Pakistan Fertilizer industry’s review

As per NFDC data, Urea offtake during March 2021 clocked in at c.343,000 tons, up 13% yoy but down 16% mom. The increase in offtake was due to pre-buying before the start of Kharif season (sowing in April-June). On a cumulative basis, in 1QCY21, Urea offtake increased by 36% yoy to 1.7mn tons. The sales volumes of FFC decreased by c.19% yoy, while that of EFERT/FFBL increased by 4.0x/10% yoy. Higher offtake of EFERT was mainly due to abnormally low sales in March 2020 (because of higher Urea prices vs. that of other producers after the discontinuation of GIDC).

Urea prices were flat mom at c.PKR1,672/bag, but have increased by PKR68/bag yoy from PKR1,602/bag in March 2020, due to pass-on of inflationary pressures.

Industry Urea inventory stood around c.297,000 tons by the end of March, compared with c.128,000 tons at the beginning. Urea production from RLNG based plants and resumed production from FFBL are attributed for the inventory buildup (up 1.3x mom). Additionally, inventory levels are likely to be elevated during the remainder of CY21 – after ECC’s decision to allow RLNG based plants to operate until November 2021.

DAP offtake in March increased by 81% yoy and 63% qoq. This is attributed to higher farmer incomes amid rising commodity prices (DAP is a more expensive fertilizer). DAP inventory stood around 55,000 tons by end-March, down 89% yoy. During the month, DAP prices increased by c.PKR320/bag to PKR5,170/bag. FFBL is a key beneficiary of this price increase.

During CY21, Urea demand is expected to clock in at 6.0mn tons, same as that last year. On the other hand, DAP offtake may hover around 2mn tons as compared with our previous estimate of 1.8mn tons, again due to better farmer economics. However, potential implementation of subsidy on DAP can lead to an increase in offtake.

We maintain our Marketweight stance on the sector, where the recent increase in DAP and other fertilizer prices will elevate overall profitability. We prefer FFC (TP PKR136/sh) and EFERT (TP PKR75/sh) in the space, as both stocks are offering attractive CY21 D/Y of 12% and 16% respectively.

Courtesy –  Intermarket Securities Limited

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