The Fuji Fertilizer Company Ltd (FFC), Pakistan’s largest urea producer, has announced a rise in urea pricing of Rs. 80 per bag, the first since August 2021, and other producers are anticipated to follow suit.
The urea pricing environment might be dramatically transformed in the future, according to brokerage company JS Global, if the weighted average cost of gas (WACOG) is applied and local companies’ pricing power stays strong. Their overweight posture on the sector is maintained due to its constant revenues and margins, which also provide a D/Y of 12%, according to their analysis.
Inflationary pressures, the demand-supply dynamic, and global fertilizer prices have all contributed to long-term expectations of urea price increases, according to the report, and recent developments, such as commodity price booms and local urea inventories dropping to roughly 7,000 tons as of end-February, have only reinforced this.
When it comes to pricing increases, urea makers have been patient over time. As a result, a price rise was long overdue, with the sector’s latest price hike occurring in August of 2021. In reaction to the recent jump in inflation, FCC boosted urea pricing over the weekend by Rs. 80 per bag, bringing the retail price to about Rs. 1,863 per bag. Similarly, other businesses have made similar statements. Similarly, additional corporations are likely to make similar announcements in the coming days, and the study does not rule out future price rises in the event of a gas price increase.
Imports are affected
Russian fertilizer shipments have been disrupted as a result of sanctions imposed by western nations on Russia. This has produced a spike in global fertilizer prices. China’s urea prices, on the other hand, are unaffected by the supply shortage and are trading at a discount to global pricing, although this is due to the country’s export embargo, which has been in place since October last year.
The global fertilizer industry was already experiencing shortages before the Russia-Ukraine spat, but the spat aggravated the food security issue by raising global gas costs, forcing regional participants to curtail fertilizer output, resulting in increased food inflation.
Because of the widening gap between local and international pricing, smuggling of the product from Pakistan to neighboring nations has increased, and Pakistan has been unable to maintain any buffer stock in recent years.
The government now wants to import 200k tons of urea to secure a sufficient supply for the Kharif season, although this will likely come at a higher price due to rising worldwide costs, and procurement of the commodity appears to be challenging due to global supply chain problems.
Implications of the New Fertilizer Policy Proposed
A new fertilizer policy has been proposed, with no gas subsidies and industry-wide pricing. The fertilizer industry understands that choices like WACOG must be made, but it also believes that the market should be deregulated, allowing producers to set their own prices. At this moment, it is uncertain if a national uniform rate will be enforced or if a sector-specific rate will be devised. However, the analysis predicts that the industry will have its own weighted average rate.
In any scenario, any rise in gas costs is expected to be passed on to end customers by the industry. In the event that the industry adopts a WACOG mechanism, EFERT will profit more than its rivals. Furthermore, because 70% of the Feed gas used by EFERT’s base plant is paid at Petroleum Policy 2012 prices, a smaller per bag price rise would be required.
Because of the aforementioned factors, local urea producers appear to have significant price power. The present urea inventory situation, which is anticipated to reach an all-time low since CY08, supports JS Globe’s position. The government has ordered enterprises to keep buffer stockpiles to assure availability during the Kharif season, but given the huge demand from dealers, this may be tough to achieve.