LAHORE – The June 2012 total fertilizer offtake came in at a record 1,311k tons, up 99 per cent YoY and 167 per cent MoM. This was on the back of record 1,029k tons urea sales in June. At the same time, DAP sales increased to 96k tons in June, up 41 per cent YoY and 269 per cent MoM. Experts said that cumulative 1H2012 fertilizer sales were consequently recorded at 2,748k tons, down 2 per centYoY. As 70 per cent of DAP offtake takes place during the latter half of the year, the lower offtake in 1H2012 (269k tons) is not much of a concern.

Going forward, It is anticipated monthly urea sales to remain volatile, depending on the availability of subsidized imported urea. Experts are of the view that the government is likely to continue with its aggressive import strategy to (1) meet the production shortfall from Sui based plants and (2) counter pricing power of urea producers. That said, imports will at the end of the day be constrained by the GoP’s financial limitations. They continue to believe that Mari based fertilizer plants (with uninterrupted gas supply) will remain relatively unscathed in 2012. The key risk to our above thesis remains the imposition of additional Gas Infrastructure Development Cess (GIDC).

Urea sales in June were reported at a record 1,029k tons, which delivered 1H2012 offtake growth of 3 per centYoY (declining trend was witnessed in 5M2012). Urea sales improved by a hefty 173 per cent MoM mainly as a result of a price cut strategy (Rs145/bag on May 10, 2012) and expectations of higher urea prices going forward. Urea production in June, however, declined by 22 per centYoY to 370k tons as Sui network plants suffered from gas curtailment. Resultantly, end June closing inventory stood at 406k tons out of which 185k tons constitute imported urea. Amongst local producers, only ENGRO carries substantial inventory of 119k tons as of end June.

DAP sales improved to 96k tons in June, up 41 per centYoY and 269 per cent MoM. The contribution from FFBL to total sales stood at 42k tons with the company still carrying 158k tons of inventory. In 1H2012, DAP offtake stood at 269k tons, down 14 per centYoY. However, as 70 per cent of DAP offtake is witnessed during the latter half of the year (wheat sowing) we see these numbers improving going forward.

In 2H2012, given continuing gas shortages on the Sui network, we anticipate that urea plants reliant on network gas will only get gas supplies for 1.5 months. Therefore, in 2H2012 domestic urea production should remain in the vicinity of 2.2mn tons against anticipated demand of 2.5mn tons (annual demand of 6mn tons). Hence, the gap between demand and local production is likely to be around 300k tons.

To plug this gap, Government is planning to import an additional 600k tons of urea, which will take cumulative imports to 1.7mn tons, well above historical average of 1mn tons a year. These imports, if materialized, would overshoot domestic requirement and will result in excess availability of subsidized urea. This could, in turn, hurt the locally produced urea offtake and their pricing power. In addition, the Ministry of Industries has also recommended to reduce the price of imported urea to Rs1,450/bag from Rs1,600/bag.