December 27, 2019 (MLN): The inventory situation in Fertilizer Industry continues to experience fluctuations dependent on change in demand and supply scenarios, and currently fertilizer industry is going through an adversative demand and supply situation.
The inventory is now reaching to an alarming level as limited buying by dealers due to uncertainty on GIDC and high urea prices in domestic market took an overall urea inventory stock to 1.04 million tons in November, up by 3.2 times YoY and 30% MoM.
A research report by Intermarket Securities highlighted that it is the highest level of inventory since May 2017 (1.7 million tons then). The high price of urea is dissuading dealers from piling up inventory.
The report further underscored that dealers have had decent inventory levels until November and they are presently selling at a price of PKR1,940/bag to sub dealers and at PKR1,990/bag to farmers. To compare, manufacturers' ex-factory price is PKR2,003/bag.
As per the latest data, in November 2019, Urea offtake recorded at 381K tons which was 2.2 times higher compared to preceding month, while declined 23% YoY. On a cumulative basis, it declined by 4.3% YoY to 4.88 million tons during 11MCY19.
Going forward, the oversupply situation in the country is further likely to aggravate as it would be hard for the government to keep providing subsidized RLNG to fertilizer manufacturers amid rising gas shortage in the country.
DAP offtake on the other hand clocked in at at 404k tons in Nov 2019, rose by 53% YoY and 49% MoM. On a cumulative basis, DAP offtake declined by 20%yoy to 1.64mn tons in 11MCY19 mainly due to price increases amid PKR depreciation.
GIDC continues to be a cause of concern as fertilizer sector would be the main beneficiary of GIDC resolution due to one-time gain. However, it would impact negatively on manufacturers due to payment of duty on one off gain if it is completely removed.
Furthermore, OGRA has recommended the government to increase gas prices for fertilizer sector by 136% for feed gas and 32% for fuel which further likely to elevate urea prices. As the report stated, “If the proposed gas prices are implemented, producers will have to increase Urea price by around PKR600/bag to about PKR2,600/bag.”
However, such increase in Urea prices is not probable, because international prices presently stand at around US$240/ton (which translates to local price of PKR2,200-2,250/bag), the report added.
The latter have declined by 15% in the past six months. Hence, government can reduce the industry's pricing power by allowing imports. Therefore, it is very unlikely that manufacturers can pass on the whole impact amid depressed international Urea prices and elevated inventory level, the report concluded.
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