How To Analyze The Fertilizer Sector In Pakistan

The fertilizer sector plays an important role in Pakistan’s agriculture-based economy. As an agriculture-based economy major portion of the population generates its income from farming, hence fertilizers are significant for food security as well as for improving crop growth. 

Many investors wonder how to best analyze the fertilizers sector. Here’s the answer.

Understanding the importance of the fertilizer sector in Pakistan

Pakistan’s economy heavily depends on agriculture as it contributes around 18-19% of the GDP and around 42% of the labor force. Fertilizers are essential for improving agriculture productivity so the Government provides subsidies and favorable policies to support the sector. 

As a result of the critical position of agriculture in the nation’s economy, the demand of fertilizer remains stable and is met by local manufacturers, with small quantities also imported annually.

Major products of the fertilizer sector in Pakistan:

Urea – It is the most commonly used nitrogen-based fertilizer in Pakistan’s agriculture sector that contributes to over 60% of total fertilizer consumption. 

DAP – Di Ammonium Phosphate is a phosphorus-based fertilizer and it is the 2nd most used fertilizer in Pakistan’s agriculture sector. It accounts for about 18% of the fertilizer consumption in Pakistan. 

Key producers in the industry:

Pakistan’s fertilizer industry is controlled by a few major players:

Fauji Fertilizer Company (FFC)

• Largest Urea manufacturer(especially after FFBL merger)
• Market share of 46% (expected to be over 48% if FFC acquires stake in AGL)
• The only local manufacturer of DAP.

Engro Fertilizers (EFERT)

• 2nd largest Urea manufacturer
• Manufactures urea and imports DAP
• Market share of 35%

Fatima Fertilizer (FATIMA)

• Manufactures Urea
• Market share 16%.

FFC & EFERT together hold a significant share of over 80% in the urea market. Since urea is also the main fertilizer that is consumed in Pakistan, it means these two companies are always the focus of investors. Local urea prices remain stable and are not impacted by import prices, so the earnings of these two companies are easily predictable and unaffected by international urea prices.

On the other hand, DAP sellers are volatile as their price competes with international prices making their shares volatile. 

Important factors to consider while evaluating the sector:

Demand and supply patterns:

Fertilizer demand depends on the crop cycle and agriculture development policies. There are two main crop seasons (winter and summer) that indicate fertilizer demand and utilization in Pakistan. 

During the summer season, nitrogen-based fertilizer (urea) is in high demand.

Wheat and rice being the most important crops in Pakistan’s food security play a crucial role in driving urea demand. 

While during the winter season, DAP’s demand is high. Fruits and vegetables are key drivers of DAP consumption. 

Gas price policies:

The major raw material for the fertilizer industry is natural gas and there are three leading gas suppliers to fertilizer companies. The government offers subsidies on gas prices to make fertilizers less costly for farmers. But the subsidy was eliminated in 2024 due to which gas prices increased. 

As a result of an increase in gas prices companies increased Urea prices to cover extra costs. But FFC was getting the gas at discounted rates and still increased the Urea price without bearing any extra cost. FFC’s profit margins improved while other fertilizer companies suffered due to this policy. This helped FFC stock price to surge to all-time high levels.

FFC receives its gas from the MARI network at a price of Rs. 580/mmbtu while EFERT receives gas from the SNGPL network at a price of Rs. 1580/mmbtu. Government could remove this price disparity at any time which would negatively impact FFC.

Production capacity and distribution channel:

• Urea-based fertilizers demand in Pakistan is met locally while half of the DAP demand is met locally and the rest is fulfilled through imports. The annual production capacity of Urea is 4.3 Million Tons and of DAP is 450 Thousand Tons.
• The distribution channel for Urea and DAP involves the private sector, dealer network, and provincial governments. Around 90% share of fertilizer marketing is handled by the private sector in Pakistan and the public sector accounts for the rest of around 10% share.

National and international price changes:

• Urea and DAP both are affected by national price fluctuations as their price depends on gas prices, supply-demand fluctuations, and other factors.
• Urea is independent of international price fluctuations because it is cheaper to produce it locally rather than import and raw materials are available locally. DAP is affected by international prices as the key raw material Phosphoric acid is needed to import and half of the DAP demand is fulfilled through import.

Is the fertilizer sector a worthy investment?

The fertilizer sector in Pakistan is a stable sector having stable demand from the agricultural sector. The sector has strong fundamentals as well as strong growth history over the past years. In order to make an investment decision investors should pay attention to companies with market dominance, strong financials, and government support. The share prices of these stocks usually trade according to the dividend yields these stocks are offering, since industry dynamics are mostly stable and earnings predictable.