Equity Analysis /

Pakistan fertilizer: Urea offtake dipped 6% yoy in July

    Intermarket Securities
    27 August 2019

    Urea offtake for the industry in Jul’19 has clocked in at 465K tons, down 6%/28% yoy/mom. The decline in offtake is possibly due to pre-buying in Jun’19 amid anticipation of increase in Urea prices the post hike in gas prices.

    On a cumulative basis, Urea offtake increased by 4.0%yoy to 3.4mn tons for 7MCY19; offtake for EFERT, FFC and FFBL declined by 8%, 6%, 20% yoy respectively. The incumbents witnessed market share attrition as imports and LNG based manufacturers together reached 13% (430k tons) of market share during 7MCY19.

    Ending Inventory levels clocked in at 382k tons, up 4.4x yoy. The increase in inventory levels was supported by (i) 76k tons of production from LNG based producers, and (ii) 100k tons of urea imports.

    DAP offtake in Jul’19 continued to decline to 202k tons, down 33%yoy. On a cumulative basis, DAP offtake declined to 14%yoy to 848k tons in 7MCY19, mainly due to the significant rise in DAP prices amid PKR depreciation. Inventory levels stood at 412k tons, up 15% yoy where FFBL and FFC together hold 72% of the inventory.

    Given LNG based production of 700k tons (assuming smooth operations of these plants) till Oct’19, urea availability across CY19f is likely to reach 6.3mn tons, in our view. Assuming urea demand remains stable at 5.8mn tons, closing urea inventory will reach 0.5mn tons which is unlikely to create major supply concerns, in our view. However, continued operations of these LNG based plants beyond Oct’19 may start building up pressure on urea prices.

    Risks: (i) GIDC removal, (ii) Inventory buildup, (iii) Low pricing power.