KARACHI: The country’s urea stockpiles surged to 1.4 million tons by the end of April, a brokerage said on Wednesday, raising the question over the recent government’s approval to the commodity’s import to meet the local demand.
Local manufacturers produce 4.5 million tons of urea a year, while the demand stands at six million tons. The demand-supply gap of 1.5 million tons is to be met through import under subsidy.
Analyst Muhammad Saad at Optimus Capital Management said sharply lower international urea prices has already squeezed domestic margins due to threat of imports. “Domestic primary margin on urea (selling prices less feed/fuel cost) has fallen from over $200/ton in CY12 to less than $140/ton in 1QCY16,” Saad said.
“Record urea production helped by improved gas supply amid weak demand constrained by low farm incomes pushed domestic urea stocks to the unprecedented level.”
The report said the government’s approval to urea exports will bring down the supply glut.
In March, the finance division allowed the ministry of national food security and research to frame a policy to permit urea import by the private sector. Thus far, the state-owned Trading Corporation of Pakistan is allowed to import the commodity.
Business leaders, however, opposed any such move, saying this would lead to price hike in the local market on unjustified commissions.
They said there is a lack of price regulating mechanism in the country. They fear that traders would likely to hoard profits on the imported nutrients.
Saad said the local fertiliser sector is facing a combination of internal and external challenges.
He said fertiliser sector’s prices witnessed sharp corrections. “Deteriorating sector fundamentals have taken toll on share prices of fertiliser stocks with Fauji Fertilizer Company, Engro Fertilizer, and Fatima down an average 29 percent from last 12 month peaks,” he said.
The report said EFERT’s stock price suffered from twin effects of sectoral weakening and impending divestment of an additional 24 percent shareholding by Engro. “We believe that at current prices EFERT offers a strong investment case given its earnings outlook and valuations,” it said. “Pressure on urea margins shall be diluted by a combination of potentially higher production due to improved gas supply and lower financial charges amid lower interest rates and fast balance sheet deleveraging.”