1h finishes on a high while apprehensions persist

Urea offtake reached a record high in Jun-12: Urea industry offtake reached record levels of over 1mn tons in Jun-12 where domestic urea offtake comprised 93% of overall sales. Bumper urea offtake was primarily driven by inventory build up by the dealers due to anticipation of price hikes and incentives offered by the manufacturers. FFC, presently the largest urea producer in Pakistan, made up more than half of the sales at 526k tons followed by Engro at 223k tons and Fatima at 128k tons. Even though urea offtake during 5mCy12 was down by 21% Y/Y on account of price speculation, water scarcity and late sowing; record sales in Jun-12 allowed 1hCy12 offtake to prop up 3% Y/Y to 2.75mn tons. Urea inventory levels liquidated to 406k tons in Jun-12 from 934k tons last month where imported inventory stood at 185k tons.

DAP sales improve on anticipation of price hike: Expectation of increase in DAP prices by PKR 100/bag to PKR 3,750/bag in Jul-12 prompted dealers to build inventory in June, before the start of peak demand season. Overall industry DAP offtake lifted by 41% Y/Y to 96k tons while FFBL’s DAP offtake, although down 6% Y/Y, recovered 149% over last month to 42k tons.

Concerns linger: As dealers are expected to be sitting on ample inventory, urea offtake is likely to have gone below recurring levels again in Jul-12. Apprehensions of catastrophic floods as witnessed during the last two years amid lower crop prices are also keeping buyers cautious. Furthermore, government is contemplating on importing further 600k tons urea to meet supply shortage in 2hCy12 while considerations of price reduction of imported urea by PKR 150/bag to PKR 1,450/bag are also going on. Persistence of severe gas curtailment on the Sui network will render domestic production insufficient to meet local demand paving way for imports. Despite these concerns, pure Mari players such as FFC and Fatima are likely to do well in 2h as minimal gas curtailment shall keep production levels unhurt while supply shortage is likely to translate into optimum offtake. Fatima is our top pick as apart from gas curtailment, it is also immune to GDIC imposition on feed cost. However, excess availability of imported urea at hefty discount remains the primary threat as it will exert downward pressure on prices and consequently margins of the fertilizer sector.

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