With ammonia prices retreating sharply since late June, analysts see limited upside for fertilizer stocks.
While an earnings upgrade may be too early to call, improving rainfall and lower ammonia prices offer some relief, even as elevated sulphur costs continue to weigh on margins.
“The benchmark Tampa contract (Yara-Mosaic) settled down a steep $110 per metric tonne month-on-month—with import hubs correcting in sympathy—followed by a further $30/mt cut for August, while Northwest Europe spot has printed ~$680/mt cost and freight, ~25% below the peak,” pointed out Harmish Desai, senior vice president, Systematix Institutional Research.
The Tampa ammonia contract is a key global benchmark for the key raw material for fertilizers.
Prices are now sliding both east and west of the Suez Canal on stifled demand, he said, explaining that fertilizer demand has entered its usual third-quarter lull after the spring season, while weak industrial demand and comfortable distributor inventories are keeping buyers on the sidelines.
Desai sees the correction as a genuine trend change, with the market shifting from the US-Iran war-driven scarcity to a surplus, and expects prices to fall further through the December quarter before seasonal Rabi demand and potential supply cuts support prices. A renewed West Asia war remains the key upside risk.
Relief from the squeeze
Varun Gogia, vice president and sector head, Icra, explained that the fall in ammonia prices provides relief to the non-urea fertilizer companies as one leg of the input cost has witnessed easing of the prices.
“With the ammonia price now trending approximately 20% higher than pre-West Asia crisis levels and significantly below the peak reached over the last couple of months, the fertilizer industry is expected to witness easing of profitability pressure, although the constrained sulphur availability is keeping the demand for ammonia also under check as both are needed to manufacture NPK grades.”
NPK stands for nitrogen, phosphorus and potassium, the three primary nutrients essential for plant growth.
For Indian phosphatic fertilizer makers such as Coromandel International Ltd, Paradeep Phosphates Ltd and Gujarat State Fertilizers & Chemicls Ltd (GSFC), and nitro-chemicals companies such as Deepak Fertilisers and Petrochemicals Corp. Ltd and Gujarat Narmada Valley Fertilizers & Chemicals Ltd (GNFC), the decline in ammonia prices “relieves the severe June-quarter cost squeeze, though elevated phosphoric acid (December-quarter contract +25%) and sulphur costs offset part of the benefit”, said Desai of Systematix.
“While the fall in ammonia prices is meaningful, ammonia cost contributes less than 20% for complex fertilizer companies,” pointed out Prashant Biyani, vice president at Elara Capital, saying the relief is only marginal.
Coromandel International and Paradeep Phosphates, which are down about 9% year-to-date, should benefit from this fall, he said, adding that these companies are a good long-term bet.
Deepak Fertilizers, which has gained over 19%, is currently trading at 77.69 times earnings, well above its five-year average multiple of 50.20 times. In contrast, peers such as Coromandel are trading at 32.5 times, below their long-term average of 50.18 times. Rashtriya Chemicals and Fertilizers Ltd, down 13%, is similarly valued at 16.31 times, compared with its long-term average multiple of 50.5 times, while GNFC, up nearly 9%, is trading at just 7.64 times, against a long-term average of 50.57 times, Bloomberg data showed.
Sore point
That said, the biggest pain point for the industry at present is sulphur, Biyani added.
Ebitda per tonne also depends on other raw material prices, and with sulphur prices remaining elevated, it is expected to decline from the first-quarter levels, he said. Ebitda is short for earnings before interest, taxes, depreciation, and amortization.
Globally, the war in West Asia has disrupted raw material supplies, with major manufacturers also announcing production cuts. This has reduced the availability of key inputs such as sulphur, acid and ammonia, pushing up prices, Coromandel said in its post-earnings call with analysts on 24 July.
“Sulphur, actually against our initial expectation, is holding high. I think sulphur is likely to remain high for some time, but it's not sustainable… Still, we feel that these are exorbitant levels. It should come down, but it may take a while…”
Even Paradeep Phosphates said during its 31 July earnings call that the outlook remains challenging amid the situation in West Asia, with high volatility and supply constraints for key raw materials, particularly sulphur.
“As you are aware, 70% to 75% of global trade of sulphur and ammonia passes across the Strait of Hormuz. The supply disruptions for these commodities are expected to continue in the short term.”
Since the sector’s second-quarter earnings outlook remains closely tied to raw material prices and government subsidies, staggered investments in fertilizer stocks could be considered, according to analysts.