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.
