Pakistan Fertilizers – July sales data

As per NFDC data, Urea offtake during July 2020 clocked in at c.574,885 tons, up 24% yoy but down 51% mom. On a cumulative basis, however, total Urea offtake in 7MCY20 fell 3% yoy to 3.25mn tons. In July, the offtake of EFERT increased by 91% yoy, FFC’s offtake decreased by 37% yoy, and that of FFBL remained flat yoy. Combined market share of these producers (and FATIMA) has increased by 6ppt yoy to 99% in 7MCY20 from 81% in the same period last year (RLNG based producers were operating last year).

During July 2020, the producers were still selling Urea at a price of PKR1,550/bag, which was lower than the quoted price of c.PKR1,600/bag (as per consensus with the government). By doing this, few producers managed to sell Urea above their historical market share. In August, EFERT and FATIMA raised their prices by PKR25/bag, in response of unregistered dealers (sales tax).

The 3% yoy decline in Urea sales in 7MCY20 is partly attributed to the lockdown (which briefly disrupted transport of crops to the market during March and April) 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.344,450 tons by end-June compared to 1.1mn tons in May 2020. Higher Urea offtake in June and July has eased off inventory burden for the whole industry. The inventory at the end of July is also lower than the level at end-July 2019 of c.381,767 tons. Major portion of the inventory is held by EFERT and FFC of 122,444 and 119,463 tons respectively. However, the government has recently allocated gas to RLNG based plants and both Fatima Fert and Agritech are operational again; which could revive inventory issues in the coming months, in our view.

DAP offtake increased to c.247,000 tons in July, up 22% yoy and 41% mom basis. This took DAP offtake in 7MCY20 to 845,000 tons, up 13% yoy, largely because of lower DAP prices. DAP inventory stood at 382,394 tons by end-July, down 7% yoy from 411,815 tons in July 2019. Major portion of the DAP inventory was held by FFC, FFBL and FatimaFert.

In the near term, fertilizer demand will likely remain softer than usual due to the threat of locust attack after monsoon season and pre-buying in June and 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 fertilizer products except for Urea.

We downgrade the sector to Underweight, where the future profitability for some has been jeopardized by the Supreme Court decision on GIDC. Recall that the market was broadly assuming a 50% cash settlement, but the SC adjudged full recovery of PKR164bn from the fertilizer industry (albeit, in 24 monthly instalments) and also includes concessionary gas based plants, which have not booked any provision. As such, this will have a significant one-time impact on the earnings and cash-flows (and equity erosion) for EFERT and FATIMA. (Intermarket Securities Limited.)

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