Urea makers bet on coal price hike to push exports

KARACHI: Local urea manufacturers, facing glut and high manufacturing costs, find an opportunity to ramp up overseas sales in the recent surge in the global prices of coal, which is used as the feedstock in urea making, analysts said on Thursday.

Coal prices hit their highest level since the start of 2014 earlier this week after tougher Chinese transport rules, lifting global urea cost. China, the biggest urea exporter, uses coal as feedstock for 65 percent of its production.

“Rise in the international urea prices would not only balloon the spread between imported and local fertiliser prices but would also make it viable for local companies to export excess inventories of 1.3 million tons expected by December 2016, “ said analyst Fahad Rauf, at Insight Securities. “Further, it could also open up the opportunity to increase margins on local sales, once inventory levels normalised.”

Rauf said global urea prices, since 2015, have weakened 37 percent to $170/ton, due to overcapacity and falling production costs, resulting in squeezed spread between imported and local urea prices in Pakistan.  “It has not only compelled local urea producers to reduce prices but also made export of excess urea less feasible.”

The government, in last August cut prices of imported urea by Rs476 per 50-kg bag, to Rs1,310/bag after ‘miscalculation’ in availability of surplus imported urea stocks, resulting in further decline in the price of local produce. Analysts said local manufactures in a recent meeting to review fertiliser stock position with the finance minister Ishaq Dar discussed export opportunities of excess supplies. Dar assured them that the government would “provide across the board facilitation to the industry.” “Though no formal decision has been made with regards to exports, but taking cue from the meeting, it is possible that the government might allow export of partial urea inventory after keeping sufficient reserves in the country,” Rauf said.

Analysts, however, said the current urea prices of around $170/ton make exports unviable for the local companies.  But, December urea futures are trading at $210/ton, which brings it just above the breakeven levels, and any increase beyond that would add to the manufacturers’ profits.

They said any development in Chinese urea market impacts global prices as it sets the floor for global market, being the largest marginal producer and having highest cost/ton. Looking at the correlation between coal and urea prices, the market expects a rise in international prices beyond $200 in coming weeks.  “The margins for local urea makers would still be bleak as their retention prices translate to above $250/ton,” Rauf said.