The resurgent global urea price offers Pakistan’s fertiliser companies what analysts call a ‘lucrative opportunity’ to export their excess urea inventory.

The international urea price has recovered to about $240/$250 a tonne, up by 42pc in last six months since July last year, on the back of increasing rate of coal used by Chinese urea producers.

The industry’s unsold stocks of urea peaked to 1.73m tonne in May last year because of poor farm incomes and uncertainty about the government’s Kissan package.

Stocks were estimated by AKD Securities to have eased to around 1.45m in November, or up by 56pc from a year ago and down by 15pc from a month earlier, on strong Rabbi demand and the announcement of urea subsidy in the Kissan package given in the budget for the ongoing financial Year.

“The revival of three closed urea plants on the back of smooth LNG supplies has changed the dynamics of the domestic urea market,” says Fahd Rauf

Uninterrupted supply of liquefied natural gas (LNG) — that had helped revive production of three major fertilisers — and weak demand are major factors blamed to have led to inventory build-up.

With unsold stocks of urea producers likely to grow to 1.8m tonnes by the end of 2017, the government is considering a request by the manufacturers to allow export of surplus fertiliser. The ministry of industries, according to industry sources, has already proposed that the producers be allowed to export 0.8m tonne urea (by June the year).

“The revival of three closed urea plants on the back of smooth LNG supplies has changed the dynamics of the domestic urea market,” argued Fahd Rauf, a senior analyst at Insight Securities.

“As a result, Pakistan instantly turned from being a urea deficit country into a urea surplus country with production rising to six million tonne against the demand of about 5.6m, thus, leading to inventory build-up and reduction in prices because of intense competition between producers,” he explained over telephone from Karachi.

Industry output grew by 14pc in 2016 from a year earlier and is expected to peak to 6.3m tonne during 2017.

The fertiliser sector had bounced back in the third quarter of last year to September after reduction in fertiliser product prices — urea rate was down by Rs390 per bag and DAP by Rs300 per bag — in the current budget after GST (general sales tax) on fertilisers was cut to five per cent from 17pc and cash subsidy.

AKD Securities analysts also expect the profitability of the manufacturers to improve “in the range of six per cent to 20pc at different export levels with Engro Fertiliser being the key beneficiary, on account of its low cost and healthy market share, followed by Fauji Fertiliser Corporation owing to its leadership in urea market.”

Fertiliser sales saw a decline of 32pc during first five months of the last year to May before rebounding by 28pc during June-November, according to the latest numbers.

On a cumulative basis, total fertiliser sales posted a growth of three per cent YoY to 7.83m tonne until November, with urea off-take dropping by four per cent to 4.59m tonnes.

The last AKD Security report on the fertiliser sector expects the rabi season to continue to drive demand.

It feels that the ruling from the Sindh High Court against Gas Infrastructure Development Cess (GIDC) imposition and brightening of export prospects on recovery of global urea prices will have a significant favourable impact on the industry, triggering earnings.

Nonetheless, analysts insist, profits of urea makers will remain under stress going forward as they compete with one another for market share.

“Fertiliser sector dynamics have changed over the last one and a half year or so: producers have lost their pricing power, at least for the time being; gas rates are going up and the market is witnessing a glut because of higher production and lower demand,” said an executive of a major fertiliser manufacturing firm, refusing to give his name because of his company’s policy.

“Government permission to export about one million tonne urea in the near term can ease pressures on producers and drive their earnings without disturbing the local market or destabilising domestic prices.”

Analysts agree that fertiliser companies that have diversified into other businesses in view of their squeezing margins, reducing gas subsidies and saturating market will recover their profitability more quickly.

Over the last several years, fertiliser producers have invested in sectors like power, food, dairy, cement, banking, etc and their investments are expected to generate returns in the next 2-3 years.

“Companies like Engro had started diversifying into other businesses to cut their reliance on their core business because of acute gas shortages and cuts in gas subsidies in recent years.

“Now their decision to invest in other industries is starting to pay them dividends,” the anonymous executive said.

Indeed, 2016 was a challenging year for fertiliser producers who saw their margins and pricing power decline significantly over the last few years.

But 2017 will not be any less challenging even if the government agrees to their request to allow export of part of their unsold stocks.

Published in Dawn, Business & Finance weekly, January 9th, 2017