Though an awful year for the fertilizer sector came to an end, clouds of uncertainties still roam around the sector. Among many issues, with respect to the fertilizer sector, gas remains on top. Companies on SNGPL’s network suffered the most, with complete gas shutdown for almost 290 days. However, safe bet can be made on the companies operating on the MARI’s network.

According to statistics, total urea offtake for CY12 turned down 12 per cent YoY to stand at 5.2 million tons, however, fertilizer sample’s sales rose 7 per cent YoY. These incremental sales were mainly on account of higher urea prices during the year. On the other hand, gross margins of the sample plunged a massive 1300bps during the year, from 50 per cent in CY11 to 37 per cent in CY12. This decline in gross margins was mainly due to upsurge in feed stock and fuel stock prices by massive 207 per cent YoY and 17 per cent YoY, respectively. This decline in gross margins translates net margins in to 15 per cent in CY12, from a high of 27 per cent in CY11.

As the commencement of Rabi season in the last quarter, along with expected increase in gas prices from Jan-13, urea offtake during 4QCY12 was boosted up by 55 per cent QoQ (in the expectation of increase in urea prices as seen in Jun-12).FFC remained the top pick in our fertilizer sector sample, as its offtake remained intact at 2.4 million tons in comparison with the last year. FFC’s bottomline was marginally down 7 per cent YoY to PKR 20.84bn in CY12.

On the other hand, FFBL faced complete shutdown of gas in 1QCY12, leading to gross loss during the quarter. However, FFBL’s profitability jumped back, primarily due to prospering primary margins on DAP (increase in local prices while decrease in int’l prices). FFBL’s bottomline plunged 60 per cent YoY to 4.3bn in CY12; the reduction was mainly due to the lower sale and production of urea.

ENGRO was the key victim of gas curtailment during CY12; with its new plant remained un-operational during 1HCY12 (arrangement was done in the 2HCY12 for diversion of gas to EnVen from base plant due to annual turnaround). Engro’s total urea offtake plunged 25 per cent YoY to 0.9 million tons while production was also contracted by 22 per cent YoY in CY12. Engro Fertilizer recorded net loss of PKR 2.9bn in CY12, mainly owing to gas curtailment and immense finance cost burden.

As long term gas plan is on the cards, for the plants operating on the SNGPL network, the new ray of hope would translate its favorable impact on fertilizer sector in general, and Engro in particular. However, some ambiguities are still there which includes 1) final sale price of gas, which includes tolling charge and gas sale price. 2) capital expenditure of laying the pipe-line from Kunnar Pasaki Deep to Qadirpur, which would eventually add up to the SNGPL network.