Dawood Fertilizers gives it up

It was not long ago when urea manufacturing was considered one of the most lucrative businesses in Pakistan. Things have changed - and changed drastically during the past two years. Quite a few urea manufacturing entities have been reporting after-tax losses, something which was unthinkable in the recent past.
Doing away with ones flagship business must be a difficult decision. But it seems that the continuous, extended gas curtailment to the urea manufacturing facility made the decision easier for Dawood Hercules Corporation Limited (DHCL). The big conglomerate shocked the market earlier this week through a notice sent to the KSE, signalling its intent to sell its only wholly owned subsidiary, DH Fertilizer Limited, to Pakarab Fertilizers.
DH Fertilizer Limited is a relatively smaller player in the urea market, with an annual production capacity of 0.45 million tons and a market share of nearly nine percent. Unfortunately for DH Fertilizer, the nearly half a million tons capacity has been of little meaning of late, as persistent gas curtailment on the SNGPL network has resulted in nearly 80 percent production loss. DH Fertilizers urea plant operated for a mere 17 days in the 2QCY12 and hefty losses followed.
Pakarab Fertilizers is jointly owned by Arif Habib Corporation and Fatima Group of Companies, both of which have large stake in fertilizer business. Pakarab Fertilizers has negligible presence (0.09 million tons per annum) in urea industry as it focuses on phosphates and nitrate products, having capacities of 0.45 million and 0.3 million tons in CAN and NP categories, respectively.
While it is easy to gauge what has prompted DHCL to shed its fertilizer arm, it remains to be seen what has prompted Arif Habib Corporation and Fatima Group to buy a plant which has been worst hit by gas curtailment and which is connected to the NSGPL network where gas curtailment is significantly higher than the Mari network.
The move will nearly double the urea market share for Fatima Group to nearly 16 percent at one million tons per annum. Fatima Group currently has more exposure in other categories such as CAN and NP, while the combined urea production capacity of 0.59 million tons is lower than the 0.87 and 0.66 million tons of CAN and NP, respectively.
On the face of it, there appears to be no respite to the gas supply situation to fertilizer companies on the SNGPL network, which makes it tough to find economic rationale behind this decision. But the rumour has it that some political connections might work in favour of the acquirer. Recall that Fatima Fertilizer, along with the plants at Mari network has been amongst the least affected from gas curtailment, therefore, a preferential treatment for the DH Fertilizer plant in Multan cannot be ruled out.
Some circles also suggest that the government is reportedly working on dedicated fields for feedstock supply to fertilizer plants. It could well be that the acquirers know something that the others do not and there is a shift in gas allocation come the winters. It is premature to talk about what price will the deal be struck on and how the gas supply situation pans out. But it is for sure that Fauji Groups hold on the urea business will become stronger as Dawood Group has finally fallen prey to the gas woes.