Update Pulse

June 30, 2011

Fertilizer Sector: Urea production witnessed a five year low

Urea offtake registered an increase of 10% YoY to 450k tons in 5MCY11. DAP offtake: DAP offtake of the ENGRO posted a sharp drop of 19% YoY to 74k tons in 5MCY11 against 91k tons in 5MCY10. On the other hand, FFBLs DAP offtake rose by 17% YoY to 160k tons in 2MCY11 as against the corresponding period of the last year.
Industry Fertilizer Offtake (k tons) 5MFY10 5MFY11 2,187 UREA 2,457 DAP 280 245 All Fertilizers 3,111 2,935 (k tons) FFC FFBL ENGRO DAWH (k tons) FFC FFBL ENGRO DAWH Urea Offtake 5MFY10 5MFY11 1007 970 208 171 410 450 139 79 p DAP Offtake 5MFY10 5MFY11 137 160 91 74 YoY -11% -13% -6% YoY -4% -18% 10% -43% Chg 17% -19% Market Snapshot KSE 30 KSE 100 KSE ALL

HOLD
Index 11561.47 12423.30 8616.54 Chg -11.34 60.86 42.03 % -.1 0.49 0.49

Pakistan Research

Synopsis
Urea and DAP offtake declined by 11% and 13% YoY respectively in 5MCY11. Urea offtake of FFC, FFBL and DAWH witnessed a decline of 4%, 18% and 43% YoY respectively during 5MCY11 FFBL posted a sharp 17% YoY growth in DAP offtake during 5MCY11 Magic of the gas curtailment is clearly witnessed on output as total production of 1.88m tons urea in 5MCY11 is lowest in five years. In 5MCY11 average urea and DAP prices showed an upsurge of 43% & 42% YoY respectively. HOLD stance recommended on FFBL and FFC.

Key Data Market Cap(PKR bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m) Key Data Market Cap(PKR bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m) Key Data Market Cap(PKR bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m) Key Data Market Cap(PKR bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m)

127.6 848.1 FFC.PA 1.40

Total fertilizer offtake declined by 13% YoY...

Total fertilizer offtake in 5MCY11 declined by 6% YoY to 2,935k tons in comparison of 3,111k tons in the corresponding period of last year. The main reason behind this plunge in offtake was lower availability of the fertilizer products mainly due to gas curtailment faced by the fertilizer producers in the country. In terms of product, both Urea and DAP offtake reported a decline of 11% and 13% YoY respectively in 5MCY11. Even though on monthly basis, total fertilizer offtake posted a modest upsurge of below 1% to 643k tons in May11 as against 639k tons in previous month, however, both key fertilizers i.e. Urea and DAP posted a drop of 3% and 45% respectively. As far as the prices are concerned, locally produced fertilizer prices have shown and exceptionally exorbitant trends as average per bag price of both Urea and DAP has shown an upsurge of 35% and 34% respectively in 5MCY11.

40.1 934.1 FFBL.PA 3.57

63.0 393.2 ENGR.PA 1.77

Source: NFDC, Summit Capital Resear ch

Gas curtailment magic Industry production witnessed a five years low

urea

30.7 481.2 DAWH.PA 0.12

Key players performance

Urea offtake: All the listed players posted decline in urea offtake except ENGRO in 5MCY11. Highest decline of 43% YoY was observed in DAWH whose offtake was 79k tons followed by FFBL and FFC with 18% and 4% YoY decline in offtake. Engro was the only urea producing player whose,

The persistent gap between demand and supply of fertilizers has further widened as a consequence of gas curtailment in the range of 12% to 20%. The gas curtailment led the urea production to a worst level as the local urea producer could produce only 1.88m tons of urea during 5MCY11 which is lowest in five years time. On the other hand, urea demand is on rise while country lacks urea inventory as May11 ending urea inventory was mere 91.592k tons. In order to bridge this demand supply gap the government is working on different options for the import of urea. As per the news reports, Trading Corporation of Pakistan (TCP) has shown

Muhammad Sarfraz Abbasi Sarfraz.abbasi@summitcapital.com.pk 021-35376125 B-209, Park Towers, Clifton, Karachi

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

confidence that it can add about 150k tons of urea in national inventory till the middle of the July 11 to ensure sufficient availability urea in country as this product is a farmers top choice among others for kharif season crops.
Urea 5 months production history
2.1 2.0

PP a k i s t a nRR e s e a r c h akistan esearch

1.9 1.8 1.7 2007 2008 2009 2010 2011

Source: NFDC, Summit Capital Research

(k tons) UREA DAP All Fertilizers (k tons) FFC FFBL ENGRO DAWH (k tons) FFC FFBL ENGRO DAWH

Industry Fertilizer Offtake Apr-11 May-11 487 473 55 30 639 643 Industry Urea Offtake Apr-11 May-11 214 210 51 44 95 113 10 14 p Industry DAP Offtake Apr-11 May-11 35 22 20 8 -

MoM -3% -45% 1% MoM -2% -14% 19% 40% MoM -39% -57% -

Future outlook and recommendations

We believe prevailing gap between demand and supply assures demand for the locally manufactured fertilizer products are selling at substantially lower prices (including subsidy) in comparison of international prices. Due to gas curtailment, to avoid production losses, in Jan11, local players had increased urea prices by PKR190/bag. In addition to this, locally manufactured urea prices witnessed an increase against imposition of the GST and also players increased the urea prices by another PKR75/bag in April 11 against curtailment. We believe, with an improved income farmer may digest this rapid hike in prices and this may not have any major impact on urea consumption in short run, however, we believe in long run this persistent hike in the prices of urea would start hurting purchasing power of the farmers. At current levels, we recommend HOLD for FFBL (Fair value of PKR48) and FFC (Fair value of PKR154).

Source: NFDC, Summit Capital Resear ch

PKR (Per bag) Urea DAP

Urea / DAP prices Apr-11 May-11 1,234 1,328 4,050 4,049

MoM 8% 0%

Source: NFDC, Summit Capital Resear ch

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.