Fertilizer Sector

[Farzooq]

Price of Engro Urea has increased by 100 Rs. Now booking price will be1580 & Farmer price will be 1600(inclusive of tax).

 

[Farzooq]

Loss coverage for one, pure profit for another
After two successive price decreases on the back of promised gas supply to Engro, the
company has yet again raised the price of its urea (Rs100/bag) citing same old reason of
gas curtailment. This increase is expected to aid Engro into recovering its production
losses due to plant closure from 8th Dec-11 till date, while duration for the current gas
winter outage is expected to last till mid of Mar-12. As per our expectations, the said
increase is going to help ENGRO recover CY12 earnings by Rs5.7/sh on the basis of our
production assumption for EnVen (450k tons). Once again, this is going to be beneficial for
FFC as it is not nearly facing as much of gas curtailment as is being faced by ENGRO. Hence,
any price increase by ENGRO (owing to gas curtailment) translates into incremental profits
for FFC. Post this price increase, a boost of Rs4.9/sh is expected in full year CY12 earnings of
FFC. Similarly, FFBL's CY12 earnings are expected to be jacked up by Rs0.9/sh.

GDS to greet fertilizer manufacturers in CY12
As per news reports, Ministry of Petroleum is expected to impose GDS on fertilizer
manufacturers, which is said to be around Rs195/mmbtu for fertilizer sector. It is still unclear
whether the said tax is to be imposed on new plants (Fatima and EnVen) or not, and we
could not get the clear picture upon our discussions with different urea manufacturers as
the actual notification regarding the GDS is yet to be received by the manufacturers.
However, general understanding is, if a law is passed, it in most cases applies on every
entity that comes into that particular bracket on which the law has been imposed. We
have done two different sensitivities in this regard to see GDS impact on ENGRO's both
plants. In both cases we expect the company to pass on the incremental impact of GDS
imposition on to the end consumer. In first case, with our production assumption for EnVen,
we expect ENGRO to pass on Rs266/bag (exclusive of tax). The impact is expected to be
minimized by ~28% to Rs191/bag if we exclude EnVen from GDS. While, for FFC and FFBL the
impact of GDS is expected to be around Rs241/bag and Rs322/bag (exclusive of tax for
both), magnified for FFBL because it has less efficient urea manufacturing plant as compared
to other two companies. This may spell into different urea prices for different companies.

Outlook and recommendation - Faujis still better-off
Keeping in mind the gas supply situation in winters, we expect gov't to start placing orders
for further imports, as Rabi harvesting starts from March. Gas supply is expected to remain
erratic for EnVen till mid of Mar-12, while still dicey from then onwards, and this same fate is
being shared by other manufacturers on SNGP network. At current levels, we have a 'Buy'
call on FFC, FFBL and ENGRO, with their respective Jun-12 TPs of Rs240, Rs70 and Rs190.

ENGRO’S COMPLETE GDS PASS-ON AND
CY12 EARNINGS IMPACT ON FAUJIS
Rs/sh Per bag FFC^ FFBL*
With GDS on Engro’s both Plants
266 1.37 (0.60)
260 1.07 (0.66)
252 0.63 (0.74)
With GDS on Engro’s old plant only
191 (2.83) (1.40)
171 (3.95) (1.61)
142 (5.62) (1.92)
Source: InvestCap Rsearch Estimates
*Expected decline in CY12 base-case earnings due to
insufficient price pass-on for FFBL’s less efficient plant.
For breakeven, FFBL needs as much as Rs322/bag (extax)
increase in urea price on account of GDS
^FFC is more efficient than FFBL, therefore, Engro’s
pass-on of the said tax is expected to provide
incremental benefit to FFC’s earnings

[Poker Face]

my assumpion of 300-350 bag impact was inclusive of tax

[Farzooq]

AKD Research - Off the Analyst's Desk
December 22, 2011
ENGRO raised urea prices by PkR100/bag
ENGRO yesterday raised urea prices by PkR100/bag, reversing last month’s PkR100/bag decline. Urea price now stands at PkR1,580/bag (PkR1362/bag ex-GST). As has been the case in the past, other manufacturers are also expected to follow ENGRO’s price increase. We estimate that ENGRO will have the highest annualized EPS impact (PkR4.15) assuming 40% utilization for ENVEN followed by FFC (PkR3.35), FFBL (PkR0.59) and FATIMA (PkR0.40). As for FATIMA , in case we assume zero utilization for CAN, EPS impact will reduce to PkR0.28.

EPS impact of PkR100/bag urea price hike
ENGRO with Enven @40%            4.15
ENGRO w/o Enven            2.64
FFC            3.35
FFBL             0.59
FATIMA            0.40
 
Source: AKD Research

[Farzooq]

Fertilizer sector battling for gas: Ismail Iqbal Securities

By: Yasir Yousuf, Senior Research Analyst, Ismail Iqbal Securities
 
Fertilizer sector is now days battling with various issues to keep the business going in an ideal manner. The sector has enjoyed phenomenal profitability in CY11 with all time high earnings of major key players. Shareholders enjoyed price appreciation and high dividend payouts till 9M11 (barring Engro Corp.). High urea and DAP margins are the major triggers that kept the sector in limelight.
 
As we know country is going through worst phase of gas shortage and efficient allocation is not possible to all the beneficiaries of it. Hue and cry from CNG association, Textile and other sectors to remove subsidy from fertilizer sector on gas (raw material for urea) drew governments’ attention, as a result govt. has levied GIDS (Gas Infrastructure Development Surcharge). The major hit would be borne by fertilizer sector with increase in feed gas price from Rs102/ mmbtu to Rs299/ mmbtu (~200% increase/ Rs197/ mmbtu hike).
 
Impact on key stocks
 
FFC: Fauji Fertilizer has been one of the best stocks that performed both in terms of dividend payout and price appreciation. With increase in feed gas price the impact of Rs230/ bag would be passed on to end users, fortunately Engro raised urea price by Rs100/ bag the same would be followed by FFC too.
 
Interesting thing to note here is that currently urea prices are up by Rs560/ bag YoY basis (Rs1020/ bag Jan’11) consequently FFC’s earnings would register growth (+3% YoY) in CY12 versus CY11. Growth in bottom line would be limited by depressed earnings expected from FFBL consequently dividend payout to FFC would fall by 40% YoY in CY12e. We have ‘BUY’ stance on the stock with Jun-12 TP of Rs230/ share, offers CY12e dividend yield of 16.40% and trading at CY12e P/E of 6.10x.
 
 
 
FFBL: The company’s gas provider is SSGC and the company has witnessed gas outage/curtailment (averaged at 70% for CY11). As per news flow FFBL’s plant would be shut down from Dec 22, 2011 till end of Feb’12. Post resumption of gas flow in March’12 we believe company to face curtailment in CY12 as well consequently urea production would be 450k tons for the year. But the major revenue and profitability contribution comes from DAP offtake and it’s very tricky to forecast the primary margins for CY12. International DAP prices peaked to US$ ~ 660/ ton in CY11 from there on it has dipped to US$ ~ 600/ ton on Dec’14, 2011, where as phosacid still trading above US$ 1050/ ton thus primary margins at current price level stands at US$ 117/ ton. Importers of DAP in Pakistan are still selling it at 3400/ bag (ex GST) or US$ 755/ ton due to higher import cost and imposition of GST inventory flow is slower compared to CY10.
 
We believe primary margins for CY12 to average at US$ 180/ ton consequently FFBL’s earning to witness a big cut in the coming year. We have already recommended Sell stance in our previous report when the stock was hovering around Rs ~53/ share. Our Jun-12 TP for the stock is Rs42/ share.
 
ENGRO: Engro is unfortunately one of the worst business world story in Pakistan’s history just due to unavailability of consistent gas supply to its new project EnVen. Initially the plant came online a bit late as per scheduled date and subsequently was engulfed with gas outages for most of the days post COD in CY11. The new plant never received optimum gas supply since its COD in order to operate at higher efficiency. Currently the plant is waiting for gas to run its affairs, as per news flow SNGPL network fertilizer plants to come online in Feb/ Mar’12. We have estimated 180 production days for new plant in CY12, conversely old plant is on Mari network and immune to gas outage thus would continue its production in full flow as it did in CY11. The recent GIDC cess would not be imposed on EnVen and company would benefit from high urea prices by paying US$ 0.7/ mbbtu (Rs63/ mmbtu) versus Rs299/ mmbtu to entire industry barring Fatima. Despite all these rough phases we have estimated growth in its earnings by ~40% and expect company to register (EPS: 23.92) for CY12e. Currently stock is available at very low CY12e P/E of 3.93x and offers CY12e dividend yield of 6.30%. We have revised down our Jun-12 TP to Rs196/ share and offers upside of 108%.
 
FATIMA: Fatima is the only fertilizer company immune from all woes like gas outage and hike in feed gas prices. The company is getting gas at US$ 0.7/ mmbtu and it receives gas from Mari network. The stock has outperformed among its peers and moved up from 52wk low of Rs9.16/ share to Rs22.82/ to date. We have ‘BUY’ stance for the stock with Jun-12TP of Rs28.25/ share, offers upside of 23.8% and trading at CY12e P/E of 4.66x.

[AGz]

Subsidy on imported urea to cost exchequer Rs42 billion
RIZWAN BHATTI
Thursday, 22 December 2011 11:00

KARACHI: The urea import requirements for the Rabi season will cost the government Rs 42 billion in subsidies as despite higher prices in the world market the imported commodity is being sold at lower price in the domestic market.

So far, following the directives of the Economic Coordination Committee, the state run grain trader - Trading Corporation of Pakistan - has finalised deals for the import of 722,085 tons of urea for Rabi season, while another deal of 200,000 tons is in process. Currently, urea prices are on the higher side in the world market and to ensure cheap availability of the commodity in the domestic market, the federal government is paying huge subsidy on imported urea. The urea is being imported at $538 to $540.75 per ton (average Rs 48,533 per ton), while it is being provided to National Fertilizer Corporation at a price of 10,760 per ton following the decision of the ECC.

Since the natural gas shortfall will not be resolved in the short-term, the Sate Bank of Pakistan has predicted in its annual report that the government will have to import urea in the new fiscal year. The government had already planned to import about one million tons of urea for Rabi season because the local urea producers are unable to cater the local demand due to inconstant gas supply. The government will also have to subsidise imported urea because the international price of the commodity is higher than the current domestic price.

According to the State Bank if the gas load management schedule is followed, it is believed that urea import requirements for the Rabi season will be 1.2 million tons, which will cost the country around $620-640 million in foreign exchange and another Rs 42 billion in subsidies.

However, the State Bank has criticised the subsidy mechanism and according to its annual report the amount of subsidy granted by the government is more than the international-domestic price per bag, because of a consequence of the subsidy transmission mechanism.

According to the report urea is being imported by the TCP at or slightly above the international market price and sold to the National Fertilizer Corporation (NFC) at a price of Rs528 per bag, fixed by the Economic Coordination Committee of the Cabinet.

NFC then distributes the fertiliser through its marketing arm, National Fertilizer Marketing Limited (NFML), across the country. Unfortunately, this creates ample opportunity for various creative methods of corruption, the report said and added that the subsidy is, therefore, untargeted.

Reports regarding an FIA investigation into a "urea scam" at NFC/NFML are strong indications that the mechanism for the distribution of imports is defective. The SBP report has also reiterated that the problems in the fertiliser sector are solely a consequence of the ad-hoc policies deployed to manage the natural gas shortage. Apart from reassessing the role of NFC and NFML in importing and distributing urea, the government needs to set proper gas allocation to manage market expectations and halt speculative activity.

The SBP estimates indicate that urea production for the Rabi season in FY12 will be 2.1 million tons, leading to a deficit of 1.2 million tons, as there will be a demand of 3.3 million tons urea in the Rabi season.

The report said that inconsistent policies will always provide incentives for significant hoarding of urea and further unofficial price increases. Since the government is still reliant on imports of urea to fulfil domestic demand, there will always be a question mark regarding the timely availability of urea in the market.

"If the government fails to time its import of the commodity precisely, and ensure that stocks are distributed systematically throughout the country, dealers will want to hold on to their stocks in anticipation of future price increases and apprehensions of future availability," the SBP pointed out. Buffer stocks will dwindle and the market will create self-fulfilling expectations of a shortage, the report added.

[Farzooq]

Int’l urea prices (Yuzhny) fell by another US$30/t or 7.8% last week to an average
of US$355/ton. This is close to Dec-2010 price levels of US$370/t but still higher
than price in global commodity crises period of US$260/t and US$230/t in Dec-09
and Dec-08 respectively. Over 3-weeks, urea prices have fallen US$130/t or 25%
due to lack of global trade activity, weaker global demand outlook from macro
uncertainty and potential low-cost capacity additions expected in coming months
in the Middle East and Africa. Pak govt. is expected to offer a fresh tender for
import of 200k tons of urea for the remaining part of the Rabi season. At
prevailing prices, the cost of imported urea would be ~PRs1848/bag (or
PRs2144/bag with GST) – suggesting a potential price gap of PRs564/bag with
GST and PRs486/bag pre-GST level between domestic and international prices.
Compared to 2008, when international-domestic price differential narrowed to
15% or US$30/t compared to a 6-year average of 40% or US$165/t, there is still a
gap of 25% or US$111/t at current levels. This indicates room for the industry to
at least pass-on the impact of gas development cess.

kasb

[Farzooq]

outlook-12-fertilizer-market-gloomy-into-2012-on-weak-demand

[Farzooq]

Urea prices plunge: International urea prices have dropped to USD390/ton (Dec?11 to date
avg), down 25% from USD520/ton in Oct?11, on account of weak demand and over supply in
the international markets. However, most recent cargo from Baltic Ocean to Mexico was
priced at USD290/ton, which translates into a CFR price of USD325/ton for Pakistan.
Local urea discount to international prices narrowing: Discount of domestic urea price to
international prices during Dec?11 shrunk to PKR909/bag (38%) compared to last eight
months average of PKR1,593/bag (54%), which still provides sufficient cushion to urea
manufactures to offset rise in input costs (GIDS) or production loss (gas curtailment).
However, most recent price of USD325/ton implies a discount of a mere PKR511/bag, which
would be sufficient to offset cost increase from GIDS after PKR100/bag hike effective for
Jan?12.
Gas availability could worsen as urea imports become cheaper than HSFO: Dec?11 CnF
urea price at USD16/mmbtu (27mmbtu/ton of urea) makes it a cheaper import alternative
than HSFO, priced at USD18.5/mmbtu. While full implementation is unrealistic, substituting
local urea production with imports at Dec?11 prices would lead to monthly FX savings of
USD24mn.
Lower international urea prices a short term phenomenon: International urea prices would
likely start recovering from Mar?11 due to fresh demand as new cropping season
approaches. Therefore, current level of international urea price is likely to be temporary.

elixir

[Farzooq]

Fertilizer offtake numbers for november are out. Awaiting details

[Dhillon]

Urea production up 28%MoM amid better gas supply               Written as on December 27, 2011     

Highlights

            •      Improved gas supply yields better production

        •      Sufficient availability pushes imported Urea offtake back

•      Outlook and recommendation

In today's Value Seeker we present analysis on latest fertilizer offtake and production figures released by NFDC for Nov-11, with sector outlook and recommendation on key stocks.

Improved gas supply yields better production

During Nov-11, urea manufacturers on the SNGP network were blessed with gas and, as a result, industry’s urea production was recorded at 435k tons, impressively up 28% MoM. Engro's urea production during Nov-11 doubled MoM, due to better gas supply to EnVen. Industry’s urea production during 11MCY11, however, declined by 4% YoY despite additional supply of 650k tons from Engro's EnVen (plant came online mid-CY11). Such dire has been the gas supply situation to fertilizer sector (primarily those players who are on SNGP network).

DAP's production on the other hand, declined by 23% MoM (~16k tons) during Nov-11 to ~53k tons. Since FFBL was sufficiently carrying inventory of 27k tons, faltering production during Nov-11 did not have any negative impact on the company. Conversely, during 11MCY11, FFBL’s DAP production was up 4% YoY. And the credit must be given to the company for efficiently running their DAP facility as compared to same period last year.

Sufficient availability pushes imported Urea offtake back

Demand for Urea during Nov-11 witnessed depression of 12% YoY owing to seasonal impact (urea offtake usually experiences slight fall during Rabi season). However, local urea offtake growth of 25% MoM is eye-catching, showcasing that if blessed with continuous gas supply, the country's fertilizer sector had enough capacity to meet its urea demand quite easily. Urea offtake of the sector was depressed by 5% YoY during 11MCY11, in which locally-produced urea offtake was down by mere 1% YoY. While, imported offtake was slashed by 24% during the same period. This suggests that urea has not been readily available for the farmers, and therefore, could haunt the Rabi production if imports are not made in time. Similar offtake pattern has been witnessed as far as offtake of DAP is concerned. During the period, offtake of DAP also fell by 18% YoY, indicating that farmer economics are not as good as they were during the previous year, and were not helped by the free fall in the price of cotton that was experienced by both local and international markets.

Outlook and recommendation

Price of urea has experienced escalation of Rs100/bag couple of weeks back on the back of latest gas curtailment to players on SNGP network, and the said curtailment is expected to last during mid Mar-12. FFBL's production on the other hand is also expected to be absent during the month of Jan-12 amid planned gas curtailment. However, looking at the present gas supply situation in Sindh, we can infer that the said gas curtailment is going to last over one month. FFBL is expected to conduct its annual plant maintenance during Jan-12 using the outage period intelligently. At current levels, we have 'Buy' call on FFBL, FFC and ENGRO with Jun-12 end target prices of Rs70/sh, Rs240/sh and Rs190/sh respectively.

Invest Cap

[007]

imports keeps sales in check

Event
? National Fertilizer Development Center (NFDC) has published fertilizer offtake
numbers for November 2011.

Impact

? Urea offtake decreased by a whopping 48% YoY during November 2011, while
DAP offtake declined by 12%. On a cumulative basis, offtake for urea witnessed
a nominal decrease of 5% YoY during 11MCY11, while DAP sales declined by
18% during the same period.

? Urea: Overall sales witnessed a decrease of 5% YoY. The decrease was
nominal due to high prices, and more importantly, low urea availability during
11MCY11 as plants faced higher gas curtailment and imports by NFML were on
the lower side. Overall urea production for FSL universe increased by 4%, while
other urea manufacturers declined by 30% YoY in 11MCY11 due to severe gas
shortage on SNGPL network. Among the three fertilizer companies in our
universe (Engro, FFC and FFBL), Engro fared the best with urea offtake
improving by 103% MoM due to resumption of gas supply to Enven. As of Nov
end, total urea inventory is just 139k tons.

? DAP: DAP sales decreased by 18% YoY during 11MCY11 due to continuous
rise in DAP prices. Our entire universe market share improved to 87% in
11MCY11 (FFBL 60%, Engro 27%). DAP sales have remained decent in Nov
(second highest monthly sales in CY11). Engro imported 63k tons DAP in Nov
while other private importers limited participation in Nov. FFBL at Nov end has
closing inventory of just 3k tons.

Analysis

? Lower imports by NFML keeps urea scarcity intact: Urea production
improved by 28% MoM in Nov as plants on SNGPL received gas. However, we
expect urea production to decline in Dec as SNGPL plants again faced
shutdown. NFML was only able to import 50k tons in Nov which kept sales in
check. Urea imports are expected to gradually come in Dec and afterwards,
which will likely keep urea scarcity intact, since winter curtailment will continue
till at least Feb 2012. Despite addition of Enven plant in CY11, total country
production will remain lower than CY10’s production of 5.2mn tons.

? Pricing power of urea producers decreasing gradually: International urea
price has started to decrease from its CY11 peak (witnessed in 3q) and is
currently at trough level for the year. Gas Infrastructure Development Cess bill
and biannual gas price revision will lead to cost side pressure. It is yet to be
seen how the companies will react to GIDC, but they may be able to pass it in
1QCY12. However, given the renewed commitment by the Government to
provide gas to Enven, once production resumes from 2QCY12, it may lead to
decrease in urea price/margin from the current level. We have incorporated the
worst case condition (no urea price increase, while GIDC is implemented) in our
models, and still have a Buy stance on both Engro and FFC. While we maintain
our cautious stance on FFBL.

FS

[Farzooq]

AKD Daily

Fertilizer offtake losing steam

Fertilizer sales in Nov'11 were lackluster with both urea and DAP offtake falling MoM by 12% and 22%, respectively. Despite a 28%MoM improvement in urea production, lack of imports resulted in a sequential urea offtake decline, while relatively higher pre-buying in Oct'11 coupled with lack of price increase triggers kept DAP demand low in Nov'11. Cumulative urea sales for 11MCY11 were down by 5%YoY to 5.2mn tons, where the decline comes despite a 1.8mn tpa addition in urea capacity, owing to gas shortages. Higher prices coupled with erosion in farmer purchasing power have combined to lower DAP offtake by 19%YoY in 11MCY11 to 1.0mn tons.

Nov'11 FATIMA sales up 80%MoM: FATIMA managed to post an increase of 80%MoM in fertilizer sales in Nov'11 following a strong rebound in all product sales (urea, NP and CAN). ENGRO urea sales also jumped by 103%MoM on higher ENVEN production; however the position will reverse in Dec'11 at ENVEN following closure of plant in Dec'11. Urea sales for FFBL improved on the back of higher production (+74%MoM), as the company allocated more gas resources towards urea (DAP production down by 23%MoM), which in turn helped draw down FFBL's DAP inventory to just 2.8k tons by Nov'11. We view low DAP inventory as a positive development for FFBL given the expected fall in DAP prices in 2012, as lower carry-over inventory into 2012 will reduce the risks of inventory losses.

If you thought 2011 was interesting... As has been highlighted before, 2012 is going to be a challenging year for fertilizer manufacturers, largely due to the imposition of gas cess, continuation of gas curtailment, declining spread between local and int'l fertilizer prices and the increasing threat of sector regulation. While urea manufacturers have restored urea prices back to PkR1,580/bag level, we see limited room for further price hikes, especially in the backdrop of falling int'l urea prices. A PkR197/mmbtu increase in feed stock coupled with a 14% increase in fuel stock prices will result in a cumulative gas cost increase of ~PkR235/bag wef 1st Jan,2012. Correspondingly, we expect urea prices to be further raised by PkR150/bag at gross level (net PkR129/bag), which coupled with the recent price hike will result in net urea price hike of PkR216/bag. However, this will take net urea prices upto PkR1,491/bag or US$330/ton, which will be nearly at par with int'l urea price, which in turn will limit manufacturers ability to further raise prices irrespective of the gas supply situation. Below we have provided our earnings sensitivity for fertilizers assuming the gas price increase and corresponding EPS impact with and w/o PkR150/bag urea price hike. ENGRO and FATIMA can be clear winners in case the new plants are exempted from gas cess, which in our view seems unlikely as gas cess is an additional tax which should be applicable to all. Nevertheless, we continue to believe that ENGRO retains the highest potential upside.

[Farzooq]

Ministry of petroleum proposed gidc from 1st jan
fertilizers old plant 207% increase
new plant 2% increase

source geo

[imran.hafeez]

1st jan meh 2 din reh gaee hain, and govt notification release nahee kar rahee.

Still ppl are debating the exact increase (90% agreement that increase is 200%)