Fertilizer Industry

Pakistan Fertilizer Industry

There is less to fear from outside competition, than from inside inefficiency, discourtesy and bad service. (Anonymous)

Fertilizer Industry in Pakistan

Technical Note

This technical note is written by Mr. Muhammad Adnan Waseem, Faculty Member and Miss. Shamsa Kanwal Kiyani, Research Scholar, with the help of Mr. Billal Aziz Qureshi and Miss. Farzana Anjum Mohammad Ali Jinnah University Islamabad, Pakistan. The note is written for the purpose of discussion in the class instead of pointing out the inefficiency of the management and it is generated from the published sources.

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Table of Contents

1. Abstract. ………………………………………….……...2

2. Pakistan Profile……………………………………………2

3. Economic Historical Background………………………...2

4. Introduction………………………………………………..3

5. Important Companies……………………………………..3

6. Current Status……………………………………………...5

7. Industry Growth……………………………………………6

8. Recent Trend………………………………………………..7

9. Government Policies………………………………………..8

10. WTO Challenges……………………………………………8

11. Conclusion…………………………………………………..9

12. Recommendation…………………………………………...9

13. Questions……………………………………………………9

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Abstract:

As Pakistan is Agriculture Country. So the Fertilizer Industry is of great significance for Pakistan. There are many Fertilizer Companies in Pakistan, out of which some are discussed, that are the important Companies of Pakistan. Government of Pakistan is struggling hard to improve the condition of Fertilizer Industry in order to develop the Agriculture department. The GOP Policy has helped in increasing indigenous supply of Urea at a lower cost and also reducing dependence on imports.

Pakistan Profile:

Pakistan is an under developing country which has faced a number of challenges on both Political and Economic fronts. Despite being a very poor country in 1947, Pakistan's Economic growth rate was better than the global average during the subsequent four decades.Basically Pakistan is an Agriculture Country. Its economic depends on agriculture sector. But the growth of Non-agricultural sectors has changed the structure of the economy, and agriculture now only accounts for roughly 20% of the GDP.The Top Industries in Pakistan are Textiles and apparel, Food processing, Fertilizer, Pharmaceuticals, Construction materials, Paper products, Shrimp, Steel, Telecom, Cement. Pakistan is a developing country with the world's sixth-largest population, and an economic growth rate that has been consistently positive since a 1951 recession. At purchasing power parity, Pakistan GDP in 2006 was estimated at approximately $439.7 billion, larger than that of Saudi Arabia, but slightly smaller than the GDP of the Philippines.

Economy Of Pakistan

Currency 100 Pakistani Rupee = 60.37 US dollar= 77.48 Euro

Fiscal year July 1—June 30

Current fiscal year (2006—2007)

Central bank The State Bank of Pakistan (SBP)

Trade organizations and treaties ECO, SAFTA, ASEAN, WIPO and WTO

Fiscal Budget $19.8 billion (revenue) $25.07 billion (expenditure)

Inflation rate (monthly) (FY05 - 06 est.)

Background:

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Pakistan Fertilizer Industry “In 1947 only some 5 percent of the large-scale industrial facilities in British India were located in what became Pakistan. The country started with virtually no industrial base and no institutional, financial, or energy resources. Three small hydroelectric power stations provided limited electricity to a few urban areas. Firewood and dung were the main sources of energy; commercial energy sources supplied only about 30 percent of the energy consumed. Further, there was a shortage of management personnel and skilled labor.” (Data as of April 1994)

Introduction:

Fertilizer: Fertilizers are compounds given to plants to promote growth; they are usually applied either via the soil, for uptake by plant roots, or by foliar feeding, for uptake through leaves. Fertilizers can be composed of organic matter, i.e. carbon based, or inorganic containing simple chemicals. They can be naturally-occurring compounds such as peat or mineral deposits, or manufactured through natural processes or chemical processes. Fertilizers typically provide, in varying proportions. The three major plant nutrients are Nitrogen, Phosphorus, and Potassium. The secondary plant nutrients are Calcium, Sulfur, Magnesium, and sometimes trace elements or micronutrients with a role in plant nutrition are Boron, Chlorine, Manganese, Iron, Zinc, Copper and Molybdenum.

Fertilizer Industry: Pakistan is an Agriculture Country. Its 70%population depends on agriculture directly and indirectly. Fertilizer Industry is one of the important industries in Pakistan. Fertilizer is a basic input and its timely available is crucial for agricultural output. In addition, the fertilizer sector provides support to the Leather, Textile, and Pesticide, financial and other sectors of the Country’s Economy. Nitrogenous fertilizer production contributed about 4.5% to the overall growth of 9% related to large-scale manufacturing during the year. Fertilizer off-take has been increasing in the recent past and is anticipated to increase further in the medium term. As a result, fertilizer has become one of eight main categories of imports of the country; at exorbitant cost to the national exchequer. Fertilizer off-take is highly dependent on unpredictable climatic condition, availability of water, and government policies. Fertilizer industry is also the second largest consumer of natural gas with consumption of around 22.5% of total gas output and is, therefore, directly affected by gas pricing structure, which in the recent past has been highly volatile owing to rise in international oil price.

- Fertilizer is one of the key inputs used in agricultural production. There are ten fertilizer units operating in the country (five units are in Punjab, three in Sindh and two in NWFP) with an installed capacity of 5.6 million tons, out of which nitrogenous fertilizer has a capacity of 4.9 million tons and phosphatic fertilizer has production capacity of 0.7 million tons. Out of these 10 units, five are in public sector with capacity of 1.9 million tons and being controlled by the National Fertilizer Corporation (NFC). The remaining five units with capacity of 3.7 million tons are managed by the private sector. Units in the private sector are Engro Chemicals Pakistan Ltd., Dawood Hercules Chemicals Ltd., Fauji Fertilizer Company Ltd., FFC-Jordan Fertilizer Company Ltd., and Pak-Saudi Fertilizer Ltd. Total investment by the private sector in this industry is over Rs.69.1 billion (U.S.$1,203 million). The production of fertilizer was increased by 2.5 percent in July-March 2003 and stood at 3.9 million as against 3.8 million tons in the same period of last year. The production of fertilizer like urea and ammonium nitrate increased by 3.5 percent and 4.2 percent respectively, while the production of nitro phosphate and super phosphate declined by 1.0 percent and 10.5 percent respectively, during July-March, 2002-03.

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Spot Analysis of Fertilizer SectorNumber of Units

a. Public 4b. Private 6Total 10Employment 7,563Technology High TechnologySource of Machinery Italy, England, Denmark, USA, Japan, Local

Installed Capacities (000 Tons) Public Sector 1,373 Private Sector 4,384 Total 5,753Total Investment Rs. 87 BillionContribution to GDP 0.40%

Important Companies of Fertilizer Industry in Pakistan:

In Pakistan there are many Fertilizer companies that work in this field successfully. We take some Important Companies and see their profile.

1. Engro Chemical Pakistan2. Fauji Fertilizer Bin Qasim 3. Fauji Fertilizer Company4. Dawood Hercules Chemicals1. Engro Chemical Pakistan Limited (ECPL) is a Pakistani Fertilizer and Chemicals

company. Its production is based in Daharki, Sindh. Engro is included in the KSE 100 stock index at the Karachi Stock Exchange and is also listed on the stock exchanges of Islamabad and Lahore. Engro Chemical Pakistan Limited is the second largest producer of Urea fertilizer in Pakistan. The Company was originally a subsidiary of what are now Exxon then Esso; after the discovery of a natural gas field near Dharki in 1957, Esso in 1968 built a plant nearby to use the gas to make Urea fZertilizer - the Esso Pakistan Fertilizer Company. In 1991 Exxon decided to divert its worldwide fertilizer interests, and Exxon's interest was sold to the company's employees in Pakistan's first corporate employee buyout. Since 1991, the plantat Dharki has been greatly expanded, and the company has launched several successful partnership ventures, including port facilities (Engro Vopak Terminal Limited, with Royal Vopak of The Netherlands) and PVC resin manufacturing (Engro Asahi Polymer & Chemical Limited, with the Asahi Glass Company and Mitsubishi). Other ventures include a milk processing plant, the

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construction of a urea plant in Oman, and the importation of fertilizer and seeds to be sold in Pakistan under Engro's brand.

2. Fauji Fertilizer Bin Qasim Limited (FFBL) formerly known as FFC Jordan Fertilizer Company Limited. The Company's principal activities are to manufacture, purchase and market fertilizers. The Company's manufacturing facilities are located at Port Qasim, Karachi. The Company’s Sales in 2006 was 14,707,000,000.The Company’s employees are 759.

3. Fauji Fertilizer Company Limited (FFC) the Group's principal activities are to manufacture, purchase and market fertilizers and invest in other fertilizer and chemical manufacturing operations. With a vision to acquire self - sufficiency in fertilizer production in the country, FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark. The initial authorized capital of the company was 813.9 Million Rupees. The present share capital of the company stands at Rs. 3.0 Billion. Additionally, FFC has Rs. 1.0 Billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited. FFC commenced commercial production of Urea in 1982 with annual capacity of 570,000 metric tons. The Company’s Sales in 2006 was 44,681,000,000. The Company’s employees are 316.

4. The Dawood Group is one of Pakistan’s most prominent and distinguished names. The Group comprises companies ranging from Fertilizers, textiles and information technology to business and finance and is regarded as an icon of consistency and integrity . The story of the Dawood Group is not a saga of an overnight success. It is rather an illustration of resilience and the fortitude that enabled the group to endure some major setbacks such as during independence, in East Pakistan separation and 70s nationalization. Today, the Dawood Group is one of Pakistan’s most prominent and distinguished names. The Group comprises companies ranging from fertilizers, textiles and information technology to business and finance and is regarded as an icon of consistency and integrity.

Current Status of Fertilizer Industry:

In a report of 2003, Current Status of Domestic Production of Fertilizer was as following;

Product Wise, Domestic Production of Fertilizer (Tones)

1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03UreaDawood Hercules 385 412 436 376 398 425Engro 663 772 818 781 872 888NFC Pak-Saudi 618 625 603 605 517 613NFC Pak-China 27 97 73 0 0 0NFC Pak-Arab 92 97 102 110 99 102NFC Pak-American 0 125 200 234 301 290FFC 1,499 1423 1736 1,877 2,073 2,703

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Pakistan Fertilizer Industry Sub Total 3,284 3,551 3,968 3,983 4,260 4,407DAPSona FFC 0 46 298 325 67 0CANNFC PAK-ARAB 315 339 386 374 329 335ASNFC PAK-American 0.5 0 0 0 0 0NPNFC PAK-ARAB 293 284 261 285 306 305SSPNFC LC&FL J.Wala 0 4 73 78 78 75NFC Hazara Fert.

0 17 73 8184 72

Sub Total 0 21 146 160 162 147N: P: K 1 1 1 2 63 75TOTAL 3,894 4,242 5,060 5,128 5,187 5,269

Growth of Fertilizer Industry:

Growth of Fertilizer Industry in 20002-03 is mention below. We can understand its growth rate through following Table.

Fertilizer Production Capacity in Pakistan 2002-03

S. No. Plant and Location Company Name Product Start

YearCapacity

Tones

1Lyallpur Chemicals and Fertilizer Limited, Faisalabad

National Fertilizer Corporation of Pakistan (Pvt) Ltd. (NFC) 12

SSP 1957 0

Jaranwala NFC 12 SSP10 1967 902 Hazara Phosphate Pvt. Ltd. Haripur. NFC12 SSP3 1989 90

3 Pak American Fertilizer (Pvt). Ltd. Daudkhel NFC Urea1 1998 346

4 Pak Arab Fertilizer (Pvt). Ltd. MultanNFC Urea4

196292

NFC CAN9 450NFC NP 305

5 Pak. Saudi Fertilizers Pvt. Ltd. Mirpur Mathelo FFC Urea 1980 557

6 Pak-China, Haripur (Presently not in operation) Schon Pak-China Urea13 1982 102

7 Dawood Hercules, Sheikpura Dawood Hercules (DH) Urea5 1971 4458 Engro Chemical Pakistan Ltd. Dharki Engro Chemical Pakistan

Limited (ECPL) Plant1 Urea8 1968 850

(Dahirki)

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Plant2 Urea 11 1993

NPK 2001 100

9 Fauji Fertilizers Co. Ltd., Machi Ghot Fauji Fertilizer Company (FFC)

Plant 1 Urea6 1982

1330 Plant 2 Urea7 1993

10 Fauji Fertilizer Bin Qasim (Pvt) Ltd, Karachi.

Fauji Fertilizer Bin Qasim (Pvt) Ltd. (FFBQ)

Urea2 1998 550 DAP2 1998 446

Urea Total 4,272 Total All Products 5,753

Recent Trend in Fertilizer Industry:

The present government has plans to achieve higher GDP growth rate and to boost exports of cotton based products for the revival of the economy of Pakistan. To achieve the targets, efforts are being made to improve production and yield in the agriculture sector. Fertilizer is the backbone of agriculture. Pakistan has to add 2.5 million tonnes production capacity in next ten years to maintain self-sufficiency in indigenous production of urea. This can be achieved through debottlenecking of the existing plants and adding at least three new plants of 600 tonnes/annum between year 2004 and 2010. The factors governing the fresh investment are financial concessions, i.e. gas (feedstock) price, tariff on plant and machinery and level of corporate tax — these factors determine the level of return on equity (ROE).

Deregulation of urea business in 1986 and DAP in 1993 coupled with duty free import of plant and machinery, tax holiday for a specified period and feedstock subsidy for 10 years have helped the country in doubling urea production capacity — from 2.2 million tonnes to 4.3 million tonnes — in the country. The GOP policy has helped in increasing indigenous supply of urea at a lower cost and also reducing dependence on imports. Since 1990 an investment of over one billion dollars has been made in the sector. Fauji, Engro, Dawood Hercules and FFC-Jordan are the major producers of urea. FFC-Jordan has the first ever DAP manufacturing unit in the country. The actual capacity utilization of urea plants has been above the designed capacity because 80 per cent of the installed machinery is less than 20 years old. The capacity utilization at Dawood has been slightly lower but it has been only because gas supply to the unit is curtailed during winter. However, with the discovery of new gas fields and expansion of gas transmission and distribution network in the country this problem will be overcome shortly.

According to industry sources Engro will be able to increase its urea production by 100,000 tonnes per annum through debottlenecking. The advantage of this addition is that the Company will not require any additional gas allocation. This capacity is expected to come online in the year 2002. Fauji will be adding another 100,000 capacity, through BMR, for which it requires additional gas allocation and the facility will be online in the year 2003. The country will need addition of another 250,000 tonnes in 2004, which can be achieved through BMR also. However, afterwards there will be a need to add plants of 600,000 tonnes each in 2005, 2008 and 2010. This calculation is based on a demand growth rate of 6 per cent.

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Fertilizers’ contribute in agriculture 30 to 70 percent to increase in crop yield. Moreover, it improves the quality of crops in the form of high nutrient value and increases plant resistance to diseases and climatic conditions. Nitrogen, Phosphorus and Potassium are major nutrients required by soil. The following fertilizers provide these nutrients. Urea, Calcium Ammonium Nitrate (CAN), Single Super Phosphate (SSP), Triple Super Phosphate (TSP), Nitro-Phosphate (NP), Di Ammonium Phosphate (DAP), Sulfate of Potash (SOP), and NPK. Urea represents 71 percent of total fertilizers consumed in Pakistan while DAP 15 percent and other fertilizers like CAN, NP, SSP and NPK have 14 percent share.

The demand of fertilizer is directly related to agricultural growth. Average yields of food crops have tremendously increased during the last decade through increased irrigation, introduction of high yielding varieties and related increase in agricultural inputs, particularly the use of fertilizer. The main market for urea is wheat grower, followed by cotton, rice and sugarcane cultivators. Wheat has the highest acreage under cultivation and therefore has the highest demand for fertilizer while sugarcane has the highest application per hectare. Trends in demand/supply of Urea, DAP, TSP, is depicted in the table. With the help of following Table we can know trend and condition of this industry better.

Supply – Demand Projection (Tones)

Year

Urea DAP

Supply DemandDeficit / Surplus Supply Demand

Deficit / Surplus

2003-04 4,170 4,390 -220 292 1,069 -7772004-05 4,170 4,499 -329 450 1,123 -6732005-06 4,170 4,612 -442 450 1,179 -7292006-07 4,170 4,727 -557 450 1,238 -7882007-08 4,170 4,845 -675 450 1,300 -8502008-09 4,170 4,966 -796 450 1,365 -9152009-10 4,170 5,090 -920 450 1,433 -9832010-11 4,170 5,218 -1,048 450 1,505 -1,0552011-12 4,170 5,348 -1,178 450 1,580 -1,130

Government policies for Fertilizer Industry:

Library Investment Policy: The main points of Library Investment Policy are;

i. All economic sectors open to Foreign Direct Investment.ii. Equal treatment to local and foreign investors.

iii. 100 % foreign equity allowed.

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iv. No Government sanction required.v. Attractive tax / tariff incentives package.

vi. Remittance of Royalty, Technical & Franchise Fee, Capital, Profits, and Dividends allowed.

Foreign investment protected Law: Foreign investment is fully protected by

Foreign Private Investment (Promotion & Protection) Act, 1976. Protection of Economic Reforms Act, 1992 Foreign Currency Accounts (Protection) Ordinance, 2001

Fertilizer Policy 2001

Fertilizer Policy has been announced with effect from 1st July 2001. In next 10 years Pakistan will need additional 2 million tons of fertilizers for local consumption.

Salient Features Policy has four parts:

1. Existing Fertilizer Plants 2. New Fertilizer Plants 3. Existing Plants Planning for expansion and BMR 4. NPK Compounds.

Some of the top reasons why Pakistan is a good destination for your investment, as highlighted by the President in his speech at Expo 2005:

1. Security of investment even during nationalization of 1970s no foreign or MNC was nationalized.

2. Returns of capital up to 50% 3. Stability and predictability of economy considering improved economic indicators. 4. Availability of liquidity 5. Expanding infrastructure 6. Cheap labor 7. Areas of investment are agriculture, textile, telecom and IT, energy sector, service

industry, construction and building.

PAKISTAN & WORLD TRADE ORGANIZATION (WTO)

Economic Growth is a wild horse; it needs to be tamed to serve the real interests of the society. If the horse misbehaves in some societies, leading to deprivation of many human lives, then the fault is not of the horse but the rider. Economic growth is essential in poor societies — but even more is its structure and distribution. (Dr. Mahbub ul Haq Late)

The W.T.O will not have a negative impact on the Fertilizer Industry. The industry will be able to face the challenges and will improve the agricultural output by according to the demands of increasing population by improving the technology. The indigenous fertilizer pricing combined with brand preference provides confidence to the industry to meet the W.T.O challenges safely.

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Conclusion

Although, Pakistan was considered one of the success cases on fertilizer market deregulation, a number of critical issues persisted. Among them were: inconsistent government policies, difficult coexistence between public and private fertilizer producer/importers, raw material prices (natural gas), fertilizer distribution in remote areas, suspected dumping of under-priced imports in the local market, quality control of imported and local products.

There was unanimity in that the use of fertilizers had to be further expanded in order to meet food security requirements of a fast growing population (2.4 per cent annually). Emphasis was placed on balanced fertilization, since the use of phosphorus, potash and micronutrients, complemented by farmyard manure and compost, were well below the required dosage.

Fad nap’s inputs and support for providing this opportunity to discuss the present situation and future orientation of fertilizer policy in Pakistan between all parties concerned were commended. The opportunity was also used to invite representatives from the Fertilizer Unit of the Ministry of Agriculture, Nepal to provide guidance for their efforts with respect to fertilizer market deregulation.

Recommendations:

The following recommendations are proposed for Investment Policy;

i. There is a need for an additional incentive package for the fertilizer industry for further increase in production capacity in order to fill the gap between demand and supply forecasted for the near future.

ii. Due to the fact, that the investment policy had changed frequently, it was proposed that any incentive package should be valid for at least ten years in order to provide a planning basis for the industry.

iii. The elements of the package should be in line with the rules set by WTO, and iv. The incentive package should be implemented by all government agencies involved.

Questions:

1) What is the importance of Fertilizer Industry in Pakistan?2) Write about the current status of Fertilizer Industry of Pakistan?

3) What are the impacts of Government Policies on Fertilizer Industry?

4) What is the impact of WTO on Fertilizer Industry in Pakistan?

5) What is the investment rate of private sector in Fertilizer Industry?

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