Economy of

Pakistan
Industry: Fertilizer Industry of Pakistan
Submitted by :

Anmol Advani 1311105

Sana Gohar 1411235
Mustafa Hasan 1511304
Umer Akhund 1311310
Shahzaib Raza 1311309

5/26/2017
Contents
INTRODUCTION: ....................................................................................................................................... 2
FERTILIZER INDUSTRY IN PAKISTAN: ................................................................................................ 3
CURRENT SITUATION OF FERTILIZER INDUSTRY IN PAKISTAN: ................................................ 4
IMPORTANCE OF FERTILIZERS: ............................................................................................................ 5
MAJOR HIGHLIGHTS OF THE FERTILIZER SECTOR IN PAKISTAN (IN YEAR 2017) ................... 6
IMPACT OF FERTILIZER SECTOR ON OTHER SECTORS: ................................................................. 7
SCOPE OF FERTILIZER INDUSTRY IN PAKISTAN.............................................................................. 8
STATISTICS ................................................................................................................................................ 9
EXPECTED GROWTH RATE: ................................................................................................................. 10
GOVERNMENT REGULATIONS AND POLICIES: .............................................................................. 11
PRODUCTION UPDATE .......................................................................................................................... 13
STRATEGIC POLITICAL IMPORTANCE OF FERTILIZERS .............................................................. 14
LONG TERM ISSUES FOR THE INDUSTRY ........................................................................................ 14
COMPARISON OF PERFORMANCE WITH PREVIOUS YEARS: ....................................................... 14
UREA: ...................................................................................................................................................... 15
DAP.......................................................................................................................................................... 17
TOP FERTILIZER COMPANIES IN PAKISTAN:................................................................................... 18
FUTURE DEMAND OUTLOOK .............................................................................................................. 19
FUTURE OUTLOOK OF THE GOVERNMENT POLICY...................................................................... 20
FUTURE OUTLOOK OF THE FERTILIZER SECTOR .......................................................................... 20
CONCLUSION AND RECOMMENDATIONS: ...................................................................................... 22

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INTRODUCTION:
HISTORY

The fertilizer industry is an integral part of Pakistans economy. The Pakistani fertilizer industry
produces imports and distributes various types of fertilizers. The National Fertilizer Corporation
(NFC), a government corporation remained for most of Pakistans history as the largest
manufacturer of fertilizers.

After the partition of the sub-continent, the Food and Agricultural organization (FAO) entered the
scene forming an agreement with the Government of Pakistan. This resulted in the initiation of
Rapid Soil Fertility Survey and Population of Fertilizers project in 1958. The conclusion from
these studies was that the Pakistani soil is highly deficient in Nitrogen content and thus more
emphasis should be placed on Urea consumption. Secondly they also concluded that our
agriculture output is 1/3 rd. of our potential.

Ayub Khans green revolution emphasized on the fertilizer sector in the Public Sector. The NFC
set up Pakistans first fertilizer plant in 1958. The first private sector plant was set up by Exxon at
Dharki in 1965 at a cost of $43 million.

This was followed by Fauji Fertilizer in 1977 and Dawood Hercules later on. The NFC owned
and operated six manufacturing units that accounted for the balance. Until 1986, the fertilizer
industry was highly regulated. The government fixed prices and the profitability of the
manufacturers was capped at 20% of ROE. The regulated environment stifled private sector
investment in the fertilizer industry, leading to a widening demand-supply gap that had to be
bridged through expensive imports.

Urea prices were deregulated in 1986. However, this did not help the manufacturers significantly
as urea price increases were not large enough to offset the loss incurred on selling costly imported
urea at lower prices in the local market. By 1991, urea imports had risen to 584,900 tons,
approximately 27% of installed capacity. Imports were not only causing damage to the local
industry, but were also affecting the countrys foreign exchange reserves.

In 1991 the government initiated a fertilizer policy which granted special incentives for setting up
new projects and expansions.

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Nine companies operate in the fertilizer sector of Pakistan, with Fauji Fertilizer and Engro
Fertilizer collectively accounting for a total share of 83% in the Urea market. Moreover, these two
companies also contribute almost three-fourth of the DAP market.

The agriculture sector is important because it accounts for:

24% of the countrys GDP

50% of the employed labor force
65% of the countrys total export earnings making it the largest source of FX earnings
Forms the basis for over 50% of industrial production
Has growth rate of 3-4% per annum

Pakistans increasing population is resulting in greater demand for food consequently higher
demand for grain.

FERTILIZER INDUSTRY IN PAKISTAN:

One-fourth of Pakistans Gross Domestic Product (GDP) contributed by the agricultural sector,
there is significant dependence on agrarian products in the countrys economy. Demand of
fertilizer products in Pakistan is largely driven by factors including availability of cultivable land,
availability of water, prices of fertilizer products, population growth and government policies such
as commodity support prices offered to farmers.

Availability of cultivable area bears a direct relation with the demand for fertilizer products.
During fiscal years of 2010 - 2014, cultivable area in Pakistan has depicted a nominal growth of
1% on account of damage caused by floods and increasing severity of water-logging and salinity
issue. Going forward, area under cultivation is expected to largely remain unchanged provided no
natural calamities take place.

Largest contribution to the agrarian economy emanates from Punjab followed by Sindh given its
sizeable cultivable area. Commodity support prices offered by the Government of Pakistan (GoP)
to farmers have also played a crucial role in fostering demand of fertilizer. Incentive, in the form
of higher prices, encourages the farmers to improve crop yield through application of fertilizers.
Over the years, support prices offered by the government have depicted an upward trend. This

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resulted in higher use of fertilizer over the same horizon. Another reason attributable to increase
in fertilizer usage is the growing awareness about its benefits by farmers.

CURRENT SITUATION OF FERTILIZER INDUSTRY IN PAKISTAN:

Fertilizer usage is the growing awareness about its benefits by farmers. Nine companies operate in
the fertilizer sector of Pakistan, with Fauji Fertilizer and Engro Fertilizer collectively accounting
for a total share of 83% in the Urea market. Moreover, these two companies also contribute almost
three-fourth of the DAP market. With excess supply and fierce competition in the industry, pricing
power of the manufacturers is considered to be on the lower side. As a result of these dynamics,
margins of industry are expected to remain under pressure.

Demand of fertilizer products is met through local production and foreign imports, with the former
accounting for majority of demand. Domestic production amounted to approximately 7.6m tones
while imports were recorded at 1.8m tones during FY15. Domestic production stood at 6.1m tones
during 9MFY16. Despite slowdown in the local demand, the increase in production is on account
of improved gas availability due to LNG import. Moreover, two of the fertilizer plants which were
closed due to gas shortage became operational due to LNG supply. Higher production led to high
inventories; year-end inventory of the industry is estimated to remain around 1m tons. Given the
high level of inventories, the Government is likely to allow export of urea to ease the oversupply
situation in the industry.

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Despite weak agronomics and decline in global commodity prices, fertilizer off-take
(consumption/ demand) in Pakistan increased in FY15 vis--vis the preceding year. Fertilizer sale
during the first half of the ongoing year remained depressed owing to price uncertainty and weak
crop dynamics. During 3QFY16, urea sales picked up pace owing to drop in prices from Rs. 1,400
per bag to Rs. 1,200 per bag as a result of direct subsidy announcement by Government. Sales tax
on Urea was reduced from 17% to 5% while Nitrogenous fertilizers were included in the new
subsidy regime. Resultantly, the average prices of the fertilizer products witnessed sizeable decline
particularly in the 3QFY16. On an aggregate basis, urea industry sales during 9MFY16 are
estimated at 3.7m tones.

IMPORTANCE OF FERTILIZERS:
Food consumption is likely to rise in emerging markets where economic growth results in better
income per capita because higher income would lead to increased food consumption and hence

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greater grain demand. With growth in arable land diminishing as a consequence of rapid soil
erosion, fertilizer usage will continue to play an important role in food production. Despite bouts
of industry swings in the intermediate terms, secular industry dynamics will remain robust for the
industry because of the estimated 5-6% p.a. long terms growth in fertilizer demand in Pakistan and
the largely inelastic food demand.

MAJOR HIGHLIGHTS OF THE FERTILIZER SECTOR IN PAKISTAN

(IN YEAR 2017)
1. Urea export increases to 0.6 million metric tons

In order to facilitate the domestic fertilizer producers, the federal government has enhance urea
quota 100 percent to 0.6 million. According to State Bank of Pakistan's (SBP) EPD Circular Letter
No 12 of 201 in terms of Ministry of Commerce's Office Memorandum No 6(1)/2015-Exp-III
dated May 23, 2017 , Government of Pakistan has allowed increase in quantity for export of urea
from 0.3 million metric tons to 0.6 million metric tons.

Further, it has also extended the deadline for export of urea from April 28, 2017 to October 31,
2017. All other terms and conditions for the export of urea shall remain unchanged. SBP has
advised authorized dealers to bring the same to the notice of all their constituents and process the
case of exports.

2. Experts call for balanced use of fertilizers

Experts at an International seminar have called for ensuring balanced use of fertilizers to overcome
decreasing soil fertility, and increasing productivity. They were addressing an international
seminar on potassium arranged by Institute of Soil and Environmental Sciences, University of
Agriculture Faisalabad.

Chairing the session, UAF Vice Chancellor Professor Dr Iqrar Ahmad Khan said that imbalance
usage of fertilizers was not only decreasing soil fertility but also causing a damage of billions of
rupees to the national economy. He said that the balanced fertilizer use could result in increasing
productivity of major crops.

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He added that the university had developed models for proper prediction of fertilizer doses. He
said that almost all the soils had become deficient in potassium, nitrogen and phosphorus. He said
that situation demands meeting the requirements of crops due to which agriculture production had
decreased considerably. He added that the agriculture sector was under the grip of different
problems including low per acre production, water scarcity, stagnation in the major crops, high
post-harvest losses, lack of mechanization, and reducing soil fertility. He added that the Punjab
Agriculture policy was being revamped that will uplift the sector and alleviate the poverty.

3. Government made Rs 13.163 billion payment against fertilizer cash subsidy: Senate
informed

The Senate was informed on Wednesday that the government made payment of Rs 13.163 billion
against announced fertilizer cash subsidy. During the question hour, the Senate was apprised that
subsidy claims for the period from June 2016 to November 2016 pertaining to 19 fertilizer
manufacturers/ importers amounting to Rs 21.16 billion were received by the "Fertilizer Cell'. The
payment of Rs 13.163 billion (Rs 4.255 billion for DAP and Rs 8.908 billion for urea) has already
been made through the State Bank of Pakistan (SBP), whereas the remaining cases of payments
are under verification process.

Federal Minister for Inter-Provincial Co-ordination Mian Riaz Hussain Pirzada said that the
finance minister announced in budget speech 2016-17 fertilizer cash subsidy of Rs 300 per bag on
DAP and Rs 156 per bag on urea. The total subsidy of Rs 17.16 billion was for urea and Rs 10.80
billion for DAP fertilizer on equal sharing of federal and provincial governments.

IMPACT OF FERTILIZER SECTOR ON OTHER SECTORS:

The fertilizer sector has direct impact on the performance of agricultural sector as fertilizers are
used to increase the productivity of agricultural sector. Urea, DAP and other fertilizers are used to
increase the productivity and improve the quality of agricultural products.

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The fertilizer sector also impacts other sectors as well particularly the textile sector. This works as
a chain process which starts from fertilizers being used to improve the quality and quantity of
agricultural products, for instance fertilizers are used to improve the productivity of cotton and
cotton is the main raw material for textile products, so if fertilizers are good it will result in better
cotton and if cotton is of good quality, it will ultimately affect the performance of textile industry.
So in short the whole textile industry somehow depends upon the performance of fertilizer sector.

Major types of fertilizers in Pakistan

The Nitrogenous Fertilizers

The Phosphorous Fertilizers
The Potassium Fertilizers

Fertilizers provide a number of benefits to the soil they include better productivity, sustainable
growth, and minimizing nutrient losses. The Nitrogenous Fertilizers provide the plant with Higher
Protein Content, Color and Growth. The Phosphorous Fertilizers promote strong, healthy root
development and helps plants mature more rapidly and thus aids in blooming. The Potassium
Fertilizers raise the resistance of plants to diseases and promotes growth from root to stack.

SCOPE OF FERTILIZER INDUSTRY IN PAKISTAN

Agriculture is continuing to be the mainstay of the Pakistan economy, the need to improve crop
productivity and quality has assumed significant proportions over the year. To that end, the
government has pursued a policy of supporting the industry in the form of feedgas subsidies and
increasing support prices for commodities (which increase farmers purchasing power for
fertilizers).

Over the years, fertilizer manufacturers have respond timely to farmer demands and in the process
reaped handsome profits. This is not extraordinary considering the fertilizer, by itself contributes
nearly 25-75% in raising yields, depending on the crop and soil type. Better marketing, product
development and prudent management have led to good return on equities for the local fertilizer
players. However, whereas past industry trends show that corporates focused on core fertilizer
activity, the next decade is likely to witness companies branching out into other products to cushion
against commodity cycles and the possibility of gas subsidy termination within the next 5-6 years.

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Nonetheless, the demand for fertilizer is unlikely to subside significantly in the longer term simply
because limited arable land should continue to demand better crop production as population grows
at current levels of 2.3% p.a.

However, the continuation profits would depend greatly on the extent of the fertilizer
manufacturer ability to pass on costs, as well as operational efficiencies, weather conditions, and
the purchasing power of farmers. Together, the latter two factors are largely responsible for annual
fertilizer demand.

STATISTICS
ktons Urea DAP
1,200
1,000
800
600
400
200
0
Mar-15

Mar-16
Jan-15

Jul-15

Jan-16
Sep-15

Jul-16

Jan-17
May-15

May-16
Nov-15

Sep-16

Nov-16

Keeping up with the trend set in the previous month, Pakistans fertilizer offtake growth (on MoM
basis) continued with its upward trajectory as posting 34%MoM growth due to massive increase
in urea sales. According to the data released by National Fertilizer Development Center (NFDC),
cumulative fertilizer offtake in June15 was recorded at 566,000 tons as against 421,000 tons sold
a month ago.Urea production increased by 15%MoM/10%YoY, whereas urea offtake increased
by 11%YoY. Analysts say the robust offtake in June15 was due to news regarding an imminent
gas price hike which will increase fertilizer cost of production.
The countrys cumulative urea sales for 1HCY15 increased 12% to 2.86 million tons as compared
to 2.55 million tons during 1HCY14. Similar to urea, DAP sales also improved by 14%YoY during
the corresponding period to 465,000 tons from 408,000 tons.Fertilizer sector remained amongst

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the best performing sectors at the Karachi Stock Exchange, outperforming KSE-100 index by
17%CYTD.
With improvement in 1HCY15 total urea offtake, imported urea sales also improved by 33%YoY
to 392,000 tons. Analysts cite a lower price differential between imported and local urea along
with increased supply of domestically produced urea and brand awareness as the main contributing
factor behind this trend.Improvement in local urea sales can also be attributed to higher indigenous
production during 1HCY15 up by 4%YoY to 2.47 million tons on the back of improvement in
capacity utilization of ENGRO and FATIMA.
On the offtake front, the countrys total urea sales during FY15 was 5.9 million tons against 5.7
million tons in FY14, up 3%YoY while locally produced fertilizer sales grew by 4%YoY to 5.08
million tons.
While demand side dynamics are expected to remain favorable going forward, analysts expect
ENGRO and FATIMA to continue to be in the limelight as potential gas price rationalization in
August15 leads to increase in feedstock prices.

EXPECTED GROWTH RATE:

The government has forecast 14.7 percent increase in the overall fertilizer off-take for Kharif crop 2017-18
as compared to the previous Kharif season. According to an official document of Ministry of National Food
Security and Research, government has estimated total fertilizer off-take for Kharif season 2017-18 at 3.9
million tons against 3.4 million tons in preceding Kharif season, which is 14.7 percent higher than Kharif.
Out of total 0.9 million tons estimated off-take of DAP, Punjab will consume 0.62 million tons, Sindh 0.22
million tons, Khyber Pakhtunkhwa, 40,000 tons and Balochistan 20,000 thousand tons. Out of total 3
million tons urea off-take, consumption of urea in Punjab is estimated at over 2.05 million tons, Sindh 0.76
million tons, Khyber Pakhtunkhwa 150,000 tons and Balochistan 40,000 tons.
The Kharif season will also witness an increase of 9.5 percent in off take of potash (SOP/MOP) fertilizer.
The Kharif seasons 2017-18 will open with a total balance of about 1.32 million tons of urea. Total
availability of urea will be about 4.23 million tons with 2.9 million tons from domestic production.
According to the document, the availability of DAP will be 0.64 million tons including against expected
off-take of 0.9 million tons. Supply and demand gap in DAP will met by imports through private sector.
During Rabi season 216-17 the total estimated urea off-take was 3.1 million tons, which is 26.7 percent
more than Rabi season 2015-16. The DAP off-take during the Rabi season increased by 3.9 percent to the
level of 1.5 million tons against 1.45 million tons for the previous Rabi season.

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The Rabi season witnessed 100 percent increase in off-take of potash (SOP/MOP) fertilizer; the overall off-
take of fertilizer increased by 18.5 percent during the Rabi season 2016-17. According to the document,
Rabi season 2016-17 opened with a balance of about 1.57 million tons of urea with 2.84 million tons
domestic production. The total availability of urea remained around 4.41 million tons.

GOVERNMENT REGULATIONS AND POLICIES:

Pakistan is facing a shortage of fertilizer. Due to a gradual increase in the off-take of fertilizer in
the recent past, the short-fall has further been increased. To cope with the problem, the Government
has decided to further encourage the local manufacture of fertilizers in the country. To achieve the
objective, following concessions and facilities have been allowed to new projects and existing
units envisaging expansion:

Assured supply of gas at existing prices for the purpose of feed-stock for a period of
10 years from the date of operation of plants.
Duty-free import of machinery not manufactured in the country. This exemption will
include Import surcharge.
Duty-free import of phosphate rock. This exemption will include Iqra and Import
surcharge.

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 In the unlikely event of imposition of price control, the ex-factory price will be so fixed
that a minimum return of 20% on equity after tax at 90% capacity utilization is assured.
The entrepreneurs would be allowed to import second-hand machinery, if they so
desire.
The gas used in the reforming furnace for heating will be treated as feedstock.
Assured supply of gas used as fuel at least for 9 months in a year.
All the fertilizer producers domestic and foreign, public and private will be treated
equally.
It would be the responsibility of the DFIs to check the economic and financial viability
of the projects before providing finance.
Expansion would be treated as new plants and be entitled to the same concessions as
allowed to new plant/s.

Apart from Nitrogenous Fertilizer (Urea), manufacture of DAP/Phosphate fertilizer was, also
lagging behind. The project proposals approved in the past were not making any progress
towards implementation for want of protection against dumping. The government has decided
to provide necessary protection and safeguards to make them compete the imported fertilizer,
therefore, following pricing measures for Phosphate Fertilizer have been taken:

In order to avoid any ambiguity, import duties if any, will be so adjusted that the C&F
price plus duty plus the costs of bagging (but excluding other incidentals) does not fall
below the equivalent of US $ 250 per ton.
Import surcharges on Sulphur specifically used for the manufacture of fertilizers are
waived.
If any change is made in government levies on the basic raw materials (import duties,
sales tax, surcharges, etc) or any levy imposed on local production of DAP (such as
excise duty, sales tax, surcharges etc.) there would be corresponding change in the
floor price of US $ 250 per ton.
In line with the current policy, the projects would enjoy three to eight years tax holiday
from the date of commercial production, depending upon the areas where such projects
are set up.

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PRODUCTION UPDATE
Production Update There was a decline in urea production largely on account of periodical
maintenance and gas shortage while NP was produced above the rated capacity mainly owing to
production efficiencies. Going forward, any significant increase in production levels would require
capacity enhancement. The company plans to expand its production capacity with expected capital
expenditure of Rs. 22b. In the initial phase, PFL intends to increase its ammonia plant production
capacity by 138,600 metric tons per year from current level of 316,800 metric tons per year. The
company has signed an agreement with the SNGPL for an uninterrupted supply of additional 16 T
JCR-VIS Credit Rating Company Limited April 2011 1 Sector Update - FERTILIZER
INDUSTRY gas from FY12 onwards. The management expects commencement of the enhanced
capacity of ammonia production by FY12. Product-wise installed production capacity and its
utilization is tabulated in the table below: M.Tons FY10 FY09 Urea Rated Production Capacity
92,400 92,400 Actual Urea Produced 73,933 105,674 Capacity utilization 80% 114% Nitro
Phosphate (NP) Rated Production Capacity 304,500 304,500 Actual NP Produced 316,699
292,102 Capacity utilization 104% 96% Calcium Ammonium Nitrate (CAN) Rated Production
Capacity 450,000 450,000 Actual CAN Produced 350,062 341,928 Capacity utilization 78% 76%.

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STRATEGIC POLITICAL IMPORTANCE OF FERTILIZERS
Ensuring adequate domestic supply of fertilizers is vital to stable agriculture output, which in turn
means stable prices for staple items like wheat, rice, etc. Hence, the availability of fertilizers on a
consistent and reliable basis is of strategic political importance for successive governments in
Pakistan. It is very difficult for the government to substantially raise prices for these items and
keeping in view the food requirements it is essential for the government to maintain a rational
policy towards encouraging domestic fertilizer capacity on a long-term basis.

Import bill for food items

Another reason for focusing on sufficient fertilizer supply is the import bill for food items,
primarily wheat. Moreover, Pakistans low foreign exchange further augments this reason.

LONG TERM ISSUES FOR THE INDUSTRY

Over Invoicing our analysis shows that ECPL set up a very expensive plant as compared to those
being set up recently (that too of higher capacity) and their BMR is nearly 2x as expensive as the
cost of new plants.
International Weakness even with major subsidies, local prices are $20-30 more than the
international ones. With this difference projected to grow, it would be best to remove the subsidy
and put the Rs. 17 billion saved to better use.
Removal of the Industry with removal, the gas can be used for power generation reducing oil
imports by around $ 860 million and $ 350 million saved on subsidies gives us gross savings of $
1.2 billion and net savings of $ 500 million.

COMPARISON OF PERFORMANCE WITH PREVIOUS YEARS:

The performance of fertilizer sector has not been good in past years due to shortage of gas supply
and the production has always been lower than the actual capacity of the sector. However in last 2
years this sector have shown positive growth due to better supply of gas and some initiatives by
the current government to improve the performance of this sector.

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The fertilizer industry has an oligopolistic market structure. Three major players in the segment
have significant pricing power, which is hampered by government intervention in the form of
taxes, agricultural subsidies and other regulations.

The domestic production of fertilizers in FY-16 (July to March) increased by 14.4% over the same
period of previous year`s performance. The main reason for this growth is the better availability
of gas especially in form of LNG. Two of the fertilizer plants were closed due to shortage of gas
supply is now operational as well.

The demand for fertilizer products depends upon many factors and one of the most important
factors is the availability of cultivable area. According to the statistics during 2010-2014,
cultivable area has shown a nominal growth of only 1% due to damage caused by floods in
Pakistan. However the demand of fertilizer products is increasing due to efforts of the current
government inform of incentives, increasing awareness and supporting prices.

Demand of fertilizer products is met through local production and foreign imports, with the local
production accounting for majority of demand. Domestic production amounted to approximately
7.6m tons while imports were recorded at 1.8m tones during FY15

There are total 9 companies operating in fertilizer sector, Fauji fertilizer and Engro fertilizer are
the top players with a combined market share of 83% in Urea market. The Domestic production
amounted to approximately 7.6m tons while imports were recorded at 1.8m tones during FY15.

The main products of fertilizer industry are Urea, DAP and Ammonia. Urea is the most widely
used fertilizer in Pakistan.

UREA:

The Urea market shrank by 5% in 2014 compared to 2013. The Urea inventory at beginning of the
year was 321 thousand tons. Urea imports for the year 2014 stood at 769 thousand tons which was
20% lower than the imports of 967 thousand tons during Jan-Dec 2013. The main reason of this
performance was the low supply of gas. However after the first quarter of 2015, the performance
of industry improved on the account of better supply of gas.

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 Industry Out Put Vs Offtake - Urea
7000
6000
5000
4000
3000
2000
1000
0
9M FY16 2015 2014 2013 2012 2011

Sales Production

Urea production for the first half of 2015 increased by 7% to 205M tons from 2.3M tons in the
first half of 2014. Even though the country has the capacity to fully meet domestic demand, urea
has had to be imported over the previous several years to meet domestic demand as plants could
not operate at required capacity due to gas curtailment. Since imported urea is expensive compared
to that produced domestically, the GOP provides a subsidy to bring its price down. On an aggregate
basis, urea industry sales during 9MFY16 are estimated at 3.7m tonnes.

Market Share

EFERT FFC Agri Tech DH Fatima NFML

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DAP

DAP is the second most widely used fertilizer in Pakistan. The only producer of DAP is the Fauji
Fertilizer with a capacity of 650k tons per anum. It only caters to around 45% to 50% of total
demand and the rest is imported. Import of DAP during Jan-Dec 2014 witnessed an increase of
14% to 993 thousand tons compared to 869 thousand tons imports of the same period last year due
to rising domestic demand for phosphatic fertilizer.

Chart Title
2,000

1,500

1,000

500

0
2014 2013 2012 2011

Sales Production

D.A.P production in the first quarter of 2015 also showed a considerable increase of about 18% as
it grew from 297 thousand tons to 351 thousand tons when compared to the first half of the last
year. Similarly, off take of DAP was also increased by 14% which is from 408 thousand tons to
465thousand tons when compared to the first half of the last year.

Other Products:

Apart from Urea & DAP, other products account for a combined 15% of total fertilizer
consumption in the country. These products include CAN, NP, NPK, SSP, MOP/SOP etc. These
products are imported with demand for some products being partially met with domestic
production. For example, Engro Fertilizers is the sole producer of NPK in the country which being
a complex fertilizer partially caters to the demand for Potash based products such as MOP & SOP
which are imported.

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TOP FERTILIZER COMPANIES IN PAKISTAN:

Pakistan is an agro-based country and there are well renowned manufacturers and suppliers of
fertilizers in Pakistan. Pakistan is one of the ten major producers of wheat in the world with an
average 24 million tons output per season. Major Fertilizers industries of Pakistan produced
different kind of fertilizers with ranking of Engro Pakistan 33% Urea Production share Fauji
Fertilizers (Goth Machi) 38%Fauji Fertilizers (Bin Qasim) 7%Engro Fatima Pak 6% Arab
(Multan) 8%Agri Tech (Mianwali) 7% Dawood Hercules (Skp) 6% Only FF produces DAP. Urea
and Phosphate Market Share by Firm 44% 9% 27% 6% 9% 5% Urea Market share Fauji Fertilizers
National Fertilizer Marketing Ltd. Engro Fertilizers Dawood Hercules Reliance Group.

Fertilizer is main source of Pakistan. Important fertilizer companies in Pakistan are: Fauji
Foundation, Pak China Fertilizer, Engro Chemical Lyallpur Chemicals & Fertilizer, Dawood
Hercules, Pak- Arab Fertilizer Pak- American Fertilizer.

Key Risks in Fertilizer Industry of Pakistan:

Gas unavailability: Unavailability of gas supply to fertilizer plants remains a key risk, especially
for companies which are catered through SNGPL network. However, LNG import agreement with
Qatar is likely to ease gas crises.

Reduction in Prices: Margins of fertilizer companies are under pressure on account of reduction
in fertilizer prices. This is a direct outcome of measures introduced in fiscal budget for FY17.
Going forward, high level of inventories carried by the fertilizer manufacturers and lower
international prices of fertilizers presents challenges to the fertilize sectors. Also, there is a vast
disconnect between local and international prices of fertilizers. Average price trend across various
fertilizer products is tabulated below: Figure 2: Average Prices per Bag

Agricultural policies: Existence of commodity support prices and other favorable policies have
mitigated the impact of decline in global commodity prices on agricultural sector. Changes in
government stance in this regard could prove to be detrimental for fertilizer industry. However,

18 | P a g e
we expect that probability of such an event is low considering that Pakistan is primarily an agrarian
economy

FUTURE DEMAND OUTLOOK

In 1999-2000, the bumper cotton crop is likely to increase the fertilizer demand growth by around
6%. However the average growth in fertilizer demand is poised to remain steady at around 4-5%
per annum in the long run.

The off-take of Urea in Kharif season (April 2000-September 2000) will be around 2.05 million
tons while the off-take in Rabi (October 1999-March 2000) is expected to be 2.157 million tons.
Thus, it has been pointed out that the total off-take of urea will be 4.207 million tonnes during
1999-2000. As against this the supply is estimated to be around 4.761 million tonnes and thus we
have a good enough export potential and at prices lower than that in the international market, the
respective fertilizer companies should be able to make handsome profits.

Further increases in off takes can come about as the support prices of different crops have been
raised. This includes wheat the prices of which have risen by 33% to Rs. 320 per 40kg bag. With
these higher prices, the farmers will tend to spend more on the fertilizers and we project a 2%
increase in demand in the coming years due to this factor alone.

The most obvious way to increase demand is through increasing the acreage of land under
cultivation. If this is not the case, however, the only way to get a higher yield is through a more
widespread use of fertilizer; and as discussed earlier this is probably a likely case since fertilizer
application is at a very low level. The future growth rate of fertilizers is expected to be around 4-
5%.

The demand for DAP is likely to remain higher than urea, because of greater marketing efforts by
the local producer-FJFC, which is likely to make the farmers more aware of the importance of
DAP for different crops. DAP is likely to remain the most important of the phosphoric fertilizers,
because of local production and easy handling benefits.

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The present crises if solved can also help to stimulate the demand for various types of fertilizers.
The government is expected to continue the subsidy, which means for the next years, the fertilizers
(urea), is likely to be at a discount to the international market, another reason for an increase in
demand.

In the recent future, we are projected to have a Urea Surplus of 550,000 tons and thus we do not
see any urea imports (rather there are government intentions to allow urea exports of 100,000 tons).
Even if the Urea consumption were to increase dramatically, we have sufficient extra production
to cater to it.

As for other imports we will need to import 420,000 tons of DAP (about 1/2 of the total
requirement). This is because with the start of FJFC, which will produce 450,000 tons, of DAP;
its import requirement will reduce. This will augur well for our foreign exchange reserves. The
Al-Noor project (of DAP) which was expected to start commercial production in 1999 has been
indefinitely delayed due to gas supply problems. Therefore in this year we will have 1/2 of DAP
requirement imported but we might see even this reduce to a minimal level once the Al-Noor
project is given the go ahead for commercial production.

FUTURE OUTLOOK OF THE GOVERNMENT POLICY

Given the past focus on improving domestic supply of urea, it would not be logical to assume a
complete turnaround in government policy.

FUTURE OUTLOOK OF THE FERTILIZER SECTOR

The government, under the pressure of the IMF, has repeatedly made increments in the fuel and
variable feedstock gas prices as shown in the table above. Despite the increments, the feedstock
(both fixed and variable), continue to be at a discount to the international gas prices, thereby
protecting the local industry. This is solely to provide benefits to the fertilizer industry, which
plays a key role in the growth of our country. The repeated increments have severely reduced the
profitability of the industry, because the rise in costs cannot be transferred completely to the
farmers, as shown in the graph below.

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According to reliable sources, the GoP of Pakistan in an effort to please the international finance
agencies intends to gradually remove the subsidies once contracts have expired, and bring the
feedstock and fuel stock prices at par with the international prices. This move would greatly reduce
the profitability of the major players who have at least 45% of their existing capacities at subsidized
rates and might even force some inefficient players out of the industry. Hence, the manufacturers
need to find alternative sources of inputs to keep on producing fertilizers.

If the government continues its support to fertilizer sector, an opportunity will emerge through
which Pakistan will once again become the exporter of locally produced urea to earn substantial
amounts of foreign exchange for the country. A recent BMA research shows an increase of 17%
month-on-month in international urea prices, due to higher coal prices; however, the high cost of
production in Pakistan does not make it an economical of proposition for export. The government
will have to offer incentives to allow export of piled up urea inventory, which stood at 900,000 at
the close of 2016.

The government must appreciate that the fertilizer industry has always looked beyond profitability,
while serving, educating and empowering the farming community, through valuable
developmental initiatives, besides passing on the benefits of tax incentives and gas subsidy, to
farmers. These enterprises pursue an elaborate philosophy to share their success with the
community around them, by fulfilling their Corporate Social Responsibility (CSR) and
contributing towards the prosperous growth of the nation.

The key players in Pakistan's fertilizer industry spend generously on improving the healthcare and
educational facilities in many deprived regions. They install renewable power projects to reduce
the energy crisis and provide relief during major calamities or disasters in the country. They have
always followed traditions of good-governance and transparency, while paying all their taxes
prudently as they absorb the substantial part of taxes or GIDC levied on the industry, thus helping
to revive the poor farming community. They have played a key role in reducing imports to save
precious foreign exchange and improving food security in the country.

The government is expected to work with this essential industry by forming a joint committee and
chalking out both short-term and long-term plans to gain maximum output, improve food security
and farmers' wellbeing that promises higher agricultural productivity and growth for an agrarian

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economy like Pakistan. The governmental support in shape of more incentives will strengthen the
valuable developmental initiatives that the fertilizer industry has already launched.

CONCLUSION AND RECOMMENDATIONS:

The government must appreciate that the fertilizer industry has always looked beyond profitability,
while serving, educating and empowering the farming community, through valuable
developmental initiatives, besides passing on the benefits of tax incentives and gas subsidy, to
farmers. These enterprises pursue an elaborate philosophy to share their success with the
community around them, by fulfilling their Corporate Social Responsibility (CSR) and
contributing towards the prosperous growth of the nation.

The key players in Pakistan's fertilizer industry spend generously on improving the healthcare and
educational facilities in many deprived regions. They install renewable power projects to reduce
the energy crisis and provide relief during major calamities or disasters in the country. They have
always followed traditions of good-governance and transparency, while paying all their taxes
prudently as they absorb the substantial part of taxes or GIDC levied on the industry, thus helping
to revive the poor farming community. They have played a key role in reducing imports to save
precious foreign exchange and improving food security in the country.

So the government is expected to work with this essential industry by forming a joint committee
and chalking out both short-term and long-term plans to gain maximum output, improve food
security and farmers' wellbeing that promises higher agricultural productivity and growth for an
agrarian economy like Pakistan. The governmental support in shape of more incentives will
strengthen the valuable developmental initiatives that the fertilizer industry has already launched.

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