Economics of Pakistan's beleaguered fertilizer industry may benefit Fatima

Last month Lahore-based Fatima Fertilizer Company Limited (FFCL) appointed BNY Mellon depository bank for its OTC ADR program in which ordinary shares of the firm will ultimately be listed under the symbol “FTMFY”. Each Fatima ADR will represent 50 ordinary shares that have traded hitherto on all three stock exchanges (Karachi, Lahore and Islamabad) in Pakistan.  “With over 22 million hectares under cultivation, agriculture is the mainstay of Pakistan's economy, and Fatima Fertilizer is a significant step in attaining fertilizer self-sufficiency.  As Fatima Fertilizer grows and expands, a key milestone in our goals is the creation of this ADR program,” commented CEO Fawad A. Mukhtar.  ”We will now be able to garner more international exposure and investment to continue to fund our future plans.”  These plans to date have centered on completing a Mukhtar Garh, Sadiqabad-based fully integrated fertilizer complex “capable of producing two intermediate products–i.e. ammonia and nitric acid–and four final products, Nitro Phosphate (“NP”), Nitrogen Phosphorous Potassium (“NPK”), Calcium Ammonium Nitrate (“CAN”), and Urea that will produce a projected output of 2.2m metrics tons (MT) by the end of the year, making it the country's largest compound fertilizer manufacturer.

It is interesting to note that even prior to last summer's devastating floods the government explicitly addressed the need for more domestic production in order to relieve escalating import costs:  as The Economist noted, “Pakistan's fiscal troubles are antediluvian. It is one of the most lightly taxed countries in the world. Fewer than a quarter of the country's firms declare any taxable revenues, and only 11 out of every 1,000 of its citizens pay tax on their incomes, according to the World Bank.  As a result, tax revenues amount to a mere 10% of GDP.”  Specifically, per one analysis, “total fertilizer demand in Pakistan is  roughly 8.9m MT, of which nitrogenous fertilizers (Urea & CAN) account for ~78%, phosphatic and mixed fertilizers (DAP, NP and NPK) ~22%, while domestic production meets around 75% of current fertilizer demand (nitrogenous ~79%, phosphatic and complex ~40%).  The shortfall is being met through imports.”  As for the near-term outlook, Fatima looks set to capitalize on robust nitrogenous trends: analysts with Arif Habib, for instance, foresee Urea demand to reach 6.45m tons in 2011, a rise of 5.3% y/o/y (and compared with 4.917m in 2007 and 5.481 in 2008, for context) despite rising prices (up 37% y/o/y in part reflecting a 17% GST).  Meanwhile, credit analysts with the state's rating agency wrote last December that “the market response to Fatima Fertilizer's trial production of CAN has been encouraging. CAN–with certain inherent advantages over traditional Urea–should be attractive to farmers, [though] they have a strong traditional association with Urea.”   Meanwhile, Fatima's NP may be set to make strong inroads on DAP use: “NP's price affordability, nutrient mix and convenient availability [may] give it an edge over imported DAP, provided Fatima Fertilizer manages requisite infrastructure and runs affective campaign among the farmers community,” analysts note.  To that, Arif Habib speculated a few weeks ago that “currently, retail DAP prices are hovering around 4,000 per bag.  This could force farmers to use substitutes [such as NP and NPK] which are trading at discount of 1500/bag to DAP prices.”