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Reversing fortune of fertilizer sector

The cultivable land in Pakistan suffers from an acute shortage of nutrient contents, which is evident from poor yield. In an attempt to improve yield fertilizer manufacturers have been playing an active role. Their endeavors have been supported by the government. However, lately government started diverting gas to power plants, which was in complete violation of Fertilizer Policy 2001. The government policy continues to suffer from some serious contradictions, allowing power plants to use gas and curtailing gas supply of fertilizer plants.

The government policy has been tempered by those suffering from myopic vision. As international price of urea plunged to around US$160/ton, government was asked to import urea as the cost of locally produced urea was high. The critics forgot that price of gas is indexed with the price of crude oil. In the recent past international price of crude oil plunged to less US$45/barrel. This also created a justification for importing LNG. However, crude oil price has hiked almost 30% from the lows touched recently. It is expected that in the medium term crude oil price would hover around US$60/barrel, which will in turn increase price of gas/LNG.

Fertilizer glut eased after export of over half a million tons of urea that was made possible only because of the subsidy offered by the government. Fertilizer off-take remained promising during November 2017 on the commencement of Rabi season coupled with continued support from subsidy package.

According to the latest figures released by National Fertilizer Development Center (NFDC), total fertilizer sales during the month under review rose to 1.26 million tons, up 37%MoM. Similarly, urea sales took a quantum leap of 60%MoM to 602,000 tons. DAP sales also posted growth of 30%MoM to 502,000 tons. However, on yearly basis, total fertilizer/Urea/DAP off-take came down by 20.8%/21.3%/20.5% in November 2017 on account of higher sales in the previous months. On a cumulative basis, total fertilizer sales posted encouraging growth of 13%YoY to 8.84 million tons during 11MCY17, whereas urea off-take posted a decent growth of 12%YoY to reach 5.14 million tons.

Near-term checkpoints for the fertilizer industry remain: 1) ongoing Rabi season to continue driving demand, 2) international pricing dynamics whereby urea prices rebounded to US$260/ton, up 60% since touching a low of US$163/ton in June last year and 3) normalization of inventory level – urea inventory coming down to 506,000 tons, from 1.45 million tons in November 2016.

Urea off-take posted impressive growth in 11MCY17, where EFERT, FATIMA and FFBL emerging as clear winners with double digit growth. EFERT sales with sales rose by 24%YoY to 1.62 million tons, FATIMA posted growth of 18%YoY to 542,000 tons and FFBL posted lowest growth of 16%YoY to 475,000 tons. As against this, FFC posted a decline of 2%YoY to 2.11 million tons.

 

DAP off-take on the other hand remained on the lower side, sliding by 20.5%YoY to 502k ton in November 2017 on account of higher sales in the previous months. FFBL sold 194,000 tons of DAP during the month under review (up 33%MoM/down 8%YoY). As against this sale of imported DAP was reported at 308k tons (+28%MoM/-27%YoY). Looking at respective market shares, FFC lost out significantly in 11MCY17, where its market share reduced by to 41%, while EFERT and FATIMA share improved to 31% and 11% respectively.

Improving demand on account of higher farm incomes along with export of urea and lower production by the local producers (down 6%YoY to 5.17million tons in 11MCY17) led to significant reduction in urea inventory towards the end of the year. Declining consistently every month, urea inventory reduced to just slightly more than half a million tons at end November 2017. This is now equivalent to one month’s average production for urea as against last year’s average of nearly three times. This is likely to ease down further given strong expected demand in Rabi season and lower production by the local manufacturer in the winter season (curtailment in gas supply).

After correcting sharply during 1HCY17, the fertilizer sector has posted a strong recovery, up 12% since August 2017 on improving fundamentals. Going forward, analysts anticipate further betterment on the back of: 1) strong demand in Rabi season, 2) normalization of inventory levels and 3) rising international pricing dynamics and 4) upward trend in local product prices. In this backdrop, analysts also expect urea manufacturers to further reduce prevailing high level of discounts in the market, thus improving margins.

It has been talked about that purchasing power of farmers has come down due to the decline in the prices of agricultural produce. In such a scenario the government should have temporarily abolished GST applicable on locally produced urea. However, an absurd decision came from the policy planners of payment of subsidy on export of urea. Some critics say the decision was driven by the reducing foreign exchange reserves of the country. Payment of subsidy on export of urea helped the country in building up foreign exchange reserves of the country, but also increased budget deficit.

Since 2018 is the election year, it is anticipated that the incumbent government would opt for popular policies that would include incentive packages for agriculture and manufacturing sectors. Subsidy on export of urea, sugar and wheat export is nothing but an effort to earn extra foreign exchange to contain mounting trade deficit. However, policy planners are completely ignoring two harsh realities: 1) hike in international prices of crude oil and 2) ballooning debt servicing. The incumbent government has opted to borrow more and abstained from seeking help from International Monetary Fund (IMF). This does not offer a sustainable solution but marks the beginning of vicious circle of borrowing to pay off debts.

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