Fertiliser margins under pressure

Improved farmers economy and even more improved gas supply would normally lead to massive profits for fertiliser companies in Pakistan. Having been under the pump for much of CY12 and the first half of CY13, especially in terms of feedstock gas supply, the latter half of CY13 to date has been a rather easy breathing period for the industry.
But, as luck would have it, the period of improved gas supply coincided with a major raw material cost increase, unfortunate for the manufacturers. Increase in feedstock gas price has almost always been a pass through event for the industry, given the strong pricing power and a huge differential with international urea rates. But, this time it is different.
The first quarter consolidated financial results of the leading fertiliser companies very clearly reflect how pricing power was tested during the period. The gross profit margins went down for all companies, as the GIDC imposition weighed on the costs. Moreover, one of the bigger players decided to play safer than be sorry-i.e. accepting thinner margins rather than facing the danger of being supplied lesser gas.
The bottom line understandably shrank. It could have been a lot worse, had it not been for a massive decline in finance cost--which is largely due to Engros successful restructuring of its debt profile. The challenges for the industry may not end anytime soon, as continuous provision of gas still remains questionable in absence of alternate arrangements in the short term.
FFC still continues to be the leader, in terms of volume, profits and net margins. A lot will depend on how strongly the firms can hold on to their pricing power, which was tested earlier this year after the imposition of GIDC. By the look of things, fertiliser firms may have to give up on such high margins that have been the hallmark of the industry for a decade.

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Fertilser sector review

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                     1QCY13      1QCY14         chg

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Sales                 41303       45876         11%

GP                    18070       18200          1%

PAT                    7729        7675         -1%

Other income           1854        2133         15%

Finance cost           3678        2644        -28%

GP margin               44%         40%

NP margin               19%         17%

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Source: Financial statements