Sunday, 5 February 2023

How will the fertilizer sector fare in 2023?

Will fertilizer companies continue to rake in record returns in 2023? After a windfall year for fertilizer producers, which saw global prices of some types of fertilizers jump as much as 100% last year, local players are likely on track for a slightly slower year in 2023. Despite optimism among fertilizer manufacturers and analysts we’ve spoken to about the sector’s performance, higher gas prices, intensifying competition and continued export restrictions are weighing down on the prospects of another record year.

Global fertilizer prices have dramatically risen since 2021: Buffeted by the post-pandemic release of demand, rising inflation and sanctions against Russia (the world’s largest exporter of fertilizers), prices hit record highs over the past couple of years. Last April, urea fertilizer prices rose globally to some USD 1.1k per ton before hitting USD 520 per ton by the end of 2022 — cooling down significantly throughout the year, but still remaining well above the average USD 290 per ton it cost before the pandemic.

High prices were a boon for local players: Manufacturing disruptions, high gas prices in Europe, and the EGP devaluation have given local fertilizer producers overwhelming incentive to boost exports, which currently constitutes about 45-70% of our domestic production. Local fertilizer demand runs somewhere between 2.5-3 mn tons, while our annual production capacity is about 7.5 mn tons, Alia El-Mehelmy, co-head of CI Capital research told Enterprise.

Export revenues hit record highs despite weaker volume: After Egypt partially filled fertilizer supply void Russia left behind during the first 10 months of last year, fertilizer sector players ended 2022 with some USD 3.39 bn in export revenue, up 42% y-o-y from 2021, Export Council for Chemical Industries and Fertilizers head Khaled Aboul Makarem told Enterprise. This came despite a 20% drop in export sales, EFG Vice President of Research Yousef Husseini tells us. Now, chemical and fertilizer industry players are targeting USD 10 bn in collective export revenue this year, after the two sectors hit a record USD 8.63 bn last year, according to Abu Al-Makarem.

The EGP devaluation has been great for producers: Fertilizer sector shares rose c.76% in 2022 — outperforming the benchmark EGX30, which ended the year up 21.2% — thanks mainly to greater export revenues and the EGP devaluation, which allowed fertilizer companies to pay out dividends to shareholders, El-Mehelmy tells us. Abu Qir Fertilizers was the sector’s best performing stock, whose price ballooned some 117% last year.

The outlook remains positive for fertilizer stocks: Fertilizer stocks are expected to maintain strong performance throughout 2023 but will likely sit slightly below 2022 figures on the back of growing global demand and a flurry of recently announced green ammonia projects, according to analysts we spoke to. Analysts also see healthy operating rates, stable levels of production, and strong sales this year compared to 2022, while a weaker EGP could also make export sales more lucrative.

It’s a good time for expansion in the sector: The EGP depreciation and geographic proximity to Europe — where production was already on the decline well before Russia’s invasion of Ukraine — will continue to support production in places with relatively lower operating costs, El-Mehelmy explained. State-owned Abu Qir Fertilizers is spearheading the sector’s largest expansion initiatives with the massive North Abu Qir green ammonia facility, of which it owns some 45%. The bulk of the facility’s production will be geared towards export to EU countries, according to El-Mehelmy. State-owned Egyptian Sugar and Integrated Industries Company (ESIIC) is also considering the establishment of an EGP 160 mn fertilizers plant in Nagaa Hammadi.

Financing is unlikely to be problematic: Although banks are setting aside greater loan loss provisions for sectors that are at risk of falling behind on loan repayments — including fertilizers — it’s unlikely that fertilizer companies (except for the highly indebted Kima) will struggle to finance growth, according to Hosseini. Most fertilizer companies have export revenues that surpass the USD cost of natural gas and sufficient liquidity to bypass taking on more debt in a high interest rate environment, El-Mehelmy told us.

Local prices remain challenging obstacles for producers: Producers sell between 30-55% of their products locally to farmers at the subsidized rate of EGP 4.5k (some USD 151) per ton — 70% lower than export prices. “The current supply price for the local market, even after its most recent adjustment, does not cover the cost of production after inflation, higher energy prices, and the cost of transportation and freight,” Chemical Industries Holding Company CEO Emad El Din Mostafa told Enterprise. This comes despite production being more than double domestic demand, while companies are still only restricted to export 45% of their production. Reforming the urea fertilizer subsidy mechanism and adjusting prices could be the biggest opportunity for the sector this year, according to El-Mehelmy.

The sharp decline in export prices this year is still a concern for some: The price of urea fertilizer dipping below USD 550 per ton is raising some concern about the sector’s performance this year, according to El-Mehelmy. The dip could be a market response to the looming threat of global recession or due to a sudden rise in exports from China, which is another concern on manufacturers’ minds this year, she explained.

Projections about how higher gas prices will affect the sector vary: The impact higher natural gas prices (which constitute about 60%of production costs) will have on the fertilizer sector will depend on foreign demand, Abu Al-Makarem told Enterprise. The government last year raised the price at which natural gas is supplied to nitrogen fertilizer facilities, following a new pricing scheme that takes into account international natural gas and fertilizer prices in setting monthly rates, with a minimum of USD 4.5 / mmBtu. That decision does not include companies that are supplied natural gas under long-term contracts with listed equivalent prices like Mopco Fertilizers, Alexandria Fertilizers, and Egyptian Fertilizers, which will continue to pay at previously agreed upon rates until their contracts expire, Hosseini told Enterprise. Although the new price scheme has hurt margins, losses were still largely offset by the EGP depreciation, El-Mehelmy told us.

Companies need to act fast to maintain competitiveness: Fertilizer and chemical industries could lose some 4% of their export earnings due to new climate restrictions being put in place in the EU — where some 60% of Egyptian fertilizer exports wound up in 2021. The new restrictions, which will require companies to provide clear documentation of the emissions released in the production of inbound goods as soon as 2026, are designed to keep European companies from simply offloading emissions from industrial production to overseas locations and could significantly impact export prospects for carbon intensive industries like fertilizer production in Egypt.

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