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What do rising urea sales mean for fertiliser stocks?

SAMAA | - Posted: Jul 30, 2020 | Last Updated: 2 weeks ago
Posted: Jul 30, 2020 | Last Updated: 2 weeks ago
What do rising urea sales mean for fertiliser stocks?

Photo: AFP

Photo: AFP

Fertiliser products such as urea and DAP witnessed a significant increase in sales in June, which can in return influence the trading of fertilizer companies’ shares on the stock exchange.

Urea sales increased by 81% to 1.16 million tonnes while DAP sales increased by 26% in June 2020 compared to June 2019, according to data released by the National Fertiliser Development Centre (NFDC).

An increase in the sale of fertiliser products can increase the revenue of the company, which can lead to an increase in its profitability.

A company that is profiting from its product is more likely, but not guaranteed, to see the price of its stock rise and as well as an increase in dividends paid to its shareholders. This is because its helps investors know which companies are successful, which then leads to an increase in the value and price of the companies’ stock.

The increase in sales of the urea and DAP was witnessed industry-wide due to pre-buying by dealers and ambiguity over the government’s subsidy.

Farmers delayed purchases in the previous month (May) in anticipation of a subsidy on urea and DAP. However, the government later decided to offer subsidies on DAP only. This led to an increase in sales in the month of June.

However, the prices of urea declined by 12% on a year on year basis. The decrease in prices can be attributed to the lower Gas Infrastructure Development Cess (GIDC) as production of fertilizer requires gas. The GIDC was imposed as a levy in 2011 on gas consumers in the industrial sector.

The government revised down the GIDC, which lead to lower input costs for fertilizer companies. Hence, they passed on this benefit in the form of lower urea price.

Prices are mainly increased or reduced according to changes in the input cost or sometimes the government’s intervention.

Fertiliser manufacturers are among the main users of natural gas. If gas price increases in the future, which has been delayed since January 2020, the input costs of fertilisers will increase. This can then lead to an increase in the prices of fertilizers, such as urea. Higher fertiliser prices can result in farmers buying less of it, which can lead to a decrease in the revenue of fertilizer companies.

“With LNG availability for the next three months, we expect urea inventory to remain at or above the 400,000-tonne level. However, this may not be sufficient enough to constrict (narrow) fertilizer players’ pass-on ability in case of any gas price hike (gas price increase delayed since Jan 20), in our view,” says a report by AKD research.

The report adds, “lower oil prices may keep gas prices in check over financial year 2021 (except for onetime gas price increase which has been delayed since Jan 20), which is another positive for the DAP producer.”

On a cumulative basis, urea sales declined by 7% on a year on year basis to 2.6 million tonnes in the first half of 2020, despite an increase in sales in June 2020. This can be attributed to the locust attacks on farms during the year and the government’s subsidy announcement, due to which farmers delayed purchase decisions.

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