As per NFDC data, Urea offtake during October 2020 clocked in at c.413k tons, up 3.5x yoy and 5% mom. The sharp yoy increase was due to depressed sales in October 2019 due to pre-buying in earlier months in anticipation of price hikes. On a cumulative basis, however, total Urea offtake in 10MCY20 increased 3% yoy to 4.63mn tons. During the month, the offtake of FFC / FFBL / EFERT increased by 3.5x / 4.0x / 3.8x yoy. Combined market share of these producers (and FATIMA) rose 7ppt yoy to 98% in 10MCY20 from 91% in the same period last year.
During October, Urea prices remained flat mom at PKR1,650/bag, but have declined significantly by PKR330/bag yoy from PKR1,980 in October 2019, due to the nearly complete removal of GIDC on both feed and fuel gas which led fertilizer producers to reduce Urea prices.
Industry Urea inventory level has risen to c.671k tons by end of October compared to 465k tons at the beginning of the month. Higher production amid commencement of RLNG based plants and lower than anticipated offtake has led to higher inventory levels. Major portion of the inventory is held by EFERT, FATIMA Group and FFC of 263k tons, 155k tons and 150k tons respectively. The inventory levels for remaining months of CY20 will remain higher amid extension in allocation of gas to RLNG based plants, as both Fatima Fert and Agritech are operational.
DAP offtake increased to c.229k tons in October, down 15% yoy but flat sequentially. This took DAP offtake in 10MCY20 to 1.6mn tons, up 20% yoy, largely because of lower DAP prices in the initial months of 2020. DAP inventory stood at 244k tons by end-October, down 62% yoy, major portion of which was held by FFBL. In last three months, DAP prices has increased by almost PKR450/bag to PKR3,900/bag; FFBL will be a key beneficiary of this increase.
In CY20, Urea demand is likely to clock in at 5.8mn tons as compared to 6.22mn tons in CY19, but the DAP offtake will increase on the back of PKR37bn direct farmer subsidy announced by government (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, as they have to pay about PKR164bn in 24 or 60 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