Urea consumption likely to surge

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KARACHI – Demand of urea, in the upcoming Kharif sowing season, is expected to be on the higher side triggered by attractive international prices of the cotton crop. In addition, reasonably good income from the wheat crop will further strengthen the aforementioned anticipation.
However, import of 225,000 tonnes of urea, out of which 125,000 tonnes have arrived from Saudi Basic Industries (Sabic), at Rs 2,012/bag, and
another 100,000 imported via open tender at Rs 1,920 per bag, is likely to create a temporary supply influx situation in the country.
Meanwhile, Fauji Fertiliser Company (FFC) is expected to be the major beneficiary of such phenomenon and the net increase in primary margins of FFC will boost the company’s earnings in the first quarter of CY11.
“Despite an eight percent annual decline in offtake in the 1QCY10, we expect FFC to post an EPS of Rs 5.7 per share with a payout ratio of 90 percent (as per historical trends), said Asad Siddiqui at Investcapital.
The aforementioned increase, coupled with the upcoming Kharif sowing season, could prove beneficial for FFC in the coming quarters. The beginning of March, 2011 saw closure of FFC’s Mirpur Mathelo plant, which produces 2,500 tonnes of urea daily, due to its turnaround lasting for 20 days. Consequently, production of Pakistan’s premier urea producer fell short by 49,000 tonnes in the said month.
Despite this shortfall, production during 1QCY11 from Mirpur Mathelo plant is estimated to be seven percent higher than the production during the same period last year, primarily due to massive urea production of 128,000 tonnes in February, 2011. However, total production in the 1QCY11 is likely to be on the lower side (down by an annual eight percent), as Goth Machi plants experienced a turnaround in February 2011.
Similarly, FFC’s offtake is expected to be 173,000 tonnes in March, nine percent less than the previous month. Lower production can be classified as the main culprit behind this decrease, though, we do not expect an increase in price of the commodity (post sales tax implementation) to have any significant negative impact on the offtake, Asad maintained.
However, net increase of Rs 140 per bag in primary margins, enjoyed by FFC ever since Engro increased the price of urea by Rs 190 per bag back in the end of Dec-10, is probable to take away the negative impact from an expected fall in supply.