February 2022: Urea import has supported inventory, but more price hikes are inevitable
According to the monthly data of fertilizer offtake by NFDC, Urea offtake in February 2022 declined by 12% mom, but rose a sharp 30% yoy, to c.527,000 tons. The yoy increase was majorly due to low base effect; as last year, offtake was low due to pre-buying in prior months and amid high prices charged by EFERT (after the discontinuation of GIDC). On a cumulative basis, in 2MCY22, Urea offtake increased by 7% yoy to 1.12mn tons. The sales volumes of FFC/FFBL increased by 14%/119% yoy, while EFERT volumes rose by a mere 6% yoy.
Urea ex-factory prices were unchanged mom at c.PKR1,730/bag in February 2022. The premium in local market remained unchanged as well, hovering around PKR100-150 per bag, after having declined in January because of better availability of Urea. However, in March Urea producers have increased prices ranging from PKR80-150 per bag to PKR1,810-1,880 per bag.
Industry Urea inventory level increased to c.69,000 tons at the end of February 2022, compared with c.27,000 tons at the end of January. This was majorly due to import of c.50,000 tons during the month, in our view. The price of imported Urea was around PKR6,200-7,220 per bag.
DAP offtake declined by c.50% mom and c.40% yoy, to c.55,000 tons; led by off-season factor, coupled with elevated DAP prices in local market (in line with international prices). DAP inventory during the month stood at c.259,000 tons, up c.4.7x yoy and c.15% mom; this is amid lower sales in previous months due to massive surge in prices. DAP prices remained unchanged in February at PKR9,100/bag. However, DAP prices have risen to PKR9,800/bag in March.
In CY22, we believe that better availability of gas to local producers, higher offtake amid better farm economics and lower inventory levels will help Fertilizer sector to post up-trending earnings, while also maintaining recent payout levels. However, Urea prices in the international market rose again, touching US$1,000/ton (Middle East) as the ongoing Russia-Ukraine conflict has exacerbated supply-chain constraints. This, coupled with recent import of Urea at higher prices, has created room for local producers to increase local Urea prices further to capitalize on low inventory levels and higher international Urea prices.
To note, at present local Urea prices, the government will have to provide over PKR5,500/bag subsidy (total PKR5.5bn) to offload imported Urea in the local market. Otherwise, there will be a massive gap between locally produced and imported Urea.
We maintain our Overweight stance on the sector, where higher Urea offtake and possibility of further increase in Urea prices locally will help the sector to post sustainable profits and dividends going forward. We prefer FFC (TP PKR140/sh) and EFERT (TP PKR95/sh) in the space.