Fertilizer sales rest on gas prices

Urea sales are up. Inventories are down. Don’t mistake the surge in fertilizer sales to be an improvement in farmers’ economy. Farmers are facing a stiff time, in terms of yields, costing and pricing – let us hope there are no floods later this year. So what has propelled the urea sales to over a million tons in the first two months of CY15? Most analysts believe it is heavy buying in anticipation of feedstock gas price increase.
Urea sales for 2MCY15 were recorded at the highest ever level, no marks for guessing that the DAP fertilizer sales dipped almost on cue. Pakistan is facing a crisis of sorts in wheat and rice crops as pointed out by Engro Chief in a recent interview with BR Research. While the need to apply nitrogenous inputs still remains intact any massive price movement could well kill the momentum.
Luckily, fertilizer production has rebounded strongly, as most manufacturers have found ways to procure the all-important feedstock gas and are running at decent utilization levels. The urea supply should be back to comfortable levels as fresh imports are due to land soon. But the game changer remains the fate of feedstock gas price.
Government is mulling over rationalizing gas tariffs. The decision is yet to be taken and continuation of inaction in this regard cannot be ruled out. But if the government really finds the muscle to increase gas tariffs, urea prices will surely jack up – by as much as 10 percent. The fertilizer industry once again seems sure of its ability to completely pass on the impact to the end user and the same has been communicated to the government.
Recall that the industry’s pricing power had been tested last year after imposition of GIDC. Fertilizer players still claim to have the pricing power on account of the price differential between imported and locally produced urea. On the face of it, the argument makes sense, but then they enjoyed the same differential back in 2014, but the government used its levers to good effect, not letting the manufacturers pass on the complete impact.
The fertilizer industry which had earlier maintained its neutrality on feedstock gas price subsidy seems to be taking sides this time around. Citing farmers’ poor economy and relative weakness to regional farmers, the argument goes that input price should not be increased. Maybe they really are worried; after all they do stand to lose margins in case of a gas price increase.