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GROWING DEBATE
FERTILIZER PRICE LIBERALIZATION STALLS
BY SARAH MARQUER
Liberalization of the nitrogen fertilizer sector had been expected to occur last month, according to February reports in the news media. While there has been some privatization in the sector – many domestic producers are privately owned and operated, though some state-controlled producers remain – the price of nitrogen fertilizer has long been capped by the government. Moreover, farmers traditionally bought nitrogen fertilizer from the government at a significantly subsidized price. This contrasts sharply with the phosphate fertilizer sector, which was fully liberalized in the 1990s.
With March come and gone, however, there are few signs of liberalization. Prices continue to fluctuate under government caps, and state involvement in the sector remains substantial. So despite the government’s announced intention to more fully privatize the sector, questions remain: Will price liberalization occur? What about distribution and exports?
Nitrogen fertilizer prices in Egypt and around the world have been volatile over the past few years. “We are in an era where prices are fluctuating,” says Ahmed Taher, adviser and former director of the Ministry of Agriculture’s Soils, Water & Environment Research Institute. He explains that domestic agriculture relies on nitrogen fertilizers because they are required to grow every kind of crop.
Prices increased sharply in response to soaring food prices in 2008. “At the beginning of 2009,” says Mona Mansour, director at CI Capital Research, “fertilizer prices increased around 40 percent.” She adds that prices continued to surge in 2009 in light of unfavorable weather conditions that negatively affected agricultural production, thus increasing fertilizer demand. Prices have continued to go up and down in 2010. Taher notes that a governmental decree in mid-February increased the price of fertilizers as a direct response to global changes in the price of nitrogen fertilizer. Muhammad El Ebrashi, associate and fertilizer expert at CI Capital, concurs, saying that prices increased month-to-month in February.
Many experts attribute the steadily climbing domestic nitrogen fertilizer prices to increasing global demand for food resulting from the steadily increasing population. Greater demand puts pressure on agricultural producers to increase yield, and that usually requires the use of more fertilizer. For example, Egypt’s rate of population growth requires feeding an additional 2 million people each year.
The UN Food & Agriculture Organization estimates that the consumption of both nitrogen and phosphate fertilizers in Egypt has tripled over the past 30 years, and Taher notes that nitrogen fertilizer prices have more than doubled in the past three years. Fertilizer prices began to take off in 2007 because of an increase in the cost of oil, he says, adding that the fertilizer industry, like many others, is inextricably linked to the global oil market. “Countries that produce urea are those that have large refineries for oil,” he says. Urea, a by-product of the oil-refining process, is about 46 percent nitrogen and an important fertilizer ingredient. Therefore, says Taher, when oil prices increased, so did nitrogen fertilizer prices.
According to El Ebrashi, domestic urea prices are about LE 1,200 (approximately $220) per ton. This, says Taher, is more than double what prices were just a few years ago. However, El Ebrashi points out that despite the significant increases over the past few years, Egyptian fertilizer prices remain low compared to international market prices. For example, he says a survey this year found international urea market prices were about $360 per ton. Nitrogen fertilizer costs have remained low vis-à-vis the international market, about LE 1,450 per ton, in part because domestic producers benefit from inexpensive natural gas, which is required in fertilizer production.
The government has historically subsidized energy costs for domestic industries, among them energy-intensive ones such as steel, cement and fertilizers. Even today, after initiatives by the government to phase out energy subsidies for energy-intensive industries and bring the cost of natural gas and electricity in line with international prices, electricity and natural gas costs remain low compared to the rest of the world. “The maximum price that local companies pay [for natural gas], whether they are fertilizer, cement or steel [producers], is $3 per mbtu [million British thermal units]. If you go and check international prices, they are in the range of $5 to $6,” says El Ebrashi, noting that many companies pay even less.
El Ebrashi estimates the number of domestic fertilizer manufacturers at 13, some of which are in industrial free zones. “The companies located in these areas have natural gas cost advantage,” he says. Orascom Construction Industries (OCI) Fertilizer Group, which was established after the acquisition of Egyptian Fertilizer Company (EFC) in 2008, is a case in point. “OCI enjoys one of the lowest fertilizer feedstock costs in the world, as we have long-term low-cost natural gas supply contracts for each of our plants,” says Omar Darwazah, investor relations manager at OCI. “Gas contracts are for 20 years for [OCI Fertilizer Group subsidiaries] EBIC [Egypt Basic Industries Company] and Sorfert; 25 years for EFC,” he says. Interestingly, fertilizer export prices are not comparably low. “Our fertilizers are exported at international prices,” says Darwazah. El Ebrashi notes that is because OCI Fertilizer Group is located in an industrial free zone.
“If they are liberalizing the fertilizer market, there are so many questions regarding this,” says El Ebrashi, “because the companies are getting natural gas at a very cheap price compared with the international market.” He says the People’s Assembly has strongly opposed the government’s intentions to liberalize the market, which would remove price caps from domestic producers and in all likelihood increase the cost of fertilizer for the country’s farmers.
Issues related to distribution and export could also delay liberalization. “The government is the main distributor of nitrogen fertilizers,” says Taher. It buys fertilizers at a capped price, which it sets, then sells them at a subsidized price to end-users through the Principal Bank for Development & Agricultural Credit (PBDAC), which has very few distribution channels. According to an article published on March 21 in Al Alam Al Youm, the private sector has expressed interest in handling distribution, but the government has not announced any concrete plans to allow it to do so.
Because the domestic market is saturated, says Taher, the PBDAC is left with an excess supply of fertilizer that must be stored or sold abroad. “The Principal Bank has a rising inventory of these products because it seems that they have some kind of logistics issues, so they cannot buy any more from the companies,” says El Ebrashi. “The companies say, ‘If the PBDAC cannot buy our products and we cannot sell at a reasonable price, why not sell it directly to the export market?’” The problem, he points out, is that exports have been intermittently banned since 2003, and producers can export only with government approval. However, fertilizer producers in industrial free zones do have the right to export. For example, 90 percent of EFC’s fertilizer product is exported and 100 percent of EBIC’s, says Darwazah. If the government liberalizes the fertilizer market, will it privatize distribution or increase exports?
Taher believes the government intends to liberalize the nitrogen fertilizer market, but he has no doubt that officials would intervene if the economic instability or haphazardly increasing prices of the past few years recur. After all, El Ebrashi notes, the PBDAC will soon establish a joint venture with fertilizer companies and distributors in which the bank will have a majority stake. The company, says El Ebrashi, which will buy fertilizer from domestic producers and sell to farmers, will ensure an available and affordable supply for farmers.
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