March 2022: High imports keep inventory levels up despite strong Urea offtake
According to the monthly data of fertilizer offtake by NFDC, Urea offtake in March 2022 decreased by 3% mom, while up 48% yoy to c.509,000 tons. The yoy increase was majorly due to low base. On a cumulative basis, in 3MCY22, Urea offtake increased by 17% yoy to 1.63mn tons. The sales volumes of FFC increased by 15%, whereas that of FFBL declined by 15% yoy. Volumes of EFERT rose by a sharp 81% yoy.
Urea ex-factory prices had increased between the price range of PKR1,810-1,880/bag in March 2022. The premium in local market remained unchanged as well, hovering around PKR200-250 per bag because of anticipation of further increase in Urea prices in local market. EFERT has recently announced another Urea price hike of PKR100/bag to PKR1,980/bag.
Industry Urea inventory level increased to c.200,000 tons at the end of March 2022, compared with c.69,000 tons at the end of February. This is attributed to import of c.100,000 tons of Urea in last two months and piling up of inventory by the producers as per government instruction (as per EFERT analyst briefing). The government has imported Urea at a price of PKR6,381-10,468 per bag versus an average price of PKR6,800 per bag in last month. The government has to provide more than PKR6,000 per bag subsidy to sell imported Urea in local market.
DAP offtake declined by c.45% yoy, but up 44% mom, to c.80,000 tons. The yoy increase is majorly led by low base effect. DAP inventory during the month stood at c.276,000 tons up c.5.0x yoy and 7% mom. DAP prices increased during the month 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 higher commodity prices, coupled with increase in Urea prices will help Fertilizer sector to post healthy earnings and payout. In the international market, Urea prices remain elevated ay c.US$950/ton (Middle East). This is due to ongoing Russia-Ukraine conflict which 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 higher international Urea prices.
We maintain our Overweight stance on the sector, due to 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 and EFERT in the space, and look to revisit our estimates in light of the recent price increases.