Equity Analysis /
Pakistan

Pakistan Fertilizers: Low offtake leading sector towards another inventory glut

  • As per NFDC data, Urea offtake for March 2020 clocked in at 302k tons, down 34% mom and 26% yoy

  • DAP offtake clocked in at 79k tons in March 2020, up 21% yoy but down 10% mom.

  • Industry Urea inventory level has increased by 4.4x yoy and 54% mom basis reaching 592k in March 2020

Intermarket Securities
24 April 2020

As per NFDC data, Urea offtake for March 2020 clocked in at 303k tons, down 34% mom and 26% yoy. On a cumulative basis, Urea offtake decreased by 26% yoy to 1.02mn tons in 1QCY20. The Urea offtake of FFC, FFBL and EFERT were up by 2.1x, 5.5x and 12% yoy in March respectively; also, their cumulative market share has increased by 6ppt to 81% in 1QCY20 from 75% in 1QCY19.

The 25% yoy decline in Urea sales in 1Q is partly attributed to pre-buying in December by dealers and partly to the Covid-19 related lockdown, which halted sales in late March. But eventually, the government has allowed fertilizer producers and dealers to operate during the day hours (from 8:00 am to 5:00 pm).

DAP offtake clocked in at 79k tons in March 2020, up 21% yoy but down 10% mom. On a cumulative basis, DAP offtake increased by 12% yoy to 211k tons in 1QCY20 because of low base-effect and lower prices. The inventory levels stand at 500k tons, lesser than at end-March 2019 when it was c.600k tons. Major portion of the DAP inventory was held by FFBL, EFERT and FatimaFert.

Industry Urea inventory level has increased by 4.4x yoy and 54% mom basis and has reached 592k in March 2020. Lower demand amid pre-buying, delay in crop cultivation and the lockdown have together led to the elevated inventory levels. Moreover, significantly lower LNG prices will create the room for RLNG based fertilizer plants to operate with little subsidy intervention from the government. If these plants are allowed to operate for long, we expect Urea inventory to rise to alarming levels, while shrinking the market share of the incumbents.

In the short run, fertilizer demand will be affected by the Covid-19 lockdown and we expect Urea sales in CY20 to clock in at 5.5-5.8mn tons, which will be less than last year offtake of 6.2mn tons.

We have a Marketweight stance on the sector, where high dividend yield for some stocks will be a key attraction amid low interest rates, in our view.