Fertiliser prices expected to decline 28 percent on subsidy

KARACHI: Fertiliser prices are expected to decline up to 28 percent owing to subsidy announced by the government for agriculture sector to offset the pandemic impact on the economy, a brokerage reported on Thursday.

Topline Research estimated reduction of 15 percent and 28 percent in prices of urea and diammonium phosphate (DAP), respectively. Subsidy on urea and DAP is likely to reduce cost to Rs1,397/bag and Rs2,400/bag from Rs1,640/bag and Rs3,325/bag, respectively.

The Economic Coordination Committee of the cabinet approved Rs50 billion for the agriculture sector. The package includes a subsidy of Rs37 billion to farmers on fertilisers – Rs925/bag on DAP and Rs243/bag on urea.

The government aims to implement subsidy on DAP and urea through scratch card scheme already being implemented by the Punjab, which requires farmers to get registration with national identity card number through SMS, after which they receive a message from the department to get cash from any branchless banking service provider.

“We believe this mechanism suits fertiliser companies as there will be no pileup of receivables from the government on their balance sheets,” Topline Research said. “We believe the availability of subsidy on urea and DAP is likely to push up demand particularly of DAP – which is more price elastic.”

The price differential of DAP/urea is likely to narrow to Rs1,228/bag from the existing Rs1,685/bag.

Over the past year, farmers have been reluctant to use DAP due to higher price differential between DAP and urea. Preference of DAP over urea might offset any positive impact of subsidy on urea sales.

Fauji Fertilizer Bin Qasim, which is the sole manufacturer of DAP, is to emerge as the major beneficiary. However, DAP importers, like Fauji Fertilizer and Engro Fertilizer are also to benefit from the initiative.

“Availability of subsidy can potentially push DAP market up to 2.2 million tons in 2020,” Topline Research said.

Government further announced a subsidy of Rs2.5 billion on sales tax on locally-manufactured tractors for one year, Rs8.8 billion subsidy for mark-up on loans and Rs2.3 billion subsidy on cotton seeds. Five percent sales tax on tractors is likely to be withdrawn. Tax refunds are expected to pile up.

“We believe these developments have both positives and negatives for the tractor industry as removal/reduction in sales tax and better farmer liquidity amidst lower cost of fertiliser is likely to boost demand,” Topline Research said. “We have already assumed unit sales growth of 43 percent year-on-year in FY2021 for Millat Tractors. However, the removal/reduction in sales tax is also likely to increase sales tax refunds from the government due to input and output tax adjustments.” Tractor industry has already been pleading the government for the release of the refunds.