U.S. Midstream and Downstream Services Market Update
SH-2013-Q4-1-ICRA-Fertilisers
1. ICRA RESEARCH SERVICES
ICRA RATING FEATURE
Corporate Ratings
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K. Ravichandran
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Pranav Awasthi
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Ankit Deora
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P h o t o C re d i t s : c o m m o ns . w i k im e d i a . o rg
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Emergence of a new global order
in fertilisers?
Demand-supply outlook and
price expectations for the
Indian Industry
2. I C R A L I M I T E D Page 2
SUMMARY
Muted performance in Q2 FY14 as channel inventory gets cleared; better outlook for Rabi 2014, global developments may aid recovery
in the medium term
Non-urea fertiliser sales lower as systemic inventory gets cleared; impact on company performances, but better outlook for Rabi season: With unprecedented high
channel inventory and other challenges such as pressure on cash flows due to high subsidy and trade receivables and decline in international prices leading to inventory losses,
the industry began taking measures to bring non-urea fertiliser inventory to reasonable levels. Sales volumes were brought down in H1 FY14 through lower imports as well as
lower sales of own manufactured fertilisers. Accordingly, sales of certain non-urea fertilisers (such as DAP, MOP and NPK complexes) have declined in YTD FY14, although
retail sales of these fertilisers are estimated to have posted a modest growth driven by healthy monsoons vis-a-vis FY13 as well as decline in prices. The decline in imports led
to a decline in the proportion of traded sales, which primarily comprise of imported products. On the other hand, urea sales volumes grew at a faster pace compared to its long-
term growth rate. The overall sales volume for the industry in 7m FY14 was 3% lower at 28.8 MMT (vs. 29.6 MMT in 7m FY13) as growth in urea sales (with its higher base)
partly offset the decline in sales of the other fertilisers. Lower fertiliser sales has also impacted the industry performance in H1 FY14. However, inventory levels continue to be
high compared to normal levels, which indicates that despite the improvement in outlook, sales volumes of imported fertilisers should likely remain muted in H2 FY14. These
expectations are also reflected in the significant decline in global prices of various fertilisers. Further, while currency volatility has reduced to some extent, it continues to post a
significant challenge as hedging costs remain high. Subsidy delays are also expected to continue to plague the industry profitability and lead to liquidity issues for many of the
players. Nevertheless, demand may be aided by the significant decline in prices of fertilisers and raw materials. With healthy monsoons and continuing decline in international
prices of various fertilisers and key inputs, the outlook for Rabi is expected to be better compared to FY13.
New supply-demand dynamics globally may lead to continued low fertiliser prices in the medium term; may have a positive impact on Indian demand:
Urea: Urea prices are primarily a function of input energy costs and demand. In recent years, high energy prices have resulted in elevated urea prices. However, since Feb’13,
prices have declined, based on expectation of continuing low energy prices (shale gas boom in the US and low coal prices for Chinese urea players). Global urea prices
continued to remain low over Aug’13-Oct’13 at ~USD 300/MT, improving marginally in November 2013 as the low Chinese export tax window came to a close in October (China
has an export tax on fertilisers, which is lower over the period June-October). The domestic industry also believes that urea prices have declined in anticipation of an increase in
Indian capacities over the medium term as India looks to add plants to lower dependence on urea imports. This apart, capacity additions are also expected globally due to low
energy cost in the US and other countries. This has made it difficult for the GoI to take a decision on whether to add domestic urea plants in the absence of low cost domestic
gas availability and expected rise in domestic gas prices. Hence, there is a trade-off between having urea plants operating at higher energy costs domestically and being
dependent on imports due to expected lower international prices of urea. In ICRA Research’s view, India would need 5-6 urea plants with a total capacity of 8-10 MMTPA over
the next 4-5 years to avoid a scenario of significant import dependence in the long run. However, any decision on this front appears unlikely in the near term and a decision may
be taken only post the general elections. In the meantime, while lower urea prices may be beneficial in terms of reducing the subsidy outflow of the GoI, they lead to lower
profitability for the players who have undergone revamp projects and earn IPP-linked realisations beyond the cut-off quantity.
P&K Fertilisers: A shake-up of the potash (due to the break-up of the Belarussian Potash Company) and phosphate market (due to weak demand from India) has led to the
market expecting prices to lower for all the nutrients, resulting in deferral of purchases. Once MOP prices stabilise, ICRA Research anticipates that urea and DAP prices will
also follow suit depending on the demand-supply scenario. Prices of DAP may continue to decline to some extent in the coming months, before picking up in H1 CY14 as Indian
demand picks up again. However, a scenario of low phosphate and potash prices seems to be emerging on account of supply additions (in case of DAP – 5-10 MMTPA
capacity additions expected in the medium term) and market developments (emergence of competition post the collapse of the BPC cartel in case of MOP and customers being
able to dictate terms by reducing off-take in case of DAP). Nevertheless, ICRA Research believes that both suppliers and customers in the fertiliser industry have been
adversely affected at different points of time in recent years on account of price volatility and a stable price scenario may be desirable for both. While the prices may continue to
fluctuate in the near term, price volatility may decline in the medium term.
3. I C R A L I M I T E D Page 3
Special Banking Arrangement to marginally ease liquidity pressure on the industry; no further budgetary allocation or aid expected: Subsidy outflow for non-urea
fertilisers would be lower in 2013-14 due to lower subsidy for primary nutrients (nitrogen, phosphorus and potash) under the nutrient-based subsidy scheme for 2013-14.
Further, international urea prices have remained low in YTD 2013-14, which should lead to lower subsidy payments on both imported and domestic production of urea.
However, weaker rupee vis-a-vis 2012-13 may partly offset the decline in subsidy outflow for urea imports as well as for the revamp quantity. INR depreciation would also lead
to higher gas costs (costed in USD terms), boosting the subsidy burden for domestically produced urea. ICRA Research estimates that the subsidy burden for 2013-14 is likely
to remain in the range of ~Rs. 650-700 billion (not including the carryover subsidy). While the budgeted subsidy for 2013-14 of Rs. 660 billion may fulfil the subsidy
requirement for the current year, there may likely be a spillover of an amount similar to the previous year in case no supplementary budget allocations are made. A Special
Banking Arrangement to the tune of Rs. 155 billion has been worked out to make overdue subsidy payments to the fertiliser industry, which would ease pressure on the
industry to some extent. ICRA Research does not anticipate any further support from the GoI in the form of any supplementary allocation or aid to the industry. For individual
companies, while interest costs may be somewhat lower to the extent of the Special Banking Arrangement, the industry will continue to face liquidity pressures in H2 FY14.
No clarity on gas pricing, urea pricing reforms and urea plant approvals under Urea Investment Policy 2012: Any reforms in the industry and major decisions are likely
only post the Lok Sabha elections in 2014. These include partial decontrol of urea or introduction of nutrient-based subsidy, which have been considered by the GoI but have
not been implemented. The fixed costs of urea players are being reimbursed based on 2002-03 data regarding those plants and was to be updated after the New Pricing
Scheme expired in March 2010. Till the time the price hike does not occur, the differential in retail prices with non-urea fertilisers will continue to adversely impact the NPK
usage ratio, which stood at 8.7:3.4:1 in FY13 as against the ideal ratio of 4:2:1. Further, approval for new plants based on the Urea Investment Policy 2012 is also pending
and any major decisions are not likely over the next few months, as the situation has been complicated by lower international urea prices and concerns regarding unavailability
of gas. On the other hand, there is no clarity on the gas prices to be applicable for the fertiliser sector from April 2014 onwards. Given the significant impact of the gas price
increase on the urea players’ earning IPP-based pricing, particularly in relation to the subdued outlook on international urea prices, it is expected that the GoI would either (i)
keep lower prices of gas for urea manufacturers (ii) subsidise the increase in cost for players earning IPP-based pricing (iii) implement NBS. While the third alternative is not
likely in the near term, there is no clarity as yet on how the gas prices for the fertiliser industry would pan out and how the players would be compensated for the increase in
costs.
Outlook: Demand outlook better for Rabi 2014; developments in global fertiliser industry may help the Indian industry get back on track, although weak rupee and
subsidy delays continue to be key challenges; any meaningful reforms in domestic industry likely only post the elections: The industry performance in H1 FY14 has
been muted as sales slowed down since only channel inventory was getting cleared. Some of the companies faced inventory and forex-related losses. The industry is likely to
take some more time to recover financially from the difficult scenario witnessed in FY13. Liquidity issues are likely to remain as subsidy delays are likely to continue in H2
FY14. Nevertheless, measures taken by the industry to control inventory levels have led to lower imports, decline in global prices and recovery of profitability at current prices.
On the other hand, lower global urea prices will affect the profitability of players earning IPP-based prices for urea production beyond cut-off quantity in FY14 in case
international urea prices continue to remain low over Dec’13-Feb’14, based on which the IPP for these players will be decided. However, subsidy outflow would be lower for
FY14 which is a positive. Nevertheless, the changes that are currently taking place in the global demand-supply order should lead to some stability in terms of prices and
volumes in the years to come, which may help the Indian industry. Overall, while significant constraints remain in the form of weak rupee, feedstock availability and subsidy
delays, the Indian fertiliser industry appears to be on the path to a slow recovery. The emerging global fertiliser industry scenario should also likely be favourable for the Indian
industry.
4. I C R A L I M I T E D Page 4
Subscribe to the Full Report for details on the following...
I. Brief update of the Indian Fertiliser Sector
Trends in fertiliser consumption in 7m FY14 vis-a-vis 7m FY13
How decline in sales volumes in H1 FY14 would be better for Rabi 2014
Decline in import volumes and impact on systemic inventory levels
II. An Analysis of Global Fertiliser Prices and Outlook
Impact of Chinese supplies on the urea market
Price outlook of various fertilisers based on relative past trends of prices of major fertilisers
III. Recent Phosphate Market Developments and Impact on India
India in the global phosphate market: Key suppliers and import trends
Impact of Indian demand on global DAP prices
Expected capacity additions and outlook on DAP prices
IV. Subsidy and Working Capital
Special Banking Arrangement and subsidy expectations for FY14
V. Brief Coverage on the following fertiliser majors
1. Chambal Fertilisers & Chemicals Limited
2. Coromandel International Limited
3. Deepak Fertilisers & Petrochemicals Corporation Limited
4. Gujarat Narmada Valley Fertilizers & Chemicals Co. Ltd.
5. Gujarat State Fertilisers & Chemicals Limited
6. Mangalore Chemicals & Fertilizers Limited
7. National Fertilizers Limited
8. Nagarjuna Fertilizers & Chemicals Limited
9. Rashtriya Chemicals & Fertilizers Limited
10. Tata Chemicals Limited
11. Zuari Agro Chemicals Limited
VI. A Primer on Subsidy Framework for Fertilisers
Subsidy rates for 2013-14 and changes in subsides for various fertilisers
5. I C R A L I M I T E D Page 5
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