LAHORE - The profitability of the urea manufactures witnessed a rise of 6.3 percent annually, to Rs23b as net sales of manufacturers increased by 18 percent owing to increase in urea off-take by 14.1 percent to 4.7m tons (including exports of 445,000 tons).

Excluding exports, urea sales of the companies grew by 3.2 percent owing to continuation of subsidy, higher discounts offerings by manufacturers to alleviate surplus inventory and improved farmers economics. To note, 2017 financial results remained better than expectations.

The concern of inventory glut prevailing since Aug 2015 has normalised to 264k tons as per Jan 2018 data released by National Fertilizer Development Centre (NFDC). This is almost equivalent to ten years average inventory of 274k tons and substantially lower than average inventory stock 1.1mn tons in last 29 months. Lower inventory could be attributed to 1) Govt allowed exports of 600k tons, and 2) lower production after disruption in production of few manufacturers.

Urea prices, post inventory depletion period improved to average Rs1,389 per bag in 4Q2017 against 9M2017 average of Rs1348 per bag, while current urea price is hovering at Rs1400-1420 per bag. This has helped manufacturers to pass on budgetary impact of subsidy reduction by Rs56 per bag (subsidy on urea was reduced from Rs156 to Rs100 per bag). Given tight supply situation amid disrupted production by Agritech and Fatima Fert, experts opine manufacturers would be able pass on cost inflationary pressure, going forward.

Experts said that urea production during 2017 declined by 6 percent to 5.6mn tons due to intermittent operations of LNG based manufactures (DH Fertilizer, Agritech, and Pak Arab) as govt diverted their allocated gas supply to retail consumers in winter season. Fertilizer production using LNG as a feed is not a feasible option for manufacturers as cost of LNG (indexed to crude oil) is 2x higher than the natural gas based urea manufacturers and is further expected to increase on the back of rising crude oil prices, experts believe.

Going forward, urea production is likely to post meager growth of 1.5 percent YoY to 5.7mn tons in 2018 as production of LNG based manufactures is expected to restore in second half of March 2018, as per channel checks. Post 2018, it is expected that urea production to remain stable at 5.7mn tons, keeping in view the rising crude prices (resulting in higher LNG prices) and episodic supply of gas to selected manufacturers.