ISLAMABAD - The Competition Commission of Pakistan (CCP) in its recent enquiry concluded that the farmers are not facilitated through billions of rupees subsidy paid by the government of Pakistan to the fertilizer sector every year.
An enquiry conducted by the Competition Commission of Pakistan (CCP) has shed light on the profitability, cost structures, subsidies, and their impact on urea prices for farmers. The investigation has raised key questions regarding the pricing strategies employed by urea manufacturers. The cost structure analysis revealed that the main raw material for urea production, feed gas, varies in price for each manufacturing unit. Despite these differences in costs, urea producers have maintained identical prices, prompting CCP to question the pricing mechanisms in place.
The fertilizer industry’s total annual gas consumption stands at 266,796 MMCF, with 83% utilized as feedstock and the remaining 17% as fuelstock. Subsidies on feedstock gas amount to approximately Rs. 152 billion annually, aimed at ensuring affordable urea prices for farmers. However, despite these subsidies, urea prices continue to rise, resulting in significant profits for producers.
In 2021, Fauji Fertilizer Company (FFC) reported a gross profit margin of 35.78%, Net profit margin of 20.15%, and a return on equity (ROE) of 46.08%. Similarly, Engro Fertilizers recorded a gross profit margin of 33.3%, Net profit margin of 15.9%, and an ROE of 44.97%. These ROE figures are notably higher compared to the Indian urea industry, where the ROE is capped at 20%.
A concerning trend of uniform pricing was also observed, with all urea manufacturers in Layyah district increasing prices by Rs. 482/bag (or 27.26%) between February 2022 and November 2022. Price adjustments, both increases, and decreases, were made simultaneously by all companies, indicating a coordinated pricing strategy.
In response to these findings, CCP has issued show-cause notices to urea producers, demanding an explanation for what appears to be a coordinated price fixation. The investigation underscores the importance of ensuring fair competition and protecting consumer interests in the fertilizer industry.
CCP’s inquiry found FMPAC and its six member firms, including Engro Fertilizers Limited, Fauji Fertilizer Company Limited, Fatima Fertilizer Company Limited, Fauji Fertilizer Bin Qasim Limited, Agritech Limited, and Fatimafert Limited, of prima facie violating the Competition Law. The inquiry was prompted by an FMPAC’s advertisement in November 2021, where they announced a ‘Maximum Retail Price of Urea at Rs 1768 per 50kg bag’, during a time of rising prices and reported shortages.
