APROPOS of the article ‘Urea market rigged?’ (Economic and Business Review. Dec 24), it is clarified here that in 2006 the government invited bids for allocation of 100 MMSCFD of gas to set up a new urea manufacturing plant in Pakistan to become self-reliant in urea.

Engro won this allocation in a transparent and competitive bidding process and entered into gas supply agreement with SNGPL on the government guarantee for gas supplies.

However, once the plant was set up at a cost of $1.1 billion by the end of 2010, the government started curtailing the gas supply. In order to honour its financial obligation to financiers, Engro increased the price of urea during 2011 to stay solvent.

Please note the following data that need correction in the above-mentioned report. Of the total urea price increase, about 80 per cent has resulted from imposition of GST on urea and cess on gas, and general inflation. Only 20 per cent of the price increase is due to gas curtailment as the government did not honour gas supply contracts.Based on the current feed and fuel gas prices, subsidy per bag of urea works out to be Rs228 a bag of urea and not Rs424 a bag.

In contrast, difference between the price of domestic and international urea is more than Rs1,000 a bag. The fertiliser industry has consistently sold urea well below international urea prices, thereby passing on the price benefit of about Rs177 billion over the last three years to farmer over and above feed gas subsidy provided to industry by the government.

Engro’s profitability increased in 2011 due to capitalisation of its new plant in mid-2011, (due to delay in availability of gas) which caused the depreciation and expenses for the first half of 2011 not to appear in income statement due to accounting regulations.

If we adjust for this, profitability for 2011 would actually have been about 40 per cent lower than 2010 despite the increase in equity investment. The year 2012 is a case in point where in the first nine months Engro has incurred a loss before tax of Rs4.1 billion

In 2011, Engro produced a total of 1,279 tons of urea versus its capacity of 2,275 tons, i.e., the capacity utilisation of mere 56 per cent. In 2012, our new plant has received gas for effectively 10 per cent of allocation.

While Engro’s production capacity is about 33 per cent of the country’s urea capacity, its market share in 2011 was only 21 per cent and in the first nine months of 2012 it was only 16 per cent.

AMAN UL HAQUE Manager Public Affairs Engro Corporation Karachi