Global commodity heat-up: More subsidy or price hike for fuel, fertiliser?

As commodity prices are spiraling on the international markets, ministries are rushing to the finance ministry on how to meet the increasing import prices of key items like petroleum and fertiliser.

The government subsidises these two vital imports and the dilemma here is whether to slop in more subsidies, which in some cases may triple the current amount, or to raise sale prices that might affect the consumers adversely.

Urea is one such case. In December last year, the government imported 30,000 tonnes of it from Saudi Arabia at a cost of Tk66 crore. But last Wednesday, the purchase committee had to give consent to purchase the same quantity of the fertiliser at three times the price at Tk190 crore.

Urea that was selling on the international market at $262 a tonne in December last year now costs $732.

Fuel is facing the same situation.

In January, petroleum was selling at $49 a barrel. But now the price has jumped to $85, the highest since 2014.

Liquefied Petroleum Gas or LPG that is now greatly used to keep domestic supply of gas stable has also seen abnormal rise in prices.

Against this backdrop, both Agriculture Minister Dr Abdur Razzaque and State Minister for Power and Energy Nasrul Hamid discussed the situation with Finance Minister AHM Mustafa Kamal on Wednesday.

Sources said the cabinet committee on Public Purchase at the Wednesday meeting discussed the possibility of cutting funds from the Annual Development Programme (ADP) to address the subsidy pressure. Noting that European countries are using load shedding to reduce energy costs, some participants at the meeting also suggested similar initiatives in the country, they added.

Citing the recent increase in gas prices in the country, the ministers agreed at the meeting that it would not be logical to increase the price of electricity, gas and fertiliser again. In this case, the policymakers are keeping in mind the upcoming 2024 parliamentary election and keeping the voters happy.

The finance minister told The Business Standard, "We are having discussions to find ways to cope with the rising pressures for subsidy but no decision has yet been taken in this regard."

People concerned told TBS that the three ministers may sit in separate meetings next week to decide what to do to deal with the huge subsidy pressure. They will also take necessary instructions from the prime minister in this regard.

Subsidy for agriculture

The Cabinet Committee on Public Purchase on Wednesday approved a proposal to buy 90,000 tonnes of urea from Qatar, Saudi Arabia and local producer Karnaphuli Fertiliser Company. During this time, the agriculture minister raised the issue of subsidy in fertiliser.

The agriculture minister said a subsidy of Tk9,500 crore has been allocated to the agriculture sector in the current fiscal year, but it could be tripled due to the price hike on the international market.

Abdur Rauf Talukder, senior secretary to the Finance Division, told the agriculture minister at the meeting that when the price of DAP fertiliser was reduced in 2019, the agriculture ministry said it would reduce the use of urea. However, the use of urea has not decreased while the use of DAP fertiliser has increased.

The senior secretary said the government sells DAP fertiliser for Tk16 a kg with a subsidy of Tk86.

The meeting also emphasised producing more fertiliser by supplying gas to the factories to reduce the subsidy on urea. The ministry of energy, however, said in that case, the amount of gas subsidy will be higher than the subsidy for fertiliser import.

Ministers and secretaries present at the meeting agreed not to increase the price of fertiliser at this time.

The main raw material of urea is nitrogen, which is obtained from natural gas. The cost of urea production has also risen due to rising gas prices around the world.

Bangladesh needs about 2.5 million tonnes of urea fertiliser every year. In the last financial year, local companies produced one million tonnes of urea which is 40% of the total demand. The country imports the remaining 1.5 million tonnes.

According to the annual report of the agriculture ministry, it spent Tk7,718 crore on fertiliser subsidy in FY21. That year, the government supplied 24.63 lakh tonnes of urea, 5.22 lakh tonnes of TSP, 7.98 lakh tonnes of MOP, and 14.24 lakh tonnes of DAP fertilisers to farmers at subsidised rates.

Subsidy in energy sector 

Fuel oil price has hit $85 this month, the highest point since 2014 in a leap from $49 per barrel in January this year.

Oil producing countries have reduced oil production to keep its price strong in an effort to offset the losses incurred in the last one and a half years.

The World Bank feels prices of all types of fuels will continue to rise.

In its World Commodity Outlook published last week, the agency said  prices of LNG and coal are also on the rise in the international market due to post-Covid-19 increased economic activities. The situation has made the policy makers of import-dependent Bangladesh nervous.

Nasrul Hamid told the finance minister at the meeting that the cost of mixing imported LNG with domestically produced gas is Tk22 per cubic foot, but it is sold at Tk7-9.

He went on to say as the price of gas rises in the international market, the cost will increase to Tk32. This will also increase the government's subsidy on LNG imports. The same is true of fuel oil.

According to the Ministry of Energy, the rise in international gas and fuel oil prices could lead to a subsidy of Tk6,000 crore for LNG imports and Tk10,000 crore for fuel oil imports.

In the last fiscal year, the subsidy in the power sector was Tk10,000 crore, which is likely to reach Tk16,000 crore this year. At the same time, the subsidy for LNG is expected to climb from Tk4,000 crore to Tk10,000 crore.

The World Bank said as the global economy has started to recover from the pandemic, demands for natural gas and coal have rebounded, both for electricity generation and industrial purposes including coking coal for steel generation.

In China, electricity use rose 11% in January-August 2021 compared to the previous year, while in India it was up by 17% year-on-year this August.

According to the World Bank, hotter-than-normal weather boosted demand for electricity for cooling in major economies including China and the United States. On the supply side, drought reduced hydroelectric power generation in several countries, notably Brazil, China, Turkey, and the United States.

Low wind speed also reduced wind power generation in Europe. Together, these developments further increased demand for fossil fuels, often in the form of LNG, said the World Bank.