Fertilizer numbers for April are out and farmers are busy buying urea. The nitrogenous fertilizer off-take registered a mammoth 42 percent year-on-year increase in April alone and 15 percent year-on-year increase in 4MCY15. But don’t mistake the surge in urea off-take for improvement in farmers’ economy – for farmers are facing stiff challenges – in terms of yields and pricing.
Recall that around this time last year, urea sales had dried up in anticipation of price reduction as uncertainty loomed over GIDC. Rest assured, there is no uncertainty looming this time around, and the exact opposite is being observed. Farmers are believed to be buying urea in heavy quantum in anticipation of a price increase, the range of which remains a question.
Industry readers firmly believe that although the GIDC bill clearly levies the fee on new fertilizer plants as well, it is unlikely to happen. The Fertilizer Policy 2001 is often cited as the reference in support of the argument. Should this happen, market leader FFC is all set to again shed some primary margins, as other key players Engro and Fatima would still be in a position to absorb some cost increase.
There is more to it as from the start of fiscal year FY16, base gas tariffs are all set to be revised upwards. Recall that the price revision was delayed to July, but the IMF seems to be in no mood to delay it any further. The industry sounds very confident of its ability to pass on any cost impact to the end user. But then, it sounded equally confident last year, when the pricing power was tested to the limit and it succumbed. All in all, a price increase in urea is inevitable. There is little that suggests that annual urea off-take would exceed the average off-take seen in the yesteryears. Expect a slowdown in off-take from now on, and also expect some players to shed some margins.
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