What does the future hold for DPM?

DPM- a PVN's subsidiary, accounted for more than 30% of the domestic urea market.

Vietnam Nam Chemicals Group (Vinachem) and Petro Vietnam Nam  (PVN) affect the fertilizer business in Vietnam. DPM- a PVN's subsidiary, accounted for more than 30% of the domestic urea market in 2020. DPM employs natural gas as both a raw material and a source of fuel for nitrogen synthesis, whereas Habac Nitrogenous Fertilizer & Chemicals Joint Stock Company (DHB), a Vinachem subsidiary, uses coal to gasify into ammonia. Fertilizers have been subjected to a gross margin squeeze to varied degrees as a result of rising global fuel prices.

Because of MOIT's tight control over selling coal prices from Vietnam's Coal Mineral Group (TKV), coal-based urea producers may be spared. More specifically, TKV will change the coal price sold to coal-fired power plants and others on a regular basis, primarily at the start of the year, based on the spread above the fixed cost of local coal mining. As a result, the size and frequency of the event are irrelevant.

PVGas Vietnam's gas selling price to fertilizer subsidiaries, on the other hand, is based on a monthly adjustment in reference to the Singapore FO price. Because of the high link between FO prices and global natural gas prices, as well as their monthly periodicity, the cost of goods supplied for gas-based products is more volatile.

In February, the FO price in Singapore averaged USD512/tonne, up 48% year on year and 9% month on month, while the natural price rose to USD277/tonne, up 38% year on year and 7% month on month. Natural gas accounts for around 74% of the total material cost of urea synthesis. In the worst-case scenario, Kis Vietnam estimates that the Singapore FO price will rise to USD630/tonne on a full-year average in 2022F, causing the gas price to rise to USD331/tonne, a 20% increase from current levels. In the best-case scenario, when the global supply chain is restored, the gas price might rise 3% to USD285/tonne, compared to February. FO might rise to USD580/tonne in the base case, forcing the gas price to rise.

Kis Vietnam created one scenario for domestic selling prices based on price changes in 2021, as well as the prospect of tighter fertilizer controls by the government to stabilize the market. DPM's domestic selling price of urea was predicted to reach a new high of roughly VND18,000–VND19,000/kg in 2Q22F, hold steady until mid-2022, and then drop by 17% to VND15,000 by the end of the year. The average selling price of urea in 2H22F is expected to be VND 16,250/kg.

Political unrest might exacerbate Europe's fertilizer shortfall, potentially setting new highs in global fertilizer prices in 1H22F. Although domestic urea/kali/NPK prices have decreased by 10%/14%/50%, respectively in February compared to December due to the winter-spring crop, Kis Vietnam believes that the local fertilizer will begin to trend upward with global prices in 2Q22F. DPM might increase urea exports in 1H22 by taking advantage of low domestic demand and a high export price. DPM's revenue could soar thanks to the profitable export price in 1Q22F, bolstering export-driven sales and easing gross margin contraction.

Despite the likelihood of strong domestic selling prices till 2Q22F, Kis Vietnam believes DPM would not be enough to compensate for the increase in input costs. As a result, DPM's gross margin has been shrinking since 2Q22F, owing to (1) the steep increase in FO Singapore prices following the rise in world oil prices, and (2) the government's probable control over the domestic selling price to protect social security. Based on these factors, this stock business estimated that DPM's gross margin of in-house products would decline by 5% QoQ to 50% in 1Q22F and by 2% YoY to 40% in 2022F in the base case.