Inventory levels has started to pile-up amid low offtake and imports
Urea offtake in May 2022 decreased by 9% mom and 17% yoy to 417,521 tons. The yoy decrease in offtake is likely due to higher Urea prices and higher base effect in SPLY. On a cumulative basis, in 5MCY22, Urea offtake increased by 14% yoy to 2.51mn tons. The sales volumes of FFC decreased by a mere 2% yoy, while that of EFERT and FFBL decreased by 24%/35% yoy, respectively.
Urea ex-factory prices had reached PKR1,930-1,980/bag in May 2022. The premium in the local market remained unchanged as well, hovering around PKR300-350 per bag due to anticipation of further increase in Urea prices amid proposed increase in GST on fertilizer products in FY23 Budget. However, recently the government has fixed prices at PKR1,950/bag (retail) and dealer transfer price at PKR1,810/bag.
Industry Urea inventory levels increased to c.465,000 tons at the end of May 2022, compared to c.320,0000 tons at the end of April. This is attributed to lower monthly offtake and imports earlier in the year.
DAP offtake declined by a sharp 46% yoy (flat mom), to c 95,000 tons. The yoy decrease is majorly led by massive surge in local DAP prices (in-line with international price and PKR devaluation). DAP inventory during the month stood at c.370,000 tons up 2.8x yoy and 10% mom.
In CY22, we believe that better availability of gas to local producers, higher Urea offtake amid better farm economics, lower Urea prices, and elevated commodity prices, will help the Fertilizer sector post healthy earnings and payouts. However, the recent price fixation is likely to keep sector earnings in check (especially FFC and EFERT to some extent). In the international market, Urea prices have started to normalize and are presently trading at 50% lower from the peak in March’22 to US$470/ton.
We maintain Overweight stance on the sector, due to higher Urea offtake and elevated DAP margins. Despite the recent Urea price fixation by the government, the sector is likely to retain a handsome DY of 12%/14% for CY22/23f (sector average). We prefer FFC and EFERT in the space.