As per the latest data released by NFDC, urea offtake registered an increase of 2.5x YoY to clock-in at 0.65Mn tons in Jan’21, primarily on account of low base effect (Urea sales: 0.26Mn tons in Jan’20). On the other hand, DAP offtake posted a growth of 1.9x YoY to 0.08Mn tons in Jan’21 due to expected hike in prices. On the prices front, local urea is currently trading at a significant discount of 50% relative to international prices at around PKR 1,730/bag, whereas DAP prices have also risen over PKR 4,900/bag owing to global supply-chain disruptions.
Urea offtake was recorded at 0.65Mn tons in Jan’21: Urea production clocked-in at 0.46Mn tons (↓ 0.3% YoY), whereas the offtake was recorded at 0.65Mn tons (↓ 2.5x YoY) during Jan’21. The uptrend in offtake is mainly attributable to improving farm economics and low-base effect (Urea sales: 0.26Mn tons in Jan’20). To recall, sales in Jan’20 were significantly lower owing to pre-buying by dealers on account of expected hike in urea prices. On the contrary, the sequential decline of 26% in offtake is mainly due to weak seasonal demand.
Company-wise, EFERT recorded the largest increase of 4.7x YoY in sales given the higher level of inventory in Dec’20 (0.25Mn tons) compared to peers. Consequently, the company held the largest market share in urea segment at 54%, followed by FFC and FATIMA at 34% and 11%, respectively.
DAP volumes rose by 1.9x YoY: DAP sales jumped by 1.9x YoY to 0.08Mn tons in Jan’21, primarily due to expected hike in DAP prices. International DAP prices surged by a massive 55% YoY to USD 414/ton in Jan’21 on account of shortage of product in the global market. As a result, local players raised DAP prices by PKR 500/bag in Jan’21 and later, PKR 450/bag in Feb’21, taking the total increase to PKR 950/bag in the two months.
Currently, DAP prices are hovering over PKR 4,900/bag in the market. Company-wise, FFBL witnessed a decline in sales volume by 8% YoY to 0.17Mn tons in Jan’21 as its Gas Supply Agreement (GSA) with SSGCL ended in Dec’20 after which the plant was shut down for the following 1.5 months. The company had also planned its annual plant turnaround during the same period. However, as per recent developments, the Economic Coordination Committee (ECC) has approved an extension in gas supply to the company for another five years.
Urea inventory reached 0.1Mn tons in Jan’21: The industry recorded urea inventory of 0.1Mn tons in Jan’21, which is considerably lower relative to inventory levels in SPLY at 0.39Mn tons. DAP inventory also reached 0.1Mn tons in Jan’21 as local players continued to face sourcing difficulties amidst rising DAP prices (Currently near USD 530/ton). Going forward, the international DAP prices are expected to sustain their momentum till at least 1QCY21 due to supply-side disruptions and strong demand ahead of spring planting season. On the other hand, local urea prices (PKR 1,730/ bag) are currently trading at a significant discount of 50%, relative to international prices, keeping the local players in a favorable pricing position.
Investment Outlook: Considering the improving farm economics and government support policies, including the soon-to-be announced agriculture package for farmers, we expect urea and DAP offtake to remain stable at 6.0Mn and 2.0Mn tons, respectively. We reiterate our BUY stance on the fertilizer universe with our Dec’21 TP of PKR 131, PKR 75, PKR 32 and PKR 40 for FFC, EFERT, FFBL and FATIMA, respectively. Key downside risk to our thesis include: 1) gas curtailment, 2) lower than expected fertilizer offtake, 3) rise in gas tariff, and 4) increase in other input costs.
Courtesy – BMA Capital