Daily Times

KARACHI: With the government’s surprising move to withdraw subsidy on fertilizers that was provided in the last Federal Budget, there is a high likelihood of increase in urea’s Maximum Retail Price (MRP) by Rs200/bag to Rs1,600/bag.

According to industry sources, there is a strong possibility of increase in urea’s MRP by Rs200/bag to Rs1, 600/bag to compensate for the withdrawal of cash subsidy, Rs156/bag, and the hit manufacturers agreed to take at the time of subsidy announcement Rs50/bag.

Uncertainty has shrouded the fertilizer sector after the government’s notification to withdraw subsidy on fertilizers that was provided in the last Federal Budget. Initially it was unclear whether the notification was applicable on both cash subsidy and sales tax subsidy, resulting in battering of fertilizer stocks at the bourse. However, clarity emerged later that the government has withdrawn only the cash subsidy on Urea, DAP and SSP (i.e. Rs156/300/91 per bag, respectively) with subsidized sales tax of 5 percent i.e.Rs186/bag intact.

Commenting on the new reports that the Punjab government is likely to provide subsidy to the farmers, Syeda Humaira Akhtar, an analyst at JS Research, said that this is highly unlikely as it will be practically impossible for a province to provide subsidy due to issues like smuggling between provinces, while the CM Punjab has also requested the federal government to restore the withdrawn subsidy.

However, manufacturers may keep selling Urea at a discount to MRP at around Rs1,500/bag (currently Urea selling price ranges between Rs1200-1300/bag vs. MRP of Rs1400/bag) – which still be an effective increase of Rs200/bag.

Earlier, in a surprise move, the Ministry of National Food Security and Research issued a notification for cancellation of subsidy provided to fertilizer sector in the Budget FY17, with immediate effect. Government had provided subsidy of Rs156/bag on urea along with reduction in GST to 5% from standard 17%, Rs300/bag on DAP, (3) Rs91/bag on SSP, (4) Rs130/bag on NP and (5) Rs88/bag on CAN in June-2016; of which the subsidy on Urea, DAP and SSP has now been withdrawn.

“Increase in Urea/DAP retail prices post-subsidy removal will dampen future offtake amid outgoing peak demand season and poor farm economics. Moreover, declining volumes means piling up inventory, which can further intensify the price competition among urea manufacturers leading to pressure on margins and hence reduced bottom line”, said Ms Akhtar.