Urea offtake in January 2023 increased by 6% YoY, but was down 24% MoM to c.631,000 tons. The MoM volume decline is due to a high base effect and off-season in the initial month of the year. The market share of FFBL/FFC/EFERT shrunk by 5/4/1ppt on YoY basis to 1%/34%/34% in Jan’23. The reduction in market share is primarily due to higher offtake from NMFL (imported fertilizer), which satisfied 22% of the total demand in January 2023.

Urea ex-factory prices were unchanged MoM at c.PKR2,155/bag in January 2023, whereas dealers were selling at a premium of PKR600-650/bag. This is due to the anticipated hike in gas prices, which eventually increased in February. In response, so far only FFBL has increased Urea prices by PKR440/bag while the others manufacturers are waiting for the government’s clarity. OGRA has only increased prices for SSGC and SNGPL network, while, most of the fertilizer producers receive gas from Mari Petroleum.

Urea inventory declined to c.101,000 tons at the end of January 2023, compared with c.249,000 tons by the end of previous month. This is due to no production from RLNG based plants (because of gas shortages during winter months) and higher offtake from NFML.

DAP offtake declined by 15% YoY and 39% MoM to c.96,000 tons in January 2023. The MoM reduction in offtake is due higher DAP prices (in line with PKR devaluation and international prices) and off-season impact too. DAP inventory during the month stood at c.346,000 tons, up 52% YoY.

Going forward in CY23, Urea offtake is expected to remain healthy at 6.3mn tons. Additionally, the sector will likely enjoy strong pricing power amid elevated commodity prices, strong international Urea prices and the spread between DTR and Urea market prices. DAP offtake in CY23 is expected to rebound to 1.6mn tons, but will likely remain lower than the long term average of 2.0mm tons. However, further reduction in international DAP prices can push offtake above expectations.

We maintain our Market weight stance on the sector, where strong Urea prices and volumes should continue to lift profitability.

We prefer FFC (TP PKR120/sh) and EFERT (TP PKR95/sh).

Courtesy –  Intermarket Securities Limited