KARACHI, Jan 5: In an effort to pass on the recent 5.5 per cent increase in fuel gas prices by the Oil & Gas Regulatory Authority (Ogra) to the users, two big players in the fertiliser market, Fauji Fertiliser Bin Qasim (FFBL) and Fauji Fertiliser Company (FFC) increased prices of urea by Rs10 per bag on Friday.
Analyst Usman Zahid at JS Global Capital in his report stated the price per bag had now reached Rs558. But other analysts said given an impact of Rs4 per bag on the cost of production due to increase in cost of fuel gas prices, the manufacturers had raised prices of fertiliser by Rs10 per bag, which would go to improve their margins, but at the cost of a bigger burden on the farming community.
In another report on the fertiliser sector of the same day (Friday), Ayub Ansari, analyst at InvestCap stated that the sector offered one of the safest plays on the KSE landscape considering its relative insulation to political uncertainty and economic downturn due to the stable nature of the underlying products.
FFBL, being the sole manufacturer of Di-ammonium Phosphate (DAP) and granular Urea provided dividend yields which eclipsed that of 10-year PIB yield.
He calculated that even after an adjustment of 200bps of risk premium, the company offers an excess of 94; 600 and 471bps over 10-year PIB yield on CY08, CY09 and CY10 dividend yields respectively.
GLOBAL PRICES: Much is being said about the international prices of DAP fertiliser, which have more than doubled during the outgoing year.
Several analysts said in early January last year DAP could be imported at approximately $ 300/ton cfr Karachi port; a fresh consignment would now cost more than $700/ton.
“Purchase price from international market at this time last year equated to approximately Rs1,050/bag of 50kg ex-Karachi port, which has now jumped to approximately Rs2,400 per bag,” calculates an analyst.
He stated that at this time last year, the government was paying a subsidy of Rs250/bag of 50kg of DAP and the importers were selling the product at Rs800/bag. The government increased the subsidy to Rs470 per bag during the course of the year, but that gave just the partial coverage for cost increases incurred by the importers. This subsidy of Rs470/bag was continuing to date.
An analyst quoted a dealer as saying that with the current import cost of DAP at Rs2,400/bag, the importers could only afford to sell DAP at Rs1,930/bag of 50kg (Rs2,400 less Rs470). The dealer said the prevailing prices in the local market were much lower than that due to large stocks with all importers and the resulting competition to sell.
The government had been successful in encouraging a large number of importers to import and stock DAP, thereby, creating competition and averting shortages of the essential fertilisers.
Analyst Ayub Ansari at InvestCap stated that the reason for a giant leap in international DAP prices was a consequence of increased demand for fertiliser from US for corn cultivation –feedstock for ethanol.
He says: “Rising crude oil prices have made energy alternatives like bio fuels more viable, which coupled with rising global food inflation, will keep the demand for DAP high, as farmers will look to apply more of this fertiliser to increase crop yields.” Analysts noted that pricing of DAP in Pakistan was based on international prices as imports met 70pc of the total demand. “FFBL being the sole manufacturer of DAP in the country stands to benefit most from increasing DAP prices, as it improves its margins (as a consequence of its fixed costs for phos. acid and feed stock gas).
The company is currently undergoing a DAP BMR that is expected to be completed by the end of 1QCY08”, fertiliser sector analyst Ansari at InvestCap concludes.