June-11 Urea offtake dips yet again!

June-11 Urea offtake down 15% YoY; DAP up 50% YoY: During the month of June, following last month’s trend, lower availability of Urea due to gas cuts was the reason for a 15% decline in its dispatches. While in case of DAP, offtake increased by 50% which was due to lower base effect and accumulation by dealers/farmers in anticipation of higher prices.

Firm outlook on prices: Gas supply to ENGRO from SNGPL was again cut last Friday for 15 days. Resultantly, we believe another Urea price hike by Engro, to offset losses from the recent shutdown, is on the cards. Moreover, DAP price was also increased by PKR150/bag in July on the back of higher phos-acid price set for 3QCY10 at USD1,050/ton.

Investment perspective: Given additional gas supply cut during 2HCY11, we have revised our Urea shortage estimate for CY11 to 711k tons, up 11%.  We have a positive stance on the sector. Our June-12 PT for FFC, FFBL and FATIMA stand at PKR178, PKR51 and PKR26 respectively. We have a BUY stance on all three fertilizer scrips under coverage.

June-11 Urea offtake down 15% YoY; DAP up 50% YoY

During the month of June, Urea offtake fell by 15% YoY to 492k tons mainly on the back of lower availability due to gas curtailment and resulting plant shutdown for manufacturers on Sui networks. While in the case of DAP, dispatches for June-11 registered a surge of 50% YoY to 68k tons which was due to lower base effect and increase in accumulation by dealers/farmers in anticipation of hike in DAP prices.

Firm outlook on prices

Engro announced an increase in Urea price by PKR145/bag (including PKR20/bag sales tax impact) earlier this month, to offset the impact of revenue losses due to gas supply cuts. This increase takes Urea price to PKR1,340/bag while landed cost of imported Urea is around PKR2,600/bag. Moreover, Gas supply to ENGRO from SNGPL was again cut last Friday for 15 days, which will result in a shutdown of 20 days including 5 days start-up period. Resultantly, we believe another hike is on the cards. Moreover, DAP price was also increased by PKR150/bag in July on the back of higher phos-acid price set for 3QCY10 at USD1,050/ton as against USD980/ton in 2QCY11.

Investment perspective

Given additional gas supply cut during 2HCY11, we have revised our Urea shortage estimate for CY11 to 711k tons, up 11%.  We have a positive stance on the sector. Higher prices on the back of gas cuts will continue to benefit FFC and FATIMA due to their lower curtailment. However any increase in prices to compensate feed stock price increase, will benefit ENGRO and FATIMA as they enjoy 10-year feed-gas subsidy on new capacities. Our June-12 PT for FFC, FFBL and FATIMA stand at PKR178, PKR51 and PKR26 respectively. We have a BUY stance on all three fertilizer companies under coverage.

Economic & Political News

12% hike in power tariff on the cards

The government decided on Monday in principle to further increase power tariff by 12% during the current fiscal year with a view to minimising subsidies.
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