CCP finds flaws in fertiliser price increases

Industry jacks up prices despite no change in input costs: report.

Farooq Baloch June 26, 2012

KARACHI: The local fertiliser industry has raised prices by an unprecedented 86% in a year – the highest during the last 20 years – without any justification, according to the Competition Commission of Pakistan’s (CCP).

Fertiliser manufacturers raised urea price to Rs1,580 per 50kg bag in October 2011, up by 86%, from Rs850 per bag of 50kg in December 2010, quotes the 40-page inquiry report of the CCP.

The average increase comes out to a 13% annual hike over the last six years, it added.

The inquiry committee, which concluded its investigation on June 25, was constituted in September 2011 to investigate the rationality of the price hikes and possible anti-competitive practices by industry players between December 2010 and December 2011, official said.

The local fertiliser industry comprises seven manufacturers Engro, Pak Arab Fertilizers, Fauji Fertilizer Company, Fauji Fertilizer Bin Qasim, Fatima Fertilizer, Dawood Hercules and Agritech.

Four producers, owned by two groups, hold 84% of the total current manufacturing capacity, says an official requesting anonymity. The report also said that domestic production is always lower than the total urea demand and the shortfall is met through imports – ensuring the sale of entire production as farmers buy every ounce of the urea produced by the local industry, the report said.

The fertiliser industry, in defence, cited gas curtailment by the government as the main reason for lost efficiency and price hike. The report, however, found that these players have increased urea prices simultaneously and coherently – at same rate and same time – without an objective justification.

To justify its findings, the commission’s report claimed that gas curtailment impacted only 27% of the total urea fertiliser manufacturing capacity, however, producers representing 73% also increased prices by the same amount – indicating some formal or informal understanding for such action in a coherent fashion. There was no justification for unprecedented price hike, it said. Gas curtailment hit only Pak Arab Fertilizers, Agritech, Dawood Hercules and Engro’s new plant that are supplied gas by Sui Northern Gas Pipelines, report added.

The report also found that the fertiliser sector saw no significant increase in input costs compared with previous years.

The analysis of input costs indicate that natural gas – a major input of urea production – was available to urea manufacturers at the same price while other cost components also remained  more or less unchanged in 2011, the report said. From the aspect of input costs, there were no significant or notable increases to justify hike in urea prices, it said.

The price increase by Engro and other industry players, on the reasons of gas curtailment, is not justified from Gas Supply Agreement with Sui Northern Gas Pipeline Limited, the report said, adding the remedy is available in the form of supply of gas in the future. There is thus no justification for unprecedented price hike, it said.

The report also stated that the industry’s profitability margins increased significantly compared to previous years.

FFC and FFBL profit before tax was Rs49 billion in the period under review, double the profit compared with the preceding year; it said. Engro – that charged Rs10 billion in depreciation and finance cost including that of new plant – earned Rs6.9 billion against the previous year’s Rs5.2 billion, the report said.

Gross margins of urea fertilisers were up to 62% of sales, which is also unprecedented and is not available to any industry in the world, the report said.

The two groups that account for 84% of the total production capacity confirmed they have not yet received any notice from the commission. However, officials familiar with the matter, said that all the seven players will receive show cause notices shortly.

“When we receive the notice, we will respond accordingly,” Engro Corporation spokesperson Amanul Haque said.

FFBL also said they did not receive any notice from the commission. “We always respond to all the notices of CCP, but we have not received any notice so far,” said Muhammad Arif of FFBL’s corporate communication department said.

Published in The Express Tribune, June 27th, 2012.


Vigilant | 10 years ago | Reply

Cartels items, sugar, energy sector, agriculture u name it......increase prices and creating artificial their own will

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