Fertilizer sales impacted due to monsoon rains in August in Pakistan

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As per NFDC data, Urea offtake during August 2020 clocked in at c.0.573mn tons, down 8% yoy but flat mom. On a cumulative basis, total Urea offtake in 8MCY20 fell 4% yoy to 3.82mn tons. During the month, the offtake of FFC / FFBL increased by 21% / 31% yoy; whereas, EFERT’s off-take fell 13% yoy, Combined market share of these producers (and FATIMA) rose 7ppt yoy to 99% in 8MCY20 from 92% in the same period last year (RLNG based producers were operating last year while imported Urea was also available).

During August, Urea producers increased prices by PKR25/bag to PKR1,630/bag as compared to an average price of PKR1,550/bag in the prior 3 months, which was lower than the quoted price of c.PKR1,600/bag (following the reduction of GIDC by the government). This helped producers to offload inventory that was hitherto piling up.

The 4% yoy decline in Urea sales in 8MCY20 is partly attributed to the lockdown during March-May (which briefly disrupted transport of agriculture produce to the market) and partly due to the delay in start of Kharif season (sowing during April-May). Besides this, the anticipation of a PKR243/bag subsidy on Urea also subdued sales in the initial months of CY20.

Industry Urea inventory level has come down to c.0.308mn tons by end of August compared to 0.334mn tons at the beginning of the month. Higher Urea offtake from June to August has eased off inventory pressure and allowed the aforementioned price hike. Major portion of the inventory is held by EFERT and FATIMA of 0.133mn and 0.087mn tons respectively. However, the government has recently allocated gas to RLNG based plants, and both Fatima Fert and Agritech are operational; which could revive inventory issues in the coming months, in our view.

DAP offtake increased to c.0.295mn tons in August, up 2.8x yoy and 19% mom basis. This took DAP offtake in 8MCY20 to 1.14mn tons, up 34% yoy, largely because of lower DAP prices in the initial months of 2020. DAP inventory stood at 0.271mn tons by end-August, down 35% yoy. Major portion of the DAP inventory was held by FFBL. Recently EFERT and FatimaFert have increased DAP prices by almost PKR250/bag to PKR3,800/bag; FFBL will be a key beneficiary of this hike.

In the near term, overall Fertilizer demand will likely be lower than usual due to crops mutilation amid monsoon season and pre-buying in June-July, but we continue to expect total Urea sales in CY20 of 5.8mn tons, supported by higher commodity prices and PKR37bn direct farmer subsidy (on fertilizers, excluding Urea).

We maintain our Underweight stance on the sector, where future profitability for some producers will be negatively affected by the Supreme Court decision on GIDC, where they have to pay about PKR164bn in 24 monthly instalments. But FATIMA and EFERT both have acquired stay from the Sindh High Court by virtue of their being concessionary-gas based plants (under Fertilizer Policy 2001).

(Intermarket Securities Limited)

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