Declining fertilizer sale in Pakistan

Fertilizer sales continued downward trend during first two months of calendar year 2016. Reportedly offtake during these months was exceptionally low. While urea sales plunged to 656,000 tons (down 40%YoY), total fertilizer offtake was 982,000 tons (down 228%YoY). The declining trend in sales is attributable to lower crop prices (depressed agricultural commodity cycle) and weather-related crop shortfalls resulting in low farmer income.

According to the latest figures released by NFDC, cumulative fertilizer offtake during the Feb'16 was recorded at 491,000 tons as compared 606,000 tons in Feb'15, a decline of 19%YoY. Specifically, urea sales during Feb'16 have declined to 315,000 tons from 340,000 tons in Jan'16, down by 7%MoM/31%YoY.

On the other hand, DAP sales showed strength, registering an increase of 12%YoY to 71,000 tons and 9%YoY to 148,000 tons in Feb'16 and 2MCY16 respectively, however remaining lower by 7%MoM.

Imported urea sales went down by 98%YoY/87%MoM to only 1,533 tons in Feb'16 on account of weak demand and increase in production from the local players particularly EFERT and FFC that enhanced their production levels by 16%YoY to 172,000 tons and 70%YoY to 209,000 tons respectively.

Near-term checkpoints for the fertilizer industry remain: 1) international pricing dynamics where urea prices are down 26%FYTD to currently stand at US$236/tons, 2) Upcoming kharif season to drive demand and 3) increase in local gas prices (expected in Jun'16). In this regard, with no major volumetric growth in CY16, depressed farmer income and weak pricing power does not bode well for the sector.

Urea market share FFC (26%), EFERT (41%) and FATIMA (5%) in Feb'16. FFC sold 146,000 tons (down 21%YoY0, EFERT sold 128,000 tons (down 13%YoY) and FATIMA sold 15,000 tons (down 50%YoY) of urea. With the month under review remaining slightly better for DAP offtake, FFBL sold 24,900 tons of DAP (up109%MoM) while imported DAP sales rose by 33%YoY to 46,400 tons, however, declined by 28%YoY. After a sluggish start in CY16, NP and CAN sales improved to 36,700 tons and 52,400 tons respectively in Feb'16. 

Weak demand on account of poor farm incomes and increase in production from local players has led to high inventory levels in the system. In Feb'16 inventory levels for Urea (800,00 tons), DAP (269,000 tons), CAN (306,000 tons) and NP (180,000) tons. Consequently, end of Feb'16 inventory levels were relatively high for all four basic types of chemical fertilizers. In this backdrop, fertilizer producers are offering hefty dealer discount to clear out huge stockpile of inventory, affecting their margins.

In line with market volatility and depressed fertilizer outlook, the sector shed 14.2% CYTD. With little respite in sight for global commodity prices along with depressed farmer incomes, analysts believe the country's urea demand in CY16 is likely to fall to as low as 5.2 million tons. This alongwith inability to pass on any sharp increase in cost from further gas tariff rationalization (expected in Jun'16) given the continuously narrowing gap between local and international prices is likely to keep price under pressure.

Poor commodity prices, rising gas price, declining urea international prices, high carryover stock