1. ICRA RESEARCH SERVICES
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Policy Movement On Gas For
Fertiliser Industry
2. I C R A L I M I T E D Page 2
SUMMARY
Volumes post healthy growth during FY15 driven by P&K segment; movement on policy front but wait for key reforms – urea price
increase, lower subsidy delays – likely to continue
P&K sales continue to post healthy growth; urea volumes to be stable: Overall fertiliser volumes should witness a growth of
5-7% during FY15 driven by sales of P&K fertilisers. The sales volumes of DAP grew 11% y-o-y to 6.71 MMT during 11m FY15,
while MOP posted an encouraging higher growth of 31% to 2.50 MMT. NPK complexes volumes are also estimated to have
grown at ~14%. The growth in sales has been driven by significantly lower systemic inventory levels compared to the previous
year leading to low sales base, although agro-climatic conditions have not been as suitable with moderate drought during Kharif
2014 and unseasonal rains during Rabi 2014-15. On the other hand, the imports of urea grew by 13% during 11m FY15 driven
by low international urea prices, which have prompted the government to hold on to the change in fertiliser policy for domestic
producers for revamped urea plants for urea production beyond cut-off quantity leading to plant shutdowns, and healthy demand.
Nevertheless, urea shortages have been reported in certain states such as Punjab, Haryana, Madhya Pradesh, etc., which was
primarily on account of lack of availability of rakes for transport of urea from the ports and limited imports during the initial part of
the year. ICRA Research estimates sales urea sales volumes to remain at similar levels as in FY14, while P&K sales are
estimated to grow by ~15%.
Muted outlook for global urea and phosphatics prices due to the Chinese factor, although high phosphoric acid
contract price surprises; modest growth on Chinese MOP contract: China has scrapped low and high export tax periods in
favour of a flat tax rate for CY15 for urea and DAP driven by domestic surplus supplies. While supply is substantial in case of
urea, which, coupled with low coal prices, should keep international prices at low levels, DAP exports may be limited in the initial
part of the year as producers focus on domestic market and increase by the time the Indian kharif demand kicks in around July-
August 2015. On the other hand, the Chinese MOP contract, which provides direction for the MOP contracts of other countries,
was set at a moderate 3% price growth over the previous year. A similar growth may now be witnessed in the contracts for India
which may see prices of around ~USD 335/MT. While there is general weakness in fertiliser industry prices globally, phosphatics
raw material prices have remained high in the recent past resulting in most of the Indian DAP-NPK companies preferring to
produce NPK complexes as reasonable MOP prices have resulted in better margins from NPK complexes than from DAP.
During Q4 FY15, lower ammonia prices also provided some room, although retail prices of DAP have been increase in recent
months. Retail prices of P&K fertilisers will be under further pressure during FY16 as phosphoric acid price negotiations for H1
FY16 for India were unfavourable with the contracts negotiated at ~USD 805/MT – an increase of ~USD 40/MT despite relatively
weak price environment for phosphatic fertilisers internationally.
Lower prices in the international market has led to the GoI not bringing about change in policy for production beyond
cut-off quantity for debottlenecked urea plants: DoF has been considering a proposal to modify the policy for production
beyond cut-off quantity. As per the proposed policy, 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. However, with
international urea prices remaining low, the GoI has been able to import urea at significantly lower prices as compared to the
subsidy outgo that would have resulted if the proposed policy was enacted. While the Department of Fertilizers has stated that
the proposal is being considered, it seems that due to the prospect of paying higher subsidy to the players, the proposal has nto
been approved for the time being.
Issues related to urea
availability in certain states on
account of low imports in the
intial part of the year and rake
availability issues
DAP likely to be imported than
manufactured due to high
phosphoric acid prices; retail
prices may increase for P&K
fertilisers in FY16
3. I C R A L I M I T E D Page 3
Complex issue of usage of cheap domestic gas for manufacture of non-urea fertilisers expected to be decided soon:
ICRA Research had earlier noted that due to significant shortage in domestic gas supply, the GoI had been deliberating on the
possibility of not allowing captive ammonia based complex fertiliser manufacturers such as Rashtriya Chemicals & Fertilizers Ltd.
(RCF), Gujarat State Fertilizers & Chemicals Ltd. (GSFC) and Deepak Fertilisers & Petrochemicals Corp. Ltd. (DFPCL) to benefit
from cheap domestic gas given that these fertilisers are deregulated and use of cheaper gas does not help GoI to save subsidy.
The issue was raised before an inter-ministerial committee (IMC) for deliberation with regard to (i) continuation of domestic gas
supply to these units (ii) recovery of benefits due to past usage of domestic gas (iii) method of recovery: cost-based or recovery-
based (iv) period for which cost is to be recovered, whether retrospective or prospective. While gas supply to DFPCL has been
already stopped and the company has appealed against the decision in the Delhi High Court, RCF and GSFC have not faced gas
cuts due to urea production at these plants. Besides, GSFC has also obtained a stay in this matter from the High Court of Gujarat.
ICRA Research notes that the gas allocation policy proposed by the new government does not provide priority for P&K
manufacturers in its list of top sectors for priority gas supply. Given that city gas distribution, urea and power sectors are the major
sectors in the priority list of the Government, it is likely that the P&K players may increasingly face issues regarding domestic gas
availability going forward. Nevertheless, the decision of the Delhi High Court in the DFPCL case would provide some direction as
regards the legal standing of the DoF in the matter. As regards mopping up of benefits of ammonia production, taking away the
entire benefits of backward integration would imply zero return on capital investment made in ammonia plant. ICRA Research
believes that lower subsidy would be mopped up to effectively provide a return on equity on ammonia.
Gas pooling approved by CCEA for fertiliser industry: The Cabinet Committee of Economic Affairs (CCEA) has approved the
gas pooling mechanism for the fertiliser industry. The proposal provides uniform delivery cost of natural gas for all gas-based urea
plants by pooling their gas supply and averaging out the different rates of domestic and imported gas. While the policy is yet to be
notified, it will be implemented from April 1, 2015 and would level the playing field for all the manufacturers. Pooling of gas would
also provide clarity on gas prices for new projects to be set up under NUIP 2012 and would make gas more affordable. ICRA
anticipates landed gas price for the urea industry at ~USD 9.5-10/mmbtu based on prevailing prices. In ICRA Research’s view,
pooling of gas could be the step towards NBS for urea over the medium term as all the plants get gas at a uniform price and the
new plants being setup under NUIP 2012 would get clarity on the gas price which would be more affordable. However, gas pooling
as a concept has been in discussion for considerable time and several operational issues will need to be ironed out for
implementation of the proposal.
Other reforms to wait; budget 2015 a disappointment: Reforms for the fertiliser sector have not been at the expected pace
since the new government has taken over. There were no major announcements in the Union Budget for 2015-16 for the fertiliser
sector either. Besides, the GoI has kept the budgeted subsidy for 2015-16 at ~Rs. 730 billion, which is expected to leave
substantial shortfall for the sector and hence, subsidy delays will likely continue. While gas pooling has been implemented, there is
little clarity for introduction of NBS or increasing retail prices of urea. While the GoI is looking to go ahead with proposed capex on
revival projects, urea projects of PSUs such as RCF and is also looking at a plant in Iran, clarity on operational and policy-related
issues is needed for the proposed urea plants of private sector companies. Nevertheless, gas pooling for the fertiliser sector is
expected to lead to improvement in energy efficiency parameters for the industry. However, subsidy delays for the sector are likely
to continue given the modest increase in budget, which would continue to impact the liquidity and profitability of fertiliser industry.
Gas pooling to be positive for
companies using R-LNG more
than industry average (Chambal
Fertilisers, National Fertilizers,
Zuari Agro, etc.) and negative
for companies using more
domestic gas (KRIBHCO,
Nagarjuna Chemicals &
Fertilisers, Rashtriya Chemicals
& Fertilizers, Tata Chemicals,
etc.)
4. I C R A L I M I T E D Page 4
Outlook: Some regulatory movement post the budget; improved operating environment and normal monsoon should
lead to stable financial performance in FY16: The fertiliser industry performance witnessed an improved operating environment
during FY15 after two very difficult years, primarily on account of normalisation of system level inventories. new government,
relatively stable currency rates and modest global prices of fertilisers and key inputs. The base effect of low sales during FY14 will
also lead to better than normal growth figures in case of P&K fertilisers. Besides, revision in fixed cost compensation for urea
companies has led to an improvement in operating profits of urea companies. While issues on subsidy delays remain, more long-
term reforms on urea pricing and subsidies continue to be on the backburner of the government’s reform agenda, which is a
concern for the fertiliser industry. Nevertheless, some movement has been observed on the regulatory front, with the government
reportedly considering various reforms for the sector. Gas pooling is a positive for the industry and should help rationalise the cost
of production for many urea players as well as improve competition in the industry. It is also hoped that the move is the first step
towards possible decontrol of urea or introduction of nutrient-based subsidy for urea in the medium to long term.
ICRA Research expects the fertiliser industry to record a reasonable performance during FY16 driven by expectations of normal
monsoon, moderate international fertiliser environment with subdued prices and subdued energy price environment likely to drive
cost of production lower, although weakening of the rupee in recent months and volatile prices of imported raw material for P&K
fertilisers remains a concern for the industry.
On the investment front, the GoI is looking largely at reviving old plants at present. While a few private projects are expected to be
cleared, it remains to be seen how the GoI comes up with a mechanism to clear the projects and if these projects would be
financially viable given the lack of availability of reasonably priced gas. Also, these projects may entail high risks for the investors
due to the issue of higher marketing risks following the removal of the buyback clause. It is expected that the GoI will try to strike a
balance between the need for domestic plants and suitable returns for a new project. These expectations are reflected in the
relatively high numbers that private players have applied for the new projects.
Several projects identified but
more regulatory clarity
required for significant
investments in the sector
5. I C R A L I M I T E D Page 5
Subscribe to the Full Report for details on the following...
I. Brief update of the Indian Fertiliser Sector
Trends in fertiliser consumption in 11m FY15 vis-a-vis 11m FY14
Why GoI is not approving policy for revamped urea plants beyond cut-off policy despite plant shutdowns
Impact of raw material price fluctuations on DAP-NPK production
Outlook on international and domestic price movement
II. Detailed analysis of gas issue for chemical-fertiliser complexes
Overview of views of various stakeholders and impact on companies
Gas price movements for fertiliser industry in FY16
III. Gas pooling for urea sector
Overview of likely impact on industry and companies
IV. Budget 2015 and Fertiliser Industry Performance in 9m FY15
V. Capex Plans and 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
6. I C R A L I M I T E D Page 6
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