Fertilizer Sector performance during the December 20

As per NFDC data, Urea offtake during December 2020 clocked in at c.881k tons, up 65% mom and down 35% yoy. The mom increase was due to better farm economics coupled with anticipated Urea price increases going forward. On a cumulative basis, however, total Urea offtake in CY20 decreased 3% yoy to 6.04mn tons. During the month, the offtake of FFC / FFBL/ EFERT decreased by 37% / 52% / 51% yoy, mainly due to a high base-effect from December 2019 (pre-buying last year ahead of anticipated price hikes). Combined market share of these producers rose 5ppt yoy to 85% in CY20 from 80% in CY19.

During December, Urea prices remained flat mom at PKR1,650/bag, but have declined significantly by PKR350/bag yoy from PKR2,000/bag in December 2019, due to the nearly complete removal of GIDC on both feed and fuel gas, which forced fertilizer producers to reduce Urea prices. However, in January 2021, producers have increased prices by PKR50/bag – ostensibly, to pass on inflationary pressures.

Industry Urea inventory level stood at c.299k tons by the end of December compared to 668k tons at the beginning of the month. Higher Urea offtake is attributed to the inventory drawdown of 55% mom. Additionally, the inventory levels in CY21 is likely to hover around the same level amid flat offtake yoy and discontinuation of gas to RLNG based plants since December 2020, in our view.

DAP offtake decreased to c.205k tons in December, down 44% mom but up 6% yoy. This took DAP offtake in CY20 to 2.17mn tons, up 12% yoy, largely because of lower DAP prices in the initial months of 2020 and, better crop prices later in the year. DAP inventory stood at 112k tons by end-December, down 77% yoy. Since August 2020, DAP prices have increased by almost PKR950/bag to PKR4,400/bag. This includes the PKR500/bag increase in January 2021. FFBL is a key beneficiary of this increase.

During CY20, Urea demand clocked in at 6.0mn tons as compared to 6.2mn tons in CY19. However, DAP offtake has increased because of low base-effect and better purchasing power of farmers owing to higher commodity prices.

We maintain our Marketweight stance on the sector, where the recent increase in Urea and DAP prices will elevate sector profitability; while, the likely increase in duration of GIDC payment from 24 to 48 monthly instalments (including one year grace period) will provide much relief to the cash-flows and profitability of the overall sector. We prefer FFC and EFERT in our Universe, as both stocks are offering attractive dividends yields (11% and 16% respectively). (Intermarket Securities Limited)

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