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Urea off-take ups industry’s profits

August 12, 2013
- File Photo
- File Photo

Despite gas supply shortages and the rising cost of transportation, fertiliser companies are happy for the time being, as some of them have seen their sales grow in the first half of FY13, yielding decent profits.

“Besides, as the rupee depreciation has made imports of fertiliser costlier and with the rising trade deficit, one can expect that the government won’t allow imports of urea in excess of the actual market requirement. This, along with a 10 per cent increase in the urea off-take witnessed so far means we can boost our sale volumes,” says a senior official of Fatima Fertiliser.

Officials of other fertiliser companies say that higher cotton prices during the outgoing season have improved farmers’ finances, and the growers are now better positioned to invest more in fertiliser. This also is a major ‘plus’ for fertiliser makers this year.

Industry sources say that ‘financial efficiency’ accomplished by a couple of fertiliser companies and higher demand for urea has helped them increase their sales and earn profits. For example, the financial cost of operations for Fauji Fertiliser Bin Qasim Limited (FFBL) fell 46 per cent to Rs624 million in 1HFY13 from Rs909 million in 1HFY12.

It’s not just an outcome of a general decline in interest rates. It’s also the result of our better cash flow management,” boasts a company official. FFBL’s pre-tax profit soared to Rs1.82 billion during 1HFY13, from Rs644 million in 1HFY12, mainly due to larger sales of diammonium phosphate fertiliser.

“The government must provide us a level playing field in terms of gas supply,” says a senior executive of Engro Fertilisers. His company has posted a pre-tax profit of Rs2 billion in 1HFY13, against a pre-tax loss of Rs2.3 billion in the year ago period.

“First, we need to increase our energy efficiency. Secondly, we must find ways to cut costs of selling urea (the most common fertiliser) and at the same time explore rising demand for other types of fertiliser. And finally, translate the benefit of a gradual cut in corporate tax rates (starting from this fiscal year) into financial efficiency, which requires out-of-the-box thinking on cash flow management.”

A few of these things actually played a part in Engro Fertilisers’ financial turnaround in 1HFY13. For example, the company’s sales soared 60 per cent to Rs20.5 billion, reflecting its ability to sell larger amounts of a diversified range of products, and thus tapping the increase in demand for fertiliser. And its financial cost fell more than 16 per cent to Rs4.9 billion during this period.

Financial costs of Fatima Fertilisers also went down 29 per cent to Rs1.030 billion in the first quarter of 2013, from Rs1.452 billion in the year-ago period. That, along with larger sales of a diversified range of products, enabled the company to earn a pre-tax profit of Rs2.527 billion — four times higher than what it was in the first quarter of the last year — Rs673 million. On the sales side, whereas its urea sales grew from 40,000 tonnes to 73,000 tonnes, sales of CAN and NP rose even faster — from 45,000 tonnes and 22,000 tonnes in 1QFY12 to 87,000 tonnes and 82,000 tonnes in 1QFY13, respectively.

Optimists in the fertiliser industry share the view that larger sales of urea and other fertiliser, and the accomplishment of energy and financial efficiency, can help the industry mitigate the impact of lower-than-required gas supplies, which are going to remain in place for some time.

Acute gas shortage hit the fertiliser industry’s output in 2012, giving rise to larger imports. And the imposition of the gas infrastructure development cess in the same year added to the cost of business of local fertiliser manufacturers and reduced their profitability.

Industry sources say that the reason for the low output of fertiliser plants is not just curtailment of gas supplies — but ‘below the allocated amount’ of supplies. The fertiliser sector’s overall gas allocation is 818 million cubic feet per day, ‘but they hardly get 600mmcf’ through Mari Gas and the Sui Southern Gas Company network. They say that fertiliser plants on the Sui Northern Gas Pipelines Limited (SNGPL) network remained shut for 300 days in 2012, as their daily gas requirement of 240mmcf could not be met.

The industry comprises seven fertiliser plants, with a production capacity of 6.9 million tonnes per year. But their combined output of urea was 4.1 million tonnes in 2012, down from 4.8 million tonnes in 2011, and far below the country’s total consumption of 5.3 million tonnes.

Urea consumption during this year is projected to remain higher than last year, as official reports so far indicate a 10 per cent increase on the back of brisk activity in the agriculture sector and high prices of imported fertiliser, which is discouraging its wider use.

Bridging the big gap between local supplies and the demand for urea means huge foreign exchange spending on imports. Even this year, imports of fertiliser are consuming tens of millions of dollars. But since the government cannot immediately reduce gas supplies of other priority areas by a big margin, fertiliser plants and CNG filling stations remain on gas-rationing.

Keeping this in view, four SNGPL-based fertiliser companies have chalked out a plan to develop lower British Thermal Unit (BTU) gas fields, with an estimated investment of $100 million. These companies are Pak-Arab Fertiliser, Engro Enven, Agritech and Dawood Hercules Fertiliser plants.

According to Shahab Khawaja, executive director of Fertiliser Manufacturers Pakistan Advisory Council, this new gas allocation plan is just a long-term arrangement to replace the current allocation mechanism for SNGPL-based fertiliser plants. It will allow the plants to obtain gas through different smaller fields, and the current mechanism will be discontinued.

He says that unlike in the past, the new arrangement will not leave room for the government to divert gas supplies from smaller fields developed with $100 million investment of fertiliser plants to other sectors, thus ensuring adequate gas supplies to the above-mentioned four fertiliser plants. Under the current gas supply agreements with SNGPL, these plants get 240 million cubic feet of gas per day. —Mohiuddin Aazim