Impact of urea price increases on Fertilizer Sector’s EPS

August 18, 2023 (MLN): A direct correlation between urea price hikes and earnings per share (EPS) emerges, as the increases in urea prices are expected to increase earnings per share of the fertilizer sector.

According to a report by Insight Securities, it suggests that for every Rs100 increase per bag in urea prices, EPS is expected to rise by Rs0.50 for FATIMA, Rs2.02 for EFERT, Rs0.50 for FFBL, and Rs2.26 for FFC.

This implies that recent increases in urea prices by leading companies FATIMA and EFERT – by Rs198 and Rs242 per bag respectively – are projected to contribute positively to their respective EPS.

This highlights the potential for further price hikes across the industry, indicating a trend set by these initial increases. This trajectory is expected to be influenced by additional industry players following suit.

Insight Securities predicts that the surge in urea prices might be propelled by mounting gas tariffs, to pass on cost pressures.

Notably, the urea sector anticipates robust offtakes for Calendar Year 2023, with estimates reaching 6.5 million tons. The recent federal cabinet decision to allow two RLNG-based plants to operate until March 2024 on indigenous gas, along with the consideration of importing 200,000 metric tons of urea, is expected to address the urea demand for the rabi season.

Surging Urea prices

The price hikes can be attributed to a confluence of factors such as inflationary pressures, currency devaluation, and tax impositions.

The recent price adjustments by FATIMA and EFERT, taking their urea prices to Rs3,109 and Rs3,411 per bag respectively, are seen as responses to these influences.

Despite these changes, Insight Securities notes the price disparity within the industry. The divergence in urea prices has widened, with FFC standing out as a major player refraining from increasing its prices, maintaining the lowest price at Rs2,910 per bag.

WACOG Mechanism

The report raises the anticipation of eventual price normalization with the implementation of the Weighted Average Cost of Gas (WACOG) mechanism.

This long-standing demand from the International Monetary Fund (IMF) is expected to introduce a uniform pricing structure based on the blended cost of RLNG and indigenous gas. Implementation of this price mechanism might result in higher gas tariffs, which will be passed on by urea manufacturers, the report noted.

After the gas price unification, players with efficient production facilities are poised to gain a competitive edge after the gas price unification.

However, FFBL, with its pricing of Di-ammonium Phosphate (DAP) based on import parity, is projected to encounter challenges in passing on the increased gas tariffs.

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