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THE KASB REVIEW

  1. The KASB review
  2. Finex week

An exclusive weekly Stock Market report for PAGE by Khadim Ali Shah Bukhari & Co.

Updated on Mar 27, 2000

Increased volumes continued to depict the heightened investor interest in the KSE 100. Total turnover of shares exceeded the 1500 mn share mark over the week, translating into a 66.43% increase w-o-w.

The KSE 100 despite remaining in a volatile phase closed the week at 2001.90, a mere drop of 0.003% over the week. The market opened up on a strong note but was unable to carry the strength through the whole duration of the week.

PSF sector shares continued to lead the KSE 100. With the reported management change in Dhan Fibre, triggered by the leading interest of Dewan Salman fibre, the share price jumped up by leaps and bounds, causing the other sector players to take advantage of the buoyancy.

Foreign investors continued to remain absent from the KSE 100. In their absence the market sentiments were driven largely by the domestic institutions. Taking a cue from the rising investor sentiments, the domestic institution resorted to profit taking, only to emerge at dips to support the KSE 100.

COT/Equity repo remained on the higher side, depicting the apparent overbought situation in the market.

For the coming week, the KSE 100 is likely to hover above the 2000 levels. Though the market has discounted the stiff stance taken by the visiting US President and the reciprocal statements by the Chief Executive, we believe that any concrete outcome would only be clear after the arrival of the US President, causing the market to act in a volatile manner.

Sector Outlook

Fertilizer Sector: Remain Underweight

In the wake of the increased focus on the agriculture sector and its allied sectors, the fertilizer industry has also been weathering a stormy operating scenario. Though the government has been instrumental in providing limited shelter to this sector by imposing import regulatory duty on urea, the recent announcement to import DAP to meet the local demand could result in encouraging further private sector imports which could provide stiff competition to Fauji Jordan and the import margins of Engro and Fauji.

Interesting developments

Fundamentals continue to remain intriguing for the fertilizer sector. Though historically urea demand has exceeded supply, FY 99 was the first year when demand of 4.08 mn tonnes lagged total supply of 4.39 mn tonnes resulting in a oversupply situation of 0.43 mn tonnes. For FY 2000, official estimates are looking at around 4.207 mn tonnes of urea demand, an increase of 3% y-o-y.

In order to safeguard the operational advantage of the local producers, the government has allowed for the export of 0.1 mn tones to be exported. This would allow mitigating the expected burden of an oversupply situation of 0.4 mn tonnes.

On the supply side there are dual pressures. Initially the installed capacity has increased by 1 mn tones. At the same time urea imports due to low international prices aggravated the situation. The only respite for the local producers tends to remain fixed on a let up in international prices. On the flip side, due to the increased government focus on encouraging farm output, any increase in local prices will be immediately addressed by allowing private imports.

DAP imports decision might be reversed

DAP demand continues to be robust for FY 2000. Despite robust demand, DAP market continues to be in a stable position right now. The prices of domestic DAP continue to remain weak, largely due to the specter of cheap imports DAP/TSP off take has increased by over a hundred per cent in October alone. This is attributed to a decline in urea off-take due to a change in the mix being provided by the farmer to the soil. With the increased usage of DAP the farmer is able to meet the correct composition for his land and in return enjoy an effectively higher yield.

In view of the increased demand, we were confident that Fauji Jordan would be able to able to cater to around half of the total import demand, while the rest would be catered by private imports. Currently international prices have weakened and we expect that to linger on for some time due to drop in international urea and DAP demand.

Global Trends Remain Weak

There are a couple of developments that resulted in the situation. 1999 was plagued by a number of uncertainties globally beginning with the financial problems in Brazil, an important phosphate importer. India began reevaluating its phosphatic subsidies, while in North America, the agricultural season was disappointing and that reinforced concerns about the impact of low commodity prices on fertilizer demand. Finally the threat of new capacity hung over the international market all year, which has still not come on line.

Going forward we expect fundamentals for the DAP sector globally to remain weak as the new capacity finally come on line. This might reinforce the specter of cheap imports.

Private Sector Imports: Volumes Decline imminent

On the domestic front our fears have been pushed in the direction of being turned into reality by the recent expected announcement by the government to allow private sector imports to meet local DAP demand. This will greatly affect the local producers profitability. Currently international DAP prices have continued to remain weakened and there still persists a possibility that cheaper imports might decrease the expected market share of FJFC. Although margins on imported DAP might improve y-o-y for Engro and Fauji, volumes will definitely take a hit. With the advent of FJFC in the market and with the recent expected government move towards imports, the fertilizer sector will continue to remain an unattractive entity for the average investor. Remain under weight.