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Morning Briefing for November 29, 2011 – Standard Capital

Karachi: Urea prices decreased by Rs 100per 50kg bag

Geo News reported that fertilizer companies are bringing down urea prices by Rs 100 per 50kg bag to Rs 1480.

According to Standard Capital, if that is true then their will be some ‘anticipated earnings erosion’ on some of the fertilizer producers since fertilizer off‐take increases in the month of December every year. It was generally forecasted that 1.4mn tons of urea is needed in the country wherein it is anticipated that overall supply could be 1.2mn tons. Some of the fertilizers would be provided by producers and rest of the shortfall (may be in the vicinity of 0.7mn tons shall be arranged by TCP through imports).

Fertilizer companies especially Engro Corp. resorted to rampant price increase and Fauji twins followed suit during CY11. Since now Faujis took advantage of better margins at the expense of Engro Corp’s malaise. Earlier Engro Corp. was ‘distressed’ given non‐supply of feed stock gas to newly installed plant during most of the period in CY11 from Qadirpur. Recently, govt. agreed to provide them gas from Sui Southern network instead of Sui Northern which may partially help them to supply some urea from new plant as well (that had a yearly capacity of more than 1 million tons).

Standard Capital still feels that Faujis were taking undue price advantage and were still minting margins when bag prices were relegating at Rs 1175 at the start of the CY11. When prices were increased from Rs 1275 in 3QCY11 at the pretext that Engro is not receiving promised gas then it inadvertently became a boon for Faujis especially Fauji Fertilizers (FFC) whose margins perked up quite a bit.

Even if a price goes down from Rs 1480 then Standard Capital continues to see margins for FFC to remain at a higher trajectory and hence they would remain at an advantageous situation. Fatima fertilizer (FATIMA), a new urea producer, too gained on higher urea prices at a time when it had a huge financial charges burden.

The only player that could feel the pinch of this price decrease is Fauji Bin Qasim (FFBL) whose urea capacity has not been utilized to the hilt given non-supply of gas. FFBL continued to thrive on DAP fertilizers margin yet had a difficulty on supplying urea.

Standard Capital still likes FFC (based on urea margins and advantageous supply chain) and Fatima (relatively small supplier of urea). FFBL shall continue to thrive on product mix since it is the sole DAP producer (expected to supply DAP nearly 0.7mn tons in CY11).

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