Fertiliser prices set to reduce by Rs390/bag in Rabi season

KARACHI: The government’s Rs36 billion subsidies on urea and massive cut in sales tax has rekindled hopes of a 20 percent fall in domestic fertliser prices during the upcoming crop season, analysts said on Saturday.

“Yes, fertiliser prices are being reduced by around Rs390/bag, which is a 20 percent cut over the prevailing prices,” said Ruhail Mohammed, Chief Executive Officer of Engro Fertilizers. “Of the total price cut, Rs50 is being borne by the manufacturers, whereas the remaining will come from reduction in GST (General Sales Tax) and subsidy from the government,” Mohammed said.

The government has proposed Rs36 billion subsidies on urea, cut in sales tax to five percent from the current 17 percent and a cap in gas tariff in the budget for the fiscal year 2016/17.  The move is likely to result in fertiliser prices plunging from the current Rs1,800/bag to Rs1,410/bag by the start of the next fiscal year. 

The government, in the Finance Bill for the next fiscal year, proposed that urea fertiliser price be brought down to Rs1,400/bag, from Rs1,800/bag, and DAP from Rs2,800 to Rs2,500/bag to help ease financial pressure on farmers wrought by persistently low agriculture growth.

Analysts were also expecting a cut in the Gas Infrastructure Development Cess (GIDC) in the budget proposals.

Mohammed said the manufactures want removal of GST on natural gas, as without the move “the fertiliser manufacturers will be in a constant GST-refund situation.” “Fertiliser companies had already taken a hit on the margins by absorbing gas price increase in September last year, and fall in prices would further reduce the manufactures’ margins at least by Rs50/bag.”

Analysts said the domestic market already had supply glut, which is expected to continue. “In addition to the expected cut in price, it is also necessary that the government should take steps to export surplus inventory, which would not only open a new revenue earning measure for the country, but also help earn valuable foreign exchange,” an analyst said.  Dealers said huge carryover stocks from the last production year have also softened the domestic urea prices. “Some companies had already decreased fertiliser prices by Rs200-300, even before the start of the next fiscal year,” said a dealer. “A bag of fertiliser is being sold at Rs1,600.”

Industry officials said manufacturers have around 1.5 million tons of urea, excluding around 0.27 million tons held by the National Fertilizer Marketing Limited.

“This level may slightly come down post July period, however, the industry will see pilling inventories up to one million tons at the end of the ongoing fiscal in the absence of any measures to export,” Mohammed said.

“Fertiliser manufacturers have a potential to bring in foreign exchange of more than $200 million if urea export is allowed.”

Mohammed said the stakeholders are in the process of taking up the export issue with the government and expects that “a rational decision for the benefit of the country will be made.”  The government has focused on reviving the agriculture sector which showed a negative growth of 0.19 percent due to slow down in international commodity market. The government also opted to provide growers cheaper input to help enhance the productivity of the farm sector.

Industry officials said the announced incentives, along with the summer crop season would foster demand for urea in the country.

“Demand for this year was forecast at around 5.3 million tons before the price decrease which is now expected to be somewhere close to 5.5 million tons for this year,” Mohammed said. “Unless there is a change in any other factor, we will see the same levels next year.”