Fertilizer prices drop

Urea off-take has not picked up. The National Fertilizer Development Centre (NFDC) released fertilizer statistics for April, showing monthly urea off-take was at its lowest since 1998, at just 114 thousand tons. The 1QCY16 urea off-take is also at a five-year low. Farm economics has surely not picked up, as feared.
Recall that farmers got into bulk urea buying in the dying months of 2015, therefore, the slowdown in following months does not come as a surprise. All said urea demand is sure to pick up as the new season starts and prices come further down. But, the full year numbers are in danger of falling for the fifth year running. And that is not good news for an already suffering agriculture sector. The farm yields are believed to have suffered adversely, in the fiscal year to date.
The vital development in the past week happened on the raw material pricing front, when Ogra notified decrease in feedstock prices from Rs200/mmbtu to Rs123/mmbtu. Recall that the fertilizer industry had been paying a hefty rate for feedstock gas, since the imposition of Gas Infrastructure Development cess (GIDC). The industry had long been demanding a downward revision in GIDC, especially in the wake of rapidly following international urea prices.
Finance Minister Ishaq Dar is believed to have asked the fertilizer players to reduce urea prices by Rs200/bag. The industry has, however, rolled back Rs70 per bag, in response to feedstock gas price reduction. The reduced price hovers around Rs1750 per bag to dealers, which is still higher than the average imported landed price of Rs1700 per bag.
Gone are the days, when the local industry had the advantage of selling locally prorogued urea at steep discounts to imported urea. The roles have reversed and hence the pressure on fertilizer players. In all fairness, it could have been worse for the local industry. The government could have just flooded or even threatened to flood the market with imported urea, and that would have surely compelled prices to come down much more than they have.
But sanity prevailed, and the government for once, does not seem to have pulled its lever. The urea off-take should go up going forward, but all eyes will be on the budget. Should the government continue with subsidy on imported urea, it could add more pressure on local players? Manufacturers, not getting concessionary gas, will benefit most from the current move, as a steep reduction in raw material cost and a disproportionate reduction in urea price would help them yield fatter margins.