Fertilizer shares give 64pc return on strong demand
By Dilawar Hussain
KARACHI, Jan 14: The fertilizer sector produced total return of 64 per cent for the stock investors during the year 2004, which outperformed the gain of 39 per cent in KSE-100 index, by a margin of 25 per cent.
Fertilizer demand remained strong during the year on the back of increase in farmers' income, credit availability and a bumper cotton crop. A record 14m plus cotton crop is expected during the year. Also, good wheat crop, due to increase in support price and timely rains, has also boosted urea demand in the country.
Faisal Jiwani, sector analyst at InvestCap stated that due to strong demand and domestic supply constraints, fertilizer sector's control over pricing improved as urea prices increased by 8 per cent during Jan-Nov 2004. Higher demand and increase in retention prices added to the sector's profitability.
Fertilizer sector has only four companies listed on the country's stock exchanges: Fauji, Engro, Fauji Bin Qasim and Dawood Hercules. Salman Rasheed, analyst at Taurus Securities noted that the fertilizer off-take for the 11 months to FY'04 (up to November) was the highest in the last five years but supply situation remains tight in the Rabi 2004-05 season.
Industry sources say that the country is facing excess of demand. Total urea off-take during the year is expected to be 2.41 million tons which has been met through imports of 240,000 tons, to augment the domestic production of 2.29 million tons.
Analysts differ on whether demand growth would travel down to the bottom lines of fertilizer companies as capacity constraints would restrict growth in the urea business for producers and on the cost side feed gas would continue to rise as the feed gas subsidy is phased out. Hence, growth can only be achieved through price hikes, or increased sale of purchased/imported urea (DAP, MAP etc).
Notwithstanding the setting up of a private plant by Fatima group and expansion plans by Fauji, the industry was believed to be in need of more investment from the private sector after the fertilizer policy modifications.
Anticipating continuous fertilizer shortages in the next few years, the federal government has decided to chalk out a long term urea-import plan to maintain a steady growth in the agriculture sector.
Shahab Farooq, analyst at First Capital Securities said that with no new plants in the fertilizer sector apart from two expansion plans by FFC and Engro, the fertilizer industry had reached a stage where the demand for urea was now crossing the local supply, said the analyst.
He observed that during December, urea prices had soared up to Rs500/bag from average retail prices of Rs456/bag during November. The hike in prices was mainly at a dealer level as the companies were bound to sell the imported urea at a fixed rate of Rs450/bag and hence it was unlikely to result in any significant gains for the fertilizer companies.
As the on-going months are peak demand season, the prices of fertilizer were generally higher, but the fears of supply shortage had currently fuelled the price hike.
