As per NFDC data, Urea offtake during September 2020 clocked in at c.393k tons, down 3% yoy and 31% mom. On a cumulative basis, however, total Urea offtake in 9MCY20 fell 64% yoy to 4.21mn tons. During the month, the offtake of FFC / FFBL / EFERT decreased by 39% / 29% / 25% on a yoy basis. Combined market share of these producers (and FATIMA) rose 6ppt yoy to 99% in 9MCY20 from 92% in the same period last year (RLNG based producers were operating last year while imported Urea was also available).
During September, Urea prices were flat mom at PKR1,630/bag, but has declined significantly by PKR330/bag yoy from PKR1,930/bag in September 2019. Drastic decline in GIDC to almost nil in feed and fuel gas has forced fertilizer produces to reduce Urea prices.
The 4% yoy increase in Urea sales in 9MCY20 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.465k tons by end of September compared to 308k tons at the beginning of the month. Lower Urea offtake in August and September has increased inventory levels. Major portion of the inventory is held by EFERT, FATIMA Group and FFC of 210k ton, 115k ton and 90k tons respectively. However, the government has extended 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.229k tons in September, up 9% yoy and down 22% mom basis. This took DAP offtake in 9MCY20 to 1.37mn tons, up 29% yoy, largely because of lower DAP prices in the initial months of 2020. DAP inventory stood at 296k tons by end-September, down 22% yoy. Major portion of the DAP inventory was held by FFBL. In the last two months, all producers have increased DAP prices by almost PKR400/bag to PKR3,850/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 anticipation of subsidy on fertilizer products other than Urea 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, as 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).