Fertiliser sector didn’t pass onbenefits ofRs152bn subsidy to consumers: CCP

ISLAMABAD: An inquiry conducted by Competition Commission of Pakistan (CCP) revealed that the fertiliser sector secured a whopping subsidy on gas to the tune of Rs152 billion but never passed the benefits on to the consumers.

The profits of fertiliser sector giants run into billions of rupees, which clearly indicates that it has gone up at the cost of voiceless consumers.

According to the CCP inquiry report, the agriculture sector contributes 22.7 percent of the GDP and fertiliser is an important input for this sector with an average usage 207 kg per hectare. Fertiliser is the second largest cost component for most crops after land rent accounting for approximately 17 percent of total cost.

The decision by the Fertiliser Manufacturers of Pakistan Advisory Council (FMPAC) and its members undertaking to increase the price of urea from Rs1,720 per 50 kg bag to Rs1,768 i.e. Rs48 alone resulted in gains of Rs1.8 billion in the four-month period of Rabi season (October 21 to January 2023).

This was also reflected in the major companies’ profits in 2021 as compared to the previous year. The FFC profit before tax in 2021 was Rs30 billion, Engro Rs29.8 billion, and Fatima Fertiliser Company Limited Rs28.4 billion. Only Agritech posted a loss of Rs4 million in 2021.

“These gains for the companies meant higher costs for the farmers and ultimately the consumers,” the inquiry report found and added that given the fact that the sector benefits from subsidised gas to the tune of Rs152 billion ultimately paid by the exchequer, makes the prima facie violation more blatant.

The enquiry report states that the CCP has shed light on the profitability, cost structures, subsidies and their impact on urea prices for farmers. The investigation has raised key questions regarding the pricing strategies employed by urea manufacturers.

The cost structure analysis revealed that the main raw material for urea production, feed gas, varies in price for each manufacturing unit. Despite these differences in costs, the urea producers maintained identical prices, prompting the CCP to question the pricing mechanisms.

The fertiliser industry’s total annual gas consumption stands at 266,796 mmcf, with 83 persent utilised as feedstock and the remaining 17 percent as fuelstock. Subsidies on feedstock gas amount to approximately Rs152 billion annually, aimed at ensuring affordable urea prices for farmers. However, despite these subsidies, urea prices continue to rise, resulting in significant profits for producers.

In 2021, Fauji Fertiliser Company (FFC) reported a gross profit margin of 35.78 percent, net profit margin of 20.15 percent, and a return on equity (ROE) of 46.08 percent. Similarly, Engro Fertilisers recorded a gross profit margin of 33.3 percent, net profit margin of 15.9 percent, and an ROE of 44.97 percent. These ROE figures are notably higher compared to the Indian urea industry, where the ROE is capped at 20 percent.

A concerning trend of uniform pricing was also observed, with all urea manufacturers in Layyah district increasing prices by Rs482/bag (27.26 percent) between February 2022 and November 2022. Price adjustments, both increases and decreases, were made simultaneously by all companies, indicating a coordinated pricing strategy. In response to the findings, the CCP has issued show cause notices to seven urea producers, demanding an explanation for what appears to be a coordinated price fixation. The investigation underscores the importance of ensuring fair competition and protecting consumer interests in the fertiliser industry.