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Pakistan Fertilizer_Aug’18 offtake - high base effect, (AKD Daily, Sep 27, 2018)

• As per latest data released by NFDC, total fertilizer/urea offtakes for Aug’18 recorded declines of 47%YoY/55%YoY to clock in at 617k/431k tons. The steep decline in fertilizer sales is attributed to high base effect, where Aug’17 numbers were abnormally high due to ambiguity surrounding fertilizer subsidy and anticipated increase in urea prices last year.
• DAP sales on the other hand remained muted at 79k tons (down 4%YoY/74%MoM) owing to seasonal slowdown.
• Despite this significant monthly slowdown, total fertilizer/urea sales posted minimal declines of 6%/8%YoY during 8MCY18 due to promising offtake between Jan-Jul’18 (up 4%/6%).
• Lackluster urea offtake resulted in inventory buildup of 45k tons to stand at 131k tons (+52%MoM) in Aug’18 as compared to 86k tons recorded in Jul'18 (lowest level seen in the last 7yrs).
• Fertilizer sector has gained 17%CYTD, outperforming the KSE-100 index by +15% during CY18. With this impressive run-up, going forward, we recommend a cautious stance owing to current sectoral headwinds in the shape of recent gas price hike at a time when manufacturers appear to possess restricted pricing power.

Company-wise breakup: Urea market shares for FFC/EFERT/FFBL/FATIMA in Aug'18 were recorded at 44%/38%/8%/10% vs. 40%/36%/8%/6% in Aug'17. In this regard, FFC sold 191k tons of urea (-49%YoY/-10%MoM), EFERT sold 165k tons (-51%YoY/-4%MoM), FATIMA sold 41k tons (-19%YoY/-33%MoM) and FFBL sold 33k tons (down 57%YoY/-34%MoM). Despite 8%YoY decline in overall urea off-take during 8MCY18, EFERT, FFC and FFBL managed to increase their respective market shares by 5.54ppts/4.50ppts/1.29ppts to 36.4%, 44.6% and 9.3% in 8MCY18, courtesy non-operational LNG based plants (Agritech & Fatimafert) last year. In this regard, urea sales for the major players jumped by 8%YoY to 1.33mn tons (EFERT), 2%YoY to 1.63mn tons (FFC) and 6%YoY to 339k tons (FFBL) while FATIMA posted a cumulative decline of 30%YoY to just 346k tons (closed Fatimafert plant). DAP off-take on the other hand posted an impressive growth of 11%YoY to 1.06mn ton in 8MCY18, where importers sold 716k tons of DAP (up 17%YoY) while FFBL sales clocked in at 346k tons (+1%YoY). 

Inventory situation to improve in months ahead: After declining to extreme low levels in Jul’18 (86k tons-lowest level seen in last 7yrs), urea inventory in Aug’18 improved by 52%MoM to 131k, courtesy lackluster urea sales during the month under review. However, inventory stockpile of crucial fertilizer is still down 80%YoY. This is now equivalent to an alarming 0.3x of one month's average production for urea vs. last year's average of 2.5x. Going forward, we expect urea inventory situation to improve further in the upcoming months on the back of: 1) GoP’s decision to import 100k tons of urea and 2) resumption of production from closed urea plants (Agritech and Fatimafert) that will result in additional production 70-75k tons. In this regard, we now estimate an inventory surplus of ~236k tons by the end of CY18 (supply/demand of 2.15/2.04mn tons).

Question of pricing power: While we feel that local manufacturers possess decent ability to pass on the higher cost impact of recent gas price hike given current ~33-35% discount to prevailing elevated cost of imported urea (US$300 per ton, landed cost: PkR2,490/bag). However, for the sake of farm income, GoP can potentially restrict any further price hike in local urea prices, in our view, which could dampen sector’s profitability.

Outlook & Investment Perspective: Fertilizer sector has gained 17%CYTD, outperforming the KSE-100 index by +15% during CY18. With this impressive run-up, going forward, we recommend a cautious stance owing to current sectoral headwinds in the shape of recent gas price hike at a time when manufacturers appear to possess restricted pricing power.

AKD Research