SOHAIL SARFRAZ

ISLAMABAD: The Competition Commission of Pakistan (CCP) will strictly monitor the fertilizer sector as the fertilizer industry is prone to cartelization and behavior of the fertilizer manufacturers may attract certain provisions of the Competition Act, 2010.

The CCP has released a draft report titled “Competition Assessment of the Fertilizer Industry in Pakistan”, exposing the probability of cartel formation is higher for products that are homogenous like various types of fertilizers. This possibility increases even more when the number of players is low and the market is concentrated. Therefore, as per Section 4 of the Competition Act, 2010, the CCP needs to monitor closely the possibility of a cartel to fix prices and production. This is even more crucial when the industry depicts a pattern of price parallelism for urea and high profit margins, CCP added.

In the downstream fertilizer market, to guarantee sale of fertilizer stock, the fertilizer manufacturers obligate the fertilizer dealers to buy DAP with urea or vice versa. Similarly, to buy slow moving micronutrients with Urea/DAP. To stay in the business, the dealer is obligated under the dealership agreement. This is an abuse of dominant position by the fertilizer manufacturers, and therefore a violation of Section 3 (2)(e) of the Competition Act. Therefore, this Report suggests the CCP to monitor the conduct of the fertilizer manufacturers under Section 3(2)(e) of the Act.

The fertilizer industry is prone to cartelization having oligopolistic market structure and homogenous inputs required for production. Therefore, a brand-wise competition review reveals ‘price parallelism’ in the industry, even when applicable gas prices are different thus raising competition concerns. The behavior of the fertilizer manufacturers may attract certain provisions of the Competition Act, 2010, Section 3 and 4 in particular. It is therefore recommended that the CCP may strengthen its regulatory oversight of the industry.

Furthermore, the SECP under its current regime may seek cost audit of the fertilizer industry to gauge any irregularities. This eventually will help CCP determine a patterns indicative of anticompetitive behaviour. The CCP, vide its Policy Note “Reinstatement of Requirement for Cost Audit under Companies Act, 2017” dated 8th May, 2020, has recommended the SECP to reinstate the requirement of cost audit for Fertilizer industry, among others to facilitate policy interventions in a fair, transparent, and independent manner, CCP report added.

The fertilizer producers make contracts with the dealers downstream and negotiate certain terms for granting distributorships. At times, these terms and conditions are alleged to be anticompetitive due to the oligopolistic market structure. Therefore, the terms of these contracts need to be reviewed such that the manufacturers do not abuse their dominant position. Under Section 5 of the Competition Act, the CCP grants exemption to parties involved in the agreement. Earlier, two fertilizer manufacturers; two companies have taken exemption from the CCP on their agreements with their distributors. However, the exemption of FFC has expired and currently only EFERT holds a valid exemption on their agreements with their distributors. The remaining manufacturers, however, have not sought exemption from the CCP for their distributorship agreements. The binding agreements are against the spirit of competition. Therefore, the CCP needs to review the agreements to grant exemption.

This Report recommends the CCP to evaluate the agreements of all fertilizer manufacturers with their distributors for any violation of the Competition Act, 2010.