Unsold local fertiliser stock swells to record high

Arrival of cheap imports makes local product unwanted.

KARACHI: Huge influx of cheap foreign fertiliser in the market has taken local fertiliser in the backdrop and swelled its unsold inventory level to a record high in April.

Unsold stock stood at a whopping 0.94 million tons in April against the past decade’s average of 0.28 million tons, says an Elixir Securities research note issued on Monday. The previous record high of 0.81 million tons was posted in May 2007.

Local fertiliser manufacturers have been second best to their imported counterparts in 2012 as price of imported fertiliser stands much lower due to the partial payment made by the government for them in the form of subsidies.

Imported fertiliser contributed a whopping 51% to total urea sales while locally manufactured goods comprised 49% in April. The surge is huge considering the fact that imports made up only 17% of total sales in the same month last year.

The government’s reliance on imports has eased the demand of the commodity for now, however, this will have a huge hit as far as the country’s fiscal management is concerned as the fertiliser import bill reached $848 million during the first seven months of the current financial year against a total of $300 million during same period last year.

In most instances when inventory level crosses the 0.5 million tons mark, it is followed by a massive drawdown. Will that happen this time around is still not clear, adds the note.

Govt to buy local imports?

The government recently placed a urea import tender for 100,000 tons although it had initially stated its intention to purchase close to 300,000 tons.

“Details haven’t transpired as to why the government may have lowered its import target, however there is a possibility that locally manufactured fertiliser could be bought instead,” says the note.

Should the local industry sell close to 0.2 to 0.5 million tons of urea to the government, it will turn into a win-win situation for both parties. The government will save huge funds and the local industry will be able to soothe its swelling unsold stock.

After buying fertiliser from the local industry, the government may sell the agriculture input at a discount to its rural base to appease them with election right around the corner.

The amount of saving for the government is also expected to be significant. Should the government sell local urea at Rs200 per bag discount to bring it at current price of Rs1,650 per bag, its subsidy would be massively lower than what it has to pay to subsides imported fertiliser.

If this scenario plays out then expected subsidy on 0.5 million tons of local urea would be only Rs2 billon while if this was imported fertiliser then subsidy would have stood at Rs30 billion.

Published in The Express Tribune, May 29^th, 2012.