Persistently low urea prices on the local market have finally persuaded farmers to apply the most important nitrogen nutrient to the soil. The latest 5MCY13 numbers released by the National Fertilizer Development Centre (NFDC) reveal a healthy 24 percent year-on-year increase in urea off-take.

Recall that urea off-take had shown negative growth over the past three years. It is the farmers’ improved economy coupled with low urea prices that has helped farmers apply more fertiliser. Urea prices in the international market have softened down to $350 per ton from the high of $450 per ton last year. Moreover, heavy quantity of imported urea available at subsidised rates has also kept pressure on local prices.

That said a round of increase in fertilizer prices is likely from July onwards as government is mulling to increase feedstock gas prices and equate these to that of the industrial slab. Should that happen, it would result in an increase of around 20-25 percent in manufacturing cost, which is most likely to be passed on to the end consumer.

It remains to be seen whether the government will directly subsidise farmers, but if the budget document is any guide, there is no allocation for subsidy on locally manufactured urea. The only subsidy on fertilizer is on imported urea, which is likely to continue. In the current scenario of low international urea prices, the local manufactures might find it difficult to pass on the entire cost to the farmers, as imported urea would still be available at subsidised rates.

Moreover, given the government’s drive to address the energy sector mess, gas allocation is also expected to be revisited. Should more gas go to the power sector, there would be added pressure on local manufacturers who might face extended gas curtailment, hence further pressure on their gross margins.

The local players are working on a plan to secure low ‘btu’ gas to reduce reliance on existing gas distribution pie. But that is going to take a while, until which time, the local players are in danger of facing a slide in their margins and off-take, especially if there is no direct subsidy to the farmers.

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KEY FERTILIZER STATISTICS


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                             5MCY13    5MCY12       chg


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Urea off-take                 2,140     1,719       24%


DAP off-take                    273       173       58%


Urea price/bag                1,724     1,790       -4%


DAP price/bag                 3,912     4,033       -3%


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