AKD Quotidian about Fertilizer Sector: Kharif demand to stay robust

Karachi –– With the Kharif crop sowing season currently underway, concerns over enhanced gas load management have raised apprehensions of urea shortage. On this note, domestic fertilizer manufacturing industry has reportedly cautioned that domestic urea prices may even reach PkR2,000/bag (near par with international prices), to compensate for production shortfall.

To avoid shortages in the current Kharif season, the government is likely to import 164k tons urea by utilizing the SABIC credit facility. That said, Kharif 2011 urea production should still clock in at 3.25mn tons, up 18%Y0Y. Moreover, the pulse of demand for fertilizers should stay robust where strong crop prices and higher rural incomes should induce greater plantations (esp. Cotton), countering the effects of higher fertilizer product prices.

According to AKD Securities Limited, in this regard, the SBP has indicated that cotton production during FY12F may reach 17mn bales against FY11E cotton production of around 11.6mn bales. While AKD Securities Limited preferred pick is FFBL, Man-based producers (FFC, ENGRO base plant) should also be net gainers from price hikes and any improvement in gas supply.

Investment Perspective: Previously, a Combination of higher Curtailment (gas load management and annual shutdown) and GST imposition has made urea price rise by – PkR400/bag since Dec’10. Going forward, AKD Securities Limited believes enhanced gas curtailment should prompt fertilizer manufacturers to further increase prices to sustain profitability. In this regard, AKD Securities Limited believes enhanced crop prices indicate the potential to absorb higher urea prices. While AKD Securities Limited preferred pick is FFBL, on an absolute basis AKD Securities Limited tag Man-based producers to benefit the most from the price hikes due to a lower gas outage and the firm demand in the Kharif sowing season.

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