KARACHI, Aug 25: Urea demand during the first seven months of 2004 (January to July) stood at 2.47 million tons, showing an increase of 7 per cent over demand of 2.31 million tons during same time last year.

"The higher demand reflects sustained water availability, improved farmer incomes and greater credit availability to the agricultural sector", commented Tanvir Abid, Head of Research at Jahangir Siddiqui Capital Markets. DAP sales during July 2004 doubled to 174,000 tons ensuing from aggressive marketing strategies to dispose inventories and price reduction.

Zaheeruddin Khalid at Elixir Securities, observed that the growth of 6.9 per cent in urea demand for the first seven months of 2004 was "despite reports of water shortage in the country".

He also noted that a sharp rebound was also seen in DAP where the year to date sales had gone up by 11.7 per cent mainly on account of exceptional sales in July 04. "We attribute the rebound in DAP sales to the 4.4 per cent month-on-month decline in DAP prices as a result of reduction in levies announced in the budget", said the analyst.

According to the figures released by the National Fertilizer Development Corporation (NFDC), urea demand during July 2004 depicted a marginal increase of 1.4 per cent to 0.51 million tons as against 0.50 million tons in the corresponding period of the previous year.

"Taking a look at cumulative fertilizer offtake during Kharif 2004, urea and DAP sales respectively portray 1.4 and 46.7 per cent year-on-year increases", said Tanvir Abid. He visualized the urea demand outlook for the remainder of 2004 to be positive.

"Urea prices during July 2004 had soared by approximately Rs30-40 per bag reflecting the higher cost of gas supplied and increased burden of sales tax", said the analyst and added that in late-July the government forced an approximate Rs20 per bag reduction in the price of urea whereby the brunt would be shared equally by the manufacturers and the government (i.e. lower sales tax).

This development squeezed fertilizer manufacturers' margins. With international fertilizer prices at sky-high levels, the landed cost of imported urea was approximately 1.6-1.8 times higher than the domestic price.

During July 2004, urea prices on the international front continued to mount on increased demand and crossed $200 per ton. DAP prices during the month were in the range of $217-225 per ton in the US Gulf and $206-221 per ton in the Jordan market.

"NFDC has stated that fertilizer prices in the international market may slide during September 2004 on account of stabilizing world demand", said the analyst.

Elixir Securities stated that going forward, they expected a demand supply gap to emerge in the last quarter of FY04 despite an expected increase in production by the existing players.

Over a slightly longer period the demand supply imbalance was likely to be corrected to some extent by the setting up of at least one new plant (possibly by Fatima Group).

But the analyst said that the demand numbers for the month of July 2004 indicated that urea sales were continuing to show a decent year-on-year growth despite reports of water shortage and increasing product prices.

Analyst said that he believed that mainly to be a function of increased purchasing power of the farmer as the last cotton and wheat seasons had been good in terms of crop prices.

On the other hand demand for DAP had also seen a sharp increase in July where 174,000 tons were sold in a single month against 181,000 tons sold in the first six months of the year.

For the full year, Mr Zaheeruddin was projecting 6 and 4 per cent year-on-year growth in urea and DAP, respectively. Despite government assurances of maintaining uninterrupted gas supply during the winter season, analysts expect a shortfall of at least 150,000 tons of urea to arise in the last quarter of the year as capacity constraints would allow fertilizer manufacturers to produce only an additional 50,000-100,000 tons.