Budget measures: ‘Supply glut to persist despite subsidy package’

Engro Fertilizers CEO says excessive commodity can be exported

KARACHI: The urea price cut announced during the budget speech bodes well for the industry - as an exorbitant surge in sales volume is expected - but the supply glut is expected to persist, Engro Fertilizers CEO Ruhail Mohammad said on Wednesday.

“In addition to the current price cut, it is necessary that the government takes steps to export surplus inventory to earn foreign exchange,” Mohammad told The Express Tribune. On the other hand, a BMA Capital report stated that with the arrival of the Kharif sowing season, along with low prices of fertiliser, the inventory glut problem is expected to ease.

Background

The government, in the proposed budget for 2016-17, announced that urea fertiliser price was to be brought down to Rs1,400 from Rs1,800 per bag, in an effort to bolster the agricultural sector that underwent a negative growth in the outgoing fiscal year.

Of the Rs400 reduction, Rs182 cut is from general sales tax, Rs168 is direct subsidy, and Rs50 retention ‘premium’ cut from manufacturers, as per the BMA Capital report.



Higher retention price is at which retailers sell fertiliser bags, while the lower selling price is at which the fertiliser manufacturers sell them to retailers, the difference - Rs50 - will be absorbed by manufacturers.

While there will be a negative hit on urea margins of Rs50, it will be partially offset by the increase in volumes.

The price cut is expected to ease the current depressed sales and the industry demand is predicted to escalate.

In reply to a question on short term challenges, the CEO said that the margins of the industry have been squeezed due to the continuous price cuts since September 2015.  This was due to a combination of factors such as pressure due to low international prices and poor crop economics. The local inventory glut is another challenge.

However, with continued support from the government through measures such as the current subsidy package, the local industry is expected to be in a stable position, he added.

“We will maintain reduced prices till the subsidy continues. Once the subsidy is exhausted, due to the already squeezed margins, manufacturers will have no choice but to increase prices,” said Mohammad.

He added that gas availability for fertiliser plants remained a long-term challenge for the industry.

Published in The Express Tribune, June 9^th, 2016.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.