AKD Quotidian about — Fertilizers: Worrying international urea price trend

Karachi, June 11, 2013 (PPI-OT): International urea prices have seen a declining trend during CY13TD where current price of US$321/ton stands at a 33-month low.

According to AKD Securities while may see a trend reversal in 2HCY13 as international demand picks up, current price represents a premium of only 7% to local urea price as compared to a 10-year average premium of 63%. Moreover, an increasing trend towards DAP consumption vs urea, as illustrated by a falling urea/DAP off take ratio bodes well for domestic DAP demand, likely paving the way for higher DAP imports going forward.

That said, against global peers Pakistani fertilizer manufacturers such as ENGRO and FFC look attractive on PIE on DIY, where ENGRO has outperformed all global players on the BBGLF with a CYTD absolute return of 55.5% while FFC’s CY13F D/Y of 13.9% is significantly higher than BBGLF average DJY of 3.4%. ENGRO remains AKD Securities tops pick in the sector with a TP of PkR2O8/share providing an upside of 45%.

Falling international prices: International urea price (Yuzhny) has come off significantly from a CYTD average monthly high of US$417/ton in Feb’13 to a 33-,rionth low of US$321/ton currently. The sharp drop has come on the back of an oversupply situation in the international market reportedly led by a sizable increase in Chinese shipments while a wet season in the US kept plantation levels (specifically corn and wheat) below expectations.

While the supply glut may be temporary as demand picks up In South America during the upcoming sowing season, the current international price represents a premium of only 7% to local urea price, as compared to a 10-year average premium of 63%, making urea imports more feasible than compared with the recent past. However, further risk arises from a possible reduction in urea import demand from India, which is one of the world’s argest importer of urea, due to the recent slide in INR (hit a record low against the US$ yesterday).

Importantly, the latest shipment of urea imports is expected to settle at -~US$335/ton, implying a landed cost of PkR1 675/bag compared with the net urea price of PkR1 466/bag for domestic manufacturers where the premium could further narrow on expected increase in domestic prices in 2HCY13 as they pass on the impact of higher gas prices.

Urea/DAP ratio: 4MCY1 3 urea/DAP consumption ratio of just 287x depicts an increasing trend towards DAP consumption in the country, where the ratio is massively lower by 64% as compared to a 10-year median of 6.8%.

The improvement in consumption ratio could be attributed to lower DAP prices in recent times. An increasing inclination towards DAP consumption spells positively for DAP players, where stable DAP prices vs a rising trend in urea input costs (further hike in gas tariffs expected in Jul13) have likely led the change.

Pakistan fertilizers still attractive: FEC and ENGRO have respective weights of 0.5% and 0.3% on the Bloomberg Global Leaders Fertilizers Index (BBGLF), which is a market capitalization based index comprising of leading global fertilizer players. FFC is currently trading at a CY13F PIE of 6.8x and ENGRO at 7.9x, implying respective discounts of 37% and 27% to the BBGLF average PIE. Moreover, ENGRO has out performed the BBGLF index in CYTD with an absolute return of 55.5% while FFC’s CY13F D/Y of 13.9% is also significantly higher than the BBGLF average D/Y of 3.4%.

Investment Perspective: Despite cheaper international prices, AKD Securities attaches a low risk of increased urea imports in CY1 3 where AKD Securities sees austerity to guide the new governments trade policies. While ENGRO remains AKD Securities tops pick in the sector with a TP of PkR2O8/share providing a strong upside of 45%, AKD Securities maintains a positive outlook on FFBL as well on unproved DAP- Phosacid PMs (up by 16%YoY to US$284/ton in 2QCY13) and a higher DAP consumption pattern.

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