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Divergent DAP global prices, Gas
Priority Re-allocation & Overseas
Outlook of Indian Fertiliser Sector
2. I C R A L I M I T E D Page 2
SUMMARY
Some improvement in industry outlook as monsoons pick up during Q2 FY15, although low expected crop output leads to some concern on
consumption growth
Healthy P&K sales growth despite delayed monsoon due to relatively lower system inventories and low base effect: The overall sales volume of fertilisers improved by
4% y-o-y to 19.9 MMT during 5m FY15 as urea sales volumes declined by 6% driven by lower urea production of Nagarjuna Fertilisers & Chemicals Ltd. (NFCL) due to gas
availability issues as well as lower imports. However, P&K fertiliser sales volumes showed a healthy growth of 21% to 8.35 MMT till August 2014 due to low opening inventory
levels vis-a-vis previous years and the base effect of low sales during 5m FY14. Indigenous P&K volumes grew by 22% y-o-y, while P&K imports jumped 18%. Industry-level
inventories remained relatively high (vis-a-vis levels seen up to FY12), although declined from levels seen during Kharif 2012 and Kharif 2013.
Delayed monsoon expected to lead to lower crop production: Monsoon has remained erratic during Kharif 2014, which has led to delayed sowing and stunted crop growth in
some regions of the country, particularly along the northern and north-western crop belts of Haryana, Punjab, UP and Bihar. Several districts in these regions have been
declared drought-hit. Nevertheless, monsoons in other parts of the country have remained close to normal levels. Monsoon deficit during the initial part of the season led to
delayed sowing and hence, sales growth has been curtailed to some extent. However, volumes picked up in Q2 FY15 as pick-up in monsoon led to an improvement in fertiliser
sales. Nevertheless, lower Kharif crop output estimates and drought scenario in many parts of the country lead to concerns on the fertiliser consumption front in the upcoming
future. ICRA Research estimates that overall fertiliser volumes should witness a healthy growth of 5-7% driven by growth in sales of P&K fertilisers, which should grow by ~15-
20%, while urea volumes are expected to remain stable or decline to some extent during FY15.
Profitability for urea players to increase with increase in fixed cost compensation; policy change for urea production beyond cut-off quantity to determine domestic
production volumes: International urea prices have remained low in the recent past and are likely to remain low on account of low cost Chinese supplies, although international
urea prices seem to have found support at USD 300/MT levels. Consequently, profitability on urea production beyond cut-off quantity is likely to remain low, if the existing policy
continues. Under the present policy, for players who have undergone capacity revamp under the Urea Investment Policy of 2008, gross margins become negligible / negative
and urea production becomes unviable given the high gas costs beyond the cut-off quantity. Further, the likely increase in gas prices from November 2014 are likely to further
increase gas costs for these players. Accordingly, some players may curtail urea production if the existing policy continues. If domestic production declines on this account, the
DoF would have had to pay increased subsidy on additional import of urea that could have been produced by these players. Hence the DoF is considering a proposal to alter the
policy for urea production beyond cut-off quantity, as per which, the players will get a fixed gross margin of US$ 40/MT over and above the energy cost, which will be passed
through for the entire production beyond 100% of re-assessed capacity. While the urea manufacturers would earn lower profitability under this scheme as compared to what they
have been earning during the previous years when international urea prices were higher and gas prices were relatively lower, the players would be assured of a fixed positive
contribution on the additional production. Further, the contribution would be higher than what these companies are earning under the existing policy at all gas prices. The
recovery of profitability for the urea industry in FY15 will depend on the change in policy, if approved. On the other hand, increase in fixed cost compensation for urea players for
urea production up to cut-off quantity should aid the industry profitability.
DAP international prices moving at a divergence to relatively muted urea and MOP prices: The domestic retail prices of the major fertilisers – urea, DAP and MOP have
continued to remain stable in response to relatively stable international prices of key inputs and delayed monsoons resulting in somewhat delayed off-take of key fertilisers.
Prices of DAP may, however, inch up going forward as international prices rise due to reduced supply and increase in global prices. Demand for DAP has remained steady in
recent years, despite weakness in offtake from the Indian and Chinese markets. Growth in imports by developing countries in the South American market such as Brazil as well
as steady demand in major markets has led to expectation of CY14 shipments of DAP being at an all-time record high of 65-66 MMT (vs. 61 MMT in CY12 and 64 MMT in
CY13). Besides, Indian DAP imports have remained low in recent months, but have picked up during Q2 FY15 as system inventory levels remained low and demand has started
picking up. While urea and MOP prices remain well below their 5-year averages, DAP demand-supply is relatively well matched. Due to expectation of increase in prices going
forward, the Indian importers of phosphoric acid could tie up the contract for phosphoric acid at a significantly high price of US$ 760/MT (vs. US$ 715/MT during Q1 FY15).
3. I C R A L I M I T E D Page 3
Budget increases subsidy allocation for fertiliser industry; subsidy receivables likely to decline during FY15: The new government increased the budgeted subsidy to
~Rs. 730 billion as compared to the interim budget allocation of ~Rs. 680 billion. The step is a marginal positive in terms of improving the financial health of the fertiliser industry.
The interim budget had also increased the allocation for domestic urea by ~Rs. 100 billion vis-a-vis 2013-14 budget, estimated to have been on account of the proposed
increase in domestic gas prices from April 2014, though the same has not been implemented so far. The increase in domestic gas prices is expected in the near term, probably
by mid-November 2014. The increase in gas price is also expected to be lower than earlier estimates. Hence, subsidy backlog may decline from an estimated ~Rs. 370 billion at
the end of FY14 to ~Rs. 250-280 billion by the end of FY15, if implemented from October 2014, depending on the level of domestic gas prices. In case the price hike is further
deferred to April 2015, the shortfall will reduce further to ~Rs. 220-250 billion. The shortfall is still substantial and implies a continuation of high subsidy receivables for urea
companies. Also, subsidy delays for the P&K sector is also likely to continue as the GoI works out ways to check appropriateness of cost of production submitted by the
companies. Nevertheless, the level of subsidy receivables may likely decline during FY15. Besides, the government is also working on a comprehensive fertiliser policy, which
should likely focus on reforms on the retail prices front and is expected to be positive for the industry in the long run.
Gas allocation policy to lower fertiliser sector priority: Due to issues and ambiguities with the extant policy, the new government has proposed to change the order of
priority for incremental domestic gas (other than NELP). The fertiliser industry, which occupied the topmost priority previously, will lose its position in the priority list, which will
now be assigned to the city gas distribution (CGD) segment. Gas-based urea plants have been accorded fourth priority. The supply for the fertiliser sector will be frozen at the
2013-14 levels. While the new policy is likely to be favourable for urea players who may get some more gas (through cuts for non-urea fertiliser manufacturers), any gas cuts for
non-urea fertiliser manufacturers will lead to increase in cost of production for these players, if implemented. Further, only those plants which are connected to a pipeline from a
source will have priority, which implies no gas for players such as Mangalore Chemicals & Fertilisers Ltd., despite having converted to natural gas as feedstock. Gas price hike
is also likely to be lower compared to that suggested by the Rangarajan Committee. As per media reports, domestic natural gas price could increase by ~50% – in the range of
USD 6-6.5/mmbtu – if the recommendations by a panel constituted by the new government are implemented.
Comprehensive fertiliser policy in the works: The new government is working on a comprehensive fertiliser policy, which is expected to address several aspects of the
fertiliser industry and usher in reforms in the sector. Some of these aspects have been highlighted by ICRA Research previously: (i) Urea pricing (ii) Increasing indigenous urea
capacities through revival of defunct plants and setting up new plants (iii) Setting up fertiliser sector JVs in resource-rich countries (iv) Farmers’ education for optimal usage of
fertilisers (v) Measures to incentivise improvement in soil health and usage of nutrients in the right proportion (vi) Focus on organic fertilisers, bio-fertilisers and micro-nutrients.
While many of the reforms required are long-term in nature and difficult to implement, some decisions need to be taken in the near term to improve the industry's financial health
and also to aid the objective of achieving the long-term food security of the country. The GoI is actively pursuing opportunities in resource-rich countries to set up JVs and
contract fertilisers / raw materials on a long-term basis. It remains to be seen whether the new policy is able to bring in reforms to usher in self-sufficiency in urea production in
the country in the longer run, apart from easing systemic issues such as nitrogen overusage, high subsidies on fertilisers and raw material availability for the industry.
Some improvement in outlook as monsoons pick up pace during Q2 FY15; comprehensive fertiliser policy, expected to touch on reforms, awaited: As monsoons
picked up pace during Q2 FY15, the sales volumes are estimated to have picked up during Q2 FY15. The fertiliser industry performance during FY15 is expected to be aided by
(i) reasonably lower systemic inventory levels (ii) base effect of low sales during FY14 (iii) relatively stable / muted raw material / finished fertiliser prices in the international
market – except for phosphatics (iv) expected decline in subsidy delays during FY15 (v) relatively stable forex rates. However, gas availability and prices continue to remain a
concern for the industry. Further, drought in several districts in northern India and likely decline in crop production pose some concerns. The comprehensive fertiliser policy is
also expected to usher in long-term and long-awaited reforms for the fertiliser industry, largely related to improvement in soil health and optimisation of nutrient consumption,
apart from ensuring long-term food security of the country by trying up long-term supply of fertilisers and raw materials.
remain muted on account of fears of weak monsoon. A possible weak monsoon may impact fertiliser industry sales to some extent and impact recovery, although the impact is
not expected to be as high as in Kharif 2012. Further, the industry continues to face liquidity issues due to high outstanding subsidy but the situation is expected to gradually
improve going forward. Also, with the rupee having largely stabilised in the Rs. 59-61/USD range over the past six months, forex risks have declined to some extent although
geopolitical risks (Iraq, Ukraine, etc.) may lead to currency depreciation. Overall, a new government should herald an era of much-needed reforms for the fertiliser sector, while
the industry gradually emerges from the troughs witnessed in FY13-FY14.
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 5m FY15 vis-a-vis 5m FY14
Movement in monsoon and impact on P&K fertiliser inventories
Demand outlook for urea and P&K fertilisers in FY15
Global and domestic price trends of key fertilisers
II. Why are DAP international prices rising when urea and MOP prices remain muted
Analysis of global phosphate fertilisers and RM prices and impact on Indian prices
III. Subsidy Woes for the Fertiliser Industry to decline?
How subsidy levels are likely to move vis-a-vis changes in domestic gas prices going forward
IV. Policy changes by the new government
Change in gas allocation priority and impact on the fertiliser sector
Expected agenda for the New Comprehensive Fertiliser Policy
Fertiliser industry and Government of India look out for overseas investments
V. Updates on Capex Plans & Industry Outlook
VI. 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
VII. A Primer on Subsidy Framework for Fertilisers
Subsidy rates for 2014-15 and changes in subsidy rates for various fertilisers
5. I C R A L I M I T E D Page 5
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