Fertilizer price and demand outlook 2014 and beyond – JSGCL Research
By: Naveed Tehsin,
+ 9221 111-574-111 Ext: 3100
JS Global Capital Limited
As per National Fertilizer Development Centre (NFDC), December 2013 urea offtake clocked in at 674k tons, down -29%YoY due to higher base of last year. In 2013 urea offtake clocked in at 5.9mn tons (+13%YoY).
Meanwhile DAP offtake clocked in higher at 173k tons (+36%YoY) in December 2013 which took 2013 DAP offtake to 1.6mn tons (+37%YoY).
Sharp decline in international DAP prices also induced farmers into buying DAP. International DAP prices touched US$350/ton in November 2013 (from a high of US$508/ton in April 2013) and resulted in 9% reduction in domestic DAP prices over 4Q2013 (-12%YoY).
We believe 2014 urea demand will normalize at ~5.8mn tons with domestic production at 4.9mn tons (assuming Engro receives Guddu gas till March 2014). If Engro receives Guddu gas till June 2014 (as rumors suggest) domestic production can jump to 5.1mn tons, suggesting ~0.7mn tons of urea import for 2014 vs. 1.0mn tons import in 2013.
For 2014, we believe local producers look all set to sell whatever they produce with limited volume competition from imports. Meanwhile recent spike in international urea prices (+43% since September 2013) would widen subsidy on fresh imported urea to Rs1,000/bag suggesting some room for local producers to gradually raise prices inline with cost push.
2013 Offtake: Urea (+13%YoY) and DAP (37%YoY)
As per National Fertilizer Development Centre (NFDC), urea offtake for December 2013 has clocked in at 674k tons i.e. down -29%YoY due to higher base of last year. Recall that in December 2012, 1) price incentive provided by local urea producers to match the price of the imported (subsidized) urea, and 2) the announcement of 14% higher wheat support price, induced buying towards the end of year. Note that December 2013 urea offtake has meanwhile remained on the higher side compared to 2013 monthly average of 491k tons. Overall in 2013, urea offtake clocked in at 5.9mn tons (+13%YoY). As far as DAP offtake is concerned, the same clocked in 36%YoY higher at 173k tons in December 2013 which lifted overall 2013 DAP offtake to 1.6mn (+37%YoY). The demand for fertilizer in last two months of 2013 increased significantly owing to pre-buying by farmers/dealers in anticipation of urea price increase due to predicted gas price hikes.
Lower DAP price and constant wheat support price
The govt. has decided not to raise FY14 wheat support price which stands at Rs1,200/maund and is almost in line with international wheat prices which are hovering around ~US$290/ton compared to the support price of US$300/ton. Meanwhile, sharp decline in international DAP prices also induced farmers into buying DAP in late 2013. International DAP prices touched US$350/ton in November 2013 (from a high of US$508/ton in April 2013) and resulted in 9% reduction in domestic DAP prices over 4Q2013 (-12%YoY). Obviously, there are other factor input costs that have a say in the farmer’s nutrient use decision but fertilizer input costs play a major role where we estimate nutrient cost at ~25% of the total cost of crop production and ~40% of variable cost of production.
2014 urea imports likely be lower by 30%
In 2013, domestic urea production stood at 4.8mn (+16%YoY) primarily attributable to enhanced production from Engro at 1.6mn (+66%YoY), where 1) operating the more efficient Enven plant on Mari, and 2) additional gas diverted from Guddu resulted in both of Engro’s plants being operational for part of the year. Going forward in 2014, we believe urea demand will normalize at ~5.8mn tons, where domestic production is likely to clock in at 4.9mn tons (including the impact of Engro receiving Guddu gas to till March 2014). Note that if Engro receives Guddu gas till the end of 1H2013 (as market rumors suggest) domestic production can jump to 5.1mn tons, suggesting ~0.7mn tons of urea import for 2014 vs. 1.0mn tons import in 2013. Meanwhile, we anticipate that revalidation of the GSA pertaining to Kunnar Pasaki Deep (KPD) and start of gas flow from there will narrow down this gap to minimal from 2015 onwards. Moreover, the government has recently decided in principle to wind-up NFML and distribute imported urea through local producers in accordance with their share in total production. This along with price matching of imported and locally produced urea is likely to 1) provide limited downside to current urea prices as Engro may not reduce prices further post allocation of concessionary gas and (3) lower incentive for dealers to opt for cheaper imports hence.
Imported and local urea price differential at Rs1,000/bag
For 2014, we believe local producers look all set to sell whatever they produce with limited volume competition from imports. While the government has of late decided to equalize the prices of domestically produced and imported urea, note that due to a recent run up in international urea price (currently ~US$400/ton FOB and up by a sharp 45% vs. the low of US$280/ton in September 2013), government subsidy on imported urea should expand to ~Rs1,000/bag on fresh imports. This in our view creates a better opportunity for local producers to gradually pass through incremental gas cost impact to farmers. Key risk, in our view, is a sharp reversal in the trend of international urea prices.