Rarely has Pakistans fertilizer industry been under as much pressure as it is now. Fertilizer statistics for August 2010 are out and, as expected, show a glum picture. Worse still, the worst is yet to come.
The floods have surely blown away the fertilizer sales, at least, in the first two months. But something has to be really bad if you need to go back as far as 1994 to find a previous incident of lower urea sales during August, right before the all-important Rabi crop season. Urea sales of 0.3 million tons in August almost halved the level it achieved a year ago.
The devastating floods have offered no respite to urea manufacturers. The worst hit amongst those is the leading urea manufacture the Fauji Fertilizer Company, which has never sold anything close to what it sold last month, let alone lesser in the last five years in any single month. Such is the effect of the floods, that even a slight decline in urea prices could not prompt an uptick in urea sales as a large area remained inundated.
The story on the DAP side of things is damp as well. In fact, it is worse than the urea situation as sales of the phosphate fertilizer dipped by more than four times in August, compared to the same period last year. Had it not been for the DAP crisis of 2008, you would have to trace back to 1996 to find a precedent of a lower DAP off-take in the all-important August.
The farmers reluctance to engage in fertilizer buying means overloaded warehouses. The firms inventory managers must be really busy piling the stock as inventory levels have risen to three-year and two-year highs for urea and DAP respectively.
The pessimist may point out at the nitrogen-phosphate ratio, which is abysmally low at 9x - a ratio poorer by even Pakistani standards, and, by the way, is already way below the international benchmarks. But the NP ratio does not matter this time round, not when the floods have destroyed the crops.
"The significant decline in fertilizer sales does not necessarily mean that the upcoming Rabi crops will be below target. The matter of fact is that flood water has multiplied land fertility, as a result of which the soil does not need more nutrients, at least not as much as it usually requires. The fertilizer off-take may drop further in September and October," shared Aurangzeb Magsi, an agricultural analyst.
Things look really bleak for the fertilizer manufacturers, regardless of the governments support in providing seeds to the affected farmers. There is every possibility that the inventory of fertilizers will keep piling up even beyond the upcoming Rabi season if farmers are deprived of free seeds.
Share price of listed fertilizer firms have largely resisted a decline until now. But sooner or later, they are destined to meet the consequences of the floods. The profits of all the manufacturers should go down considerably, come the third quarterly results, and so a fall in their share prices is inevitable.