Fertilizer Producers Sector Update - Record-high 2022 NPAT to support attractive DPS yields

Urea prices to remain high in 2023F due to high gas and coal prices. The average Middle East urea price in 9M 2022 was USD740/tonne (+82% YoY), beating our expectation. Moreover, we expect natural gas (input for ~70% of urea produced globally) prices to remain high in 2023. In its October 2022 gas report, the International Energy Agency (IEA) raised its average 2022 gas price forecast by ~16% to ~USD29/MMBTU vs its July 2022 report. In addition, Chicago Mercantile Exchange (CME) futures as of October 2022 imply average LNG prices of USD35/31 per MMBTU in 2022/2023, respectively, suggesting a continuing decline of the urea supply from Europe next year, which should thus support urea prices. Furthermore, the outlook for coal (input for 30% of urea produced globally) prices remains high. Therefore, we broadly maintain our 2022-2027F Middle East urea prices. Specifically, we forecast Middle East urea prices of USD700/539 per tonne in 2022/2023, respectively. We assume USD350-400/tonne in 2024-2026F as we expect oil, gas & LNG costs to cool over the long term. See more in our July 20, 2022 Energy Sector Update.

We expect a 7% gap between DPM & DCM’s ASPs vs international urea prices in 2023-2026F. In 9M 2022, DPM & DCM’s ASPs were ~10-15% lower vs the average Middle East urea price, which was partly due to both companies providing support to farmers. We now assume a 7% discount for DPM & DCM’s ASPs vs the average Middle East urea price (vs a ~2% discount as previously). Although we maintain our Middle East price forecast, we raise DPM & DCM’s selling prices by ~5% due to the VND depreciating 10% against the USD in 2022.

We expect domestic urea consumption to pick up in 2023. According to DPM, domestic fertilizer demand declined ~20%-30% YoY in 9M 2022 due to high fertilizer prices. Therefore, we expect domestic urea consumption to recover in 2023 as we forecast urea prices to fall ~25% YoY that year. We also forecast flat YoY sales volume for DPM & DCM as we believe these two companies will reserve some inventory for 2023 and prioritize the domestic market over international markets following robust exports in 2022.

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