimaryonebeingthatofensuringfoodsecurityandcombatinginfation.Italsovariesbetweenleadingsuppliersandconsumers of


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fertilizer products and the availability of indigenous raw material also plays a vital role inhow the fertilizer sector is organized in different countries.

gas pricing policies across different regions play a crucial role in determining what priceswould eventually prevail indomesticmarkets,specifcallyfornitrogen-

basedfertilizers.Naturally, if the domestic pricing policy is favourable in the deficitregion, prices of fertilizer would stay lower than the prevailing regional prices. If anyincremental supply under this case is subject to this favourable policy, then prices in theregion would come under pressure (e.g. when comparing gas price policy in SaudiArabia, a leading fertilizer supplier from the Middle East, to that prevailing in India andPakistan).IntheMiddleEast,gasisthemainfeedstockforthefertilizerindustry,whichtakesupalmost80%oftheoverallrawmaterialcost.InthecaseofSaudiArabianFertilizersCo.(SAFCO)which has a total annual ammonia and urea capacity of 2.30 and 2.60 milliontons, the company entered into a long term supply contract with Saudi Aramco, thegovernment-owned oil and gas company, for a termof30yearstoprovideitfeed-gasattherateof$0.75/mmbtufrom19991. This has enabled the company to enjoy a

substantial competitive advantage over its rivals and has also enabled it to earnabnormally high margins. Table 2 illustrates the comparative operating margins earnedby companies in various regions.

Pricing Mechanism-Pakistan

Prominent phosphate fertilizers like DAP, MAP and TSP have increased usage for Rabiswheat crop. Another notable aspect is that usage of these fertilizers is highest during themonth of November, when wheat sowing actually starts. This implies that phosphatefertilizer is used during the sowing of the crop and its application during the growth orharvest period appears limited. A divergence from this trend would therefore suggest pre-emptive procurement, such as in anticipation of rising prices. Pricing mechanismsThepricing of fertilizers, like for any other product, is based on various fundamental demandand supply side factors. The demand side in this case is influenced by seasonality andaffordability of the relevant fertilizers during the cropping seasons. Since crop cultivationin Pakistan follows the typical Rabi and Kharif cycle, fertilizer demand for both seasonsvaries, based on the crops cultivated during each season. Meanwhile, affordability is afunction of prices experienced by farmers during the preceding crop period. For instance,better prices realized by the farmer on cotton and rice crops will enhance their purchasingpower for input procurement (including seeds and fertilizers)requirements for the wheatcrop. Another means to improve farmers purchasing power is through fixation of anattractive procurement/support price by the government, alongside assigning aprocurement quota on such prices through an agency called the Pakistan AgricultureStorage and Services Corporation(PASSCO).Thismotivatesarationalfarmertoincreasecultivationofthespecifccroponthebasisofthesupportpricesfxedbythegovernment.It was further established by Quddus etal.(2008)that demand fornitrogen and phosphate fertilizer is relatively inelastic in relation to price movementswhile potash appears to be more elastic. The statistical inference drawn by the studyrevealed that a 10% increase in the relative price of fertilizer may lead to less than 2 to3.5% decrease in the short run and about 4 to 7% decrease in the long run in the perhectare consumption of nitrogen and phosphorus fertilizers. The study further revealed


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that a shift in production technology also had a strong positive impact on the off-take offertilizers1. On the supply side, raw material and fuel costs are the key componentswhich drive the producers overall manufacturing costs, which eventually determine theprices of the final product. For importers, the international pricing mechanics are thecritical factors. In terms of products, urea pricing is primarily dependent upon the cost of

natural gas, which is produced domestically and priced in the light of the Fertilizer Policy2001. Since domestic gas prices are regulated in Pakistan and are fixed by thegovernment on a periodic basis, urea prices that manufacturers can charge can be deemedto be regulated indirectly, even though they are not directly determined by thegovernment. In this manner, the government tends to control and keep urea prices lowerthan international prices in order to provide relief to domestic consumers. This is donetypically by providing concessionary rates at which gas is utilized by fertilizermanufacturers for ammonia production. While domestic manufacturers tend to pass theimpact of any gas price hike in their urea prices, they tend to keep it at uniform rateswhile maintaining their margins, independent of seasonal demand hikes. The abovescenario is relevant for urea manufacturers. As far as DAP is concerned, phosphoric acid

is the primary raw material, which is imported by FFBL through its subsidiary PMP.Since FFBL accounts for 40-45% of domestic supply,theremaining DAP is still imported thereby linking domestic pricing more closely tointernational pricing mechanics as well as to exchange rates.However, owing to FFBLs large market share in this segment, its brand often sells at a premium to other imported brands. The government tends to control domestic prices amidinternational price shocks through direct subsidies determined each year after assessinginternational pricing.Price variations in DAP are more evident due to rapid fluctuations in international marke

ts; hence, margins tend to remain more erratic for both importers and manufacturers evenwhen subsidies are provided. Therefore, the import markets and manufacturing unitswhich rely heavily on imported raw material are more market-driven. Figure 11 : Localand International Prices Comparison

Source: Bloomberg,

FBS From the analysis of the above demand side and supply side factors whichinfluence prices, it can be inferred that government intervention plays an active role,even though it still does no exercise direct control over supplies. This does restrict the


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free and full control over the market by key supply and demand side market forces.Therefore, any seasonal shortages and the resultan increase in retail prices fall ondistribution channels.

fertilizer policy

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