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ECONOMIC REVIEW
Dwindling Outlook Of Fertilizer Industry
(by SHABBIR H. KAZMI
)
Dwindling Outlook Of Fertilizer Industry
At present Pakistan has an installed capacity to produce approximately 7 million tons urea annually. Out of this 4 million tons capacity gets gas from Mari gas field and remaining 3 million tons from Sui Northern Gas Pipeline (SNGPL) and Sui Southern Gas Company (SSGC). During 2011 these plants collectively produced slightly less than 5 million tons urea. During 2011 urea demand was projected at 6.2 million tons leading to a shortfall of 1.2 million tons.
To operate these plants at 100% capacity 803mmscfd gas is required for which the Government of Pakistan (GoP) has signed gas supply agreements. This includes 492.5mmscfd from Mari, 240.5mmscfd from SNGPL network and 70mmcfd from SSGC for Fauji Fertilizer bin Qasim. In the past gas supply to fertilizer units linked to SNGPL network was curtailed in winter. However, in 2011 units receiving gas from Mari faced 20% curtailment and those getting gas from SGGPL and SSGC faced mandatory closure up to 60 days. In 2012 this mandatory closure is likely to extend beyond 90 days due to an acute shortage of gas.
In 2011, gas outage for Engro's new plant (capable of producing 1.3 million tons annually) stretched more than six months and supplies during on-stream days were around 77% of allocation. Units getting gas from SNGP were hit the most. DH Fertilizer and Engro's expansion unit (getting gas from Qadirpur gas field) faced the longest outages up to 190 days. FFBL supplies also remained suspended for nearly two months.
Industry experts expect urea production around 4.8 million tons during 2012 if current levels of gas curtailment are followed. Total urea production in Pakistan during January-November 2011 declined by 4% YoY despite additional production of 650,000 tons by Engro's EnVen (plant came online mid 2011). However, the overwhelming consensus is that units may not be able to achieve even this production level due to the widening gap between demand and supply of gas as projected by the government.
With urea demand projected at 6.3 million tons in 2012, the shortfall is expected to be around 1.5 million tons. Import of urea will erode country's foreign exchange by US$600 million at least, based on current prices and may cost even higher if prices go up in the international markets. It is expected that any hike in crude oil prices will automatically escalate urea prices in the international markets. Growing tension between the United States and Iran and a likely showdown in Strait of Hurmnz has already initiated a spiraling increase in global crude oil prices
If the current gas load management program remains in place, production at fertilizer plants will have similar level of capacity utilization as in 2012. Some manufacturers like Agritech and DH Fertilizers have not been able to pass on the entire impact of gas curtailment to the farmers. Their financial positions are likely to further worsen if gas curtailment continues as experienced in 2011.
Dwindling Outlook Of Fertilizer IndustryThere is a loud talk that urea manufacturers should exercise LNG import option to meet the shortfall in gas supply. The experts are dividend into two groups one that says running plants on LNG is not feasible for the fertilizer sector. Others say the shortfall can be met by using LNG during winter and also scheduling annual shut down of plants when the shortfall is at its maximum. LNG import has become a must because Pakistan has not been able to make Iran-Pakistan gas line a reality due to the opposition of the United States. The use of LNG can also be resorted to, to ensure 100% gas supply to Kot Addu Power Plant instead of furnace oil containing higher percentage of sulphur. Conversely, it is possible that the GoP import LNG and distribute the cost of gas across all consumers.
Based on oil prices of US$100/barrel, LNG cost comes to around $15/mmbtu, as opposed to local fuel gas at $4.8/mmbtu and local feed gas at $1.13/mmbtu. This may be true but according to 2001 Fertilizer Policy Mari gas field has been dedicated to the fertilizer sector. Therefore, supply of gas from this field to power plants must be stopped immediately and made available to the units getting gas from this field.
Some quarters have suggested using coal gas instead of natural gas by the fertilizer manufacturing units. Most of the sector experts are of the consensus that the costs associated with converting existing technology to a coal-based urea plant are prohibitively expensive and not really a workable option. However, they are of the firm belief that urea production cost can be rationalized by operating plants at optimum capacities.
In the past fertilizer manufacturers had expressed willingness to pay the difference between the cost of gas and furnace oil. Analysts wonder if they are still willing to make such an offer. Industry sources say it was a one-time offer made in June 2011 and the government didn't avail it. Therefore, getting a similar offer from fertilizer manufacturers may not be possible again. One wonders what stopped the government from accepting this offer. One of the conspiracy theories is that 'oil lobby' bulldozed this offer.
Industry experts are of the consensus that there should be no curtailment of gas for fertilizer units getting supplies from Mari. There is also no need for mandatory closure of FFBL because it consumes 70mmcfd gas. However, the gas supply of units linked to SNGPL consuming 240.5mmscfd has to be ensured. It is record that total leakage and pilferage of SNGPL exceeds 250mmcfd or more than the total requirement of fertilizer units getting gas from the gas marketing company.
Another apprehension is declining power of urea producers to pass on the cost to consumers. Experts are of the view that urea price in international markets has come down significantly and reported around US$400/ton. This translate into Rs2,300/bag as against cost of locally produced one of Rs1,680/bag. While local manufacturers still enjoy power to further increase the price the government will still be required to pay Rs620/bag subsidy. However, it is feared that with the rise in price farmers may not be able to appropriate dosage of nutrients, which may affect yield negatively and also may not allow Pakistan to achieve food security.


 
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