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Fertiliser Sector Reforms: A Challenge
for the New Government
2. I C R A L I M I T E D Page 2
SUMMAR Y
Significant impact on sales volumes in FY14 due to previous years’ stock overhang, even while El Nino fears loom large over
volumes in FY15
Sales de-growth in FY14 due to previous years’ stock overhang; El Nino fears derail sales volumes in the current fiscal: The overall sales volume of fertilisers declined
by 5% to ~51 MMT in FY14 despite relatively healthy monsoons and higher off-take by farmers due to high systemic inventory levels which clogged the distribution channels.
Inventory losses and forex pressures forced the industry to re-orient its sales strategy to a more cautious one leading to a decline in imports. While urea volumes remained
relatively stable at 30.5 MMT in FY14, non-urea fertiliser volumes declined by 12% to ~20.6 MMT in FY14, with volumes of imported fertilisers declining by 31% to ~6.1 MMT.
During Q1 FY15, urea sales grew by a healthy 16% y-o-y by mid-June 2014. However, despite relatively normal levels of system inventory, sales volumes of non-urea fertilisers
have been below normal due to delay in monsoon and fears of less than normal rainfall. In ICRA Research’s view, any significant impact of El Nino on the monsoon may lead to
weak volume growth and obstruct chances of recovery for the industry. However, in case of close to normal rainfall, there could be an upside of 6-8% on overall volumes, largely
on account of growth in consumption of P&K fertilisers, which should grow by ~15-20% in case of normal monsoon due to low base effect of FY14. However, in case of lesser
than normal monsoon, the upside in total volumes may be lower at 3-5%, with P&K fertiliser volumes rising by ~7-10%. Apart from monsoon, increase in the retail price of urea
will remain a key risk to the overall volume growth.
International urea prices remain subdued due to oversupply from China: The global urea prices have remained subdued since the last 15 months (averaged ~USD 325/MT
during the 15-month period from Mar’13-May’14 as opposed to an average of ~USD 373/MT during the 5-year period prior to that (Mar’08-Feb’13)) on account of high exports
from China, which has significant oversupply (~20 MMT) and lower production cost due to dependence on coal as feedstock. International coal prices have remained weak
during the past 12-18 months. Due to oversupply, the Chinese Government reduced the export taxes on urea even during the peak season. With continuing low coal prices and
oversupply in China, Chinese exports will continue to play a vital role in keeping urea prices under pressure in the medium term. Further, commissioning of capacities based on
low-cost gas in the US will further lead to a decline in US dependence on imports of urea and keep urea prices under check. However, ICRA Research notes that geopolitical
risks (such as the Ukraine-Russia crisis and increase in energy prices due to insurgency in Iraq) may result in temporary spikes in urea prices.
Increase in compensation for fixed cost of urea; to improve urea profitability moderately, but increase subsidy outflow: In April 2014, the DoF has notified a modified
New Pricing Scheme-III as per which, there will be an increase in the additional fixed cost of urea by Rs. 350/MT for FY15. For plants which are more than 30 years old, the fixed
cost increase would be a further Rs. 150/MT. ICRA Research estimates that while the fixed costs of the players has increased substantially over the past decade and the
increase in fixed cost will not compensate the companies for the entire increase in cost of production, the move will boost the profitability of the players to some extent. The
increase in costs will be compensated to the companies in the form of increased subsidies, leading to an additional subsidy burden of ~Rs. 9-10 billion for the GoI.
Challenges abound for the new government: As a new government takes the reins of the Indian economy, the fertiliser industry would need several reforms to enable the
industry to achieve reasonable returns and cash flows. In ICRA Research’s view, while many of the reforms required are long-term in nature and difficult to implement, certain
decisions need to be taken in the near term to improve the industry's financial health as well as in view of the long-term food security of the country. Some of the near-to-medium
term measures may include (i) Increasing the retail prices of urea in a phased manner and reduction of subsidy to that extent (ii) Possible movement towards NBS for urea, with
a view to phasing out subsidy for fertilisers in the long-term (iii) Prudent budgetary subsidy allocations to move towards timely payment of subsidies (iv) Direct payment of
subsidy amount to gas marketers so as to reduce working capital requirements for the fertiliser industry (v) Pooling of gas prices to ensure uniformity of input prices (barring state
taxes) for domestic manufacturers (vi) Undertaking coal gasification-based urea projects. The long term measures include (i) Possible gradual phasing out of subsidy for all
fertilisers to pave the way for market pricing (ii) Taking up JVs / long-term agreements at definitive prices with resource-rich countries (iii) Ensuring domestic raw material
availability wherever possible (natural gas, rock phosphate) and (iv) Farmers' educational programmes to ensure optimal fertiliser application, river interlinking projects,
3. I C R A L I M I T E D Page 3
widespread auxiliary services such as soil testing labs and availability of high quality agri-inputs to the farmers at reasonable cost. Besides, while the regulated nature of the
sector has led to relatively stable profitability, the returns earned by various companies are on the lower side and setting up capacities is a tedious and time-consuming process,
as evident from the delays in approvals for urea projects post the notification of the New Urea Investment Policy 2012. The principles behind setting up various policies need to
be adhered to in the long-term interests of the industry and the country’s food security. However, ICRA Research believes that it would be politically challenging to implement
many of the measures, especially letting urea retail prices increase and move towards market pricing.
Special Banking Arrangement in June 2014 for urea payments reflects shortage of funds for subsidy payments for the DoF: In the interim budget for FY15, the GoI
budgeted ~Rs. 680 billion for fertiliser subsidy payments for FY15. However, the budget did not factor in outstanding payments of ~Rs. 370 billion, for which payments are to be
made from the FY15 budget. Besides, the GoI has been making Special Banking Arrangements for the fertiliser industry for delayed payments and arrangements to the extent
of ~Rs. 155 billion for the previous year was to be settled from the subsidy budget of FY15. It appears that the DoF ran out of funds for payment to the urea industry and another
Special Banking Arrangement has been made to the tune of ~Rs. 70 billion for making payments for urea production beyond January 2014. A key challenge for the new
government, therefore, with respect to the fertiliser industry will be to ensure the industry’s health by making arrangements to clear the overdue subsidy payments. Besides, the
government will also have to look at measures to reduce the subsidy burden in the medium-to-long term.
Gas price hike likely to be moderate compared to earlier expectations: As per the Rangarajan Committee formulae, the domestic gas prices would have increased to US$
7-8/mmbtu for FY15. However, as per media reports, the new government is likely to look at an alternative pricing formula with gas prices estimated at US$ 5.5-6.8/mmbtu. In
any case, the domestic prices of gas are likely to increase from H2 FY15 onwards. While the cost of production of urea would increase, the magnitude of subsidy outflow from
the GoI would be lower compared to what was anticipated earlier (~Rs. 60-80 billion vs. ~Rs. 130 billion earlier). Nevertheless, the actual increase in gas prices and the
corresponding increase in subsidy outflow from the GoI and the working capital intensity of the players remains to be seen. Further, it would impact the profitability of revamped
urea capacities earning IPP-based pricing and those of non-urea fertilisers under NBS such as ammonium nitro-phosphate, which are produced using domestic gas. Some of
the chemicals manufacturing companies may also face non-viability or significantly reduced profitability for certain chemicals. The GoI will subsidise the increase in energy costs
for urea while other impact would have to be passed on to the customers.
Outlook: Cautious outlook for industry performance in FY15, reforms overdue: A new strong government with a majority at the Centre has also sparked a hope of reforms
for the sector. It is anticipated that the government will take certain steps to aid the ailing industry. An imminent reform in the wake of the likely rise in domestic gas prices is the
urea price hike. Further, the GoI may target to bring down subsidy levels as well as lower delays in payment of the same over the medium term. On the other hand, the GoI
need to take a call on the number of brownfield projects to be approved under the New Urea Investment Policy 2012, given that gas availability will continue to remain a
concern.
As regards the outlook for fertiliser industry performance in Q1 FY15, while the performance is likely to be better compared to Q1 FY14, the performance is still expected to
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 FY14 vis-a-vis FY13
Sales and inventory movement up to June 15, 2014
Demand outlook for urea and P&K fertilisers in FY15
Impact of Chinese urea supplies, increase in urea fixed cost and pricing beyong cut-off quantity on domestic urea
producers
II. Competition in the Indian Fertiliser Industry
Market shares of key producers in the government, private and cooperative space during FY14
Market shares of DAP-NPK complexes manufacturers vis-a-vis importers
Why domestic fertiliser majors are able to maintain their market positions
III. Time for Reforms: Challenges for the New Government
An analysis of the various issues facing the fertiliser sector and the likely ways forward for the government in the near
and the long term
Key reform areas: Urea prices, gas availability and pooling, subsidy reimbursement, investments in the sector
IV. Subsidy Woes for the Fertiliser Industry
Special Banking Arrangement in May 2014
V. Aggregate Industry Performance in FY14, Gas and Capex Issues & 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 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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