The fertiliser volumes posted a healthy 15% y-o-y growth during 5m FY16 to 22.86 MMT, driven largely by a significant jump in imports. While the urea volumes grew by 12% during 5m FY16, non-urea volumes grew by 19%, as per a recent report release by ICRA Research on the fertiliser sector. ICRA Research, in its October 2015 update of its Fertiliser Industry Report series entitled “Forex Volatility and the Outlook on the Fertiliser Industry”, says that, despite good sowing levels due to healthy early monsoons, rainfall in the latter part of the monsoon season has not been encouraging – overall monsoons at 14% lower than the long-term average. With dwindling monsoon, system inventory levels of non-urea fertilisers increased to a 5-year high as of end-Aug’15. With weak rainfall has been weak in several parts of the country and increase in the inventory levels, fertiliser volumes may witness moderation in the coming months. In ICRA Research’s view, due to monsoon and cost pressures on the industry especially non-urea fertilisers, overall urea demand may post a minor 1-2% growth to ~31-31.5 MMT during FY16 and P&K segment is expected to witness volume growth at a moderate ~2-5%.
Regarding the recent reduction in the gas prices, Mr. K. Ravichandran, Senior Vice President & Co-Head, Corporate Ratings, noted that, “With the domestic gas price to decline to US$ 4.2/mmbtu from US$ 5.12/mmbtu in H1 FY16 (on NCV basis) as per the modified Rangarajan formula and long-term R-LNG prices also set to decline further from the current levels of ~US$ 13.5/mmtbu, the pooled gas price is expected to decline to ~US$ 9.1-9.3/mmbtu during H2 FY16. This would be positive for the urea sector as the energy cost base and hence, subsidy requirements would decline to that extent. For every US$ 1/mmbtu fall in gas prices, the variable cost declines by Rs. 1,800-2,000/MT, leading to subsidy savings of ~Rs. 12-13 billion for the Government for H2 FY 16 (assuming the currency to remain stable). Lower subsidy for the industry would in turn lead to lower working capital borrowings for the companies and enable them to reduce their interest cost. Further, lower pooled gas prices would favourably impact the profitability of revamped urea capacities earning IPP-based pricing.”
ICRA Research also noted that Deepak Fertilisers & Petrochemicals Corp. Ltd. (DFPCL) received a favourable order from the Honourable High Court of Delhi in july 2015, asking the government to resume supply of domestic gas to DFPCL for the manufacture of NPK fertilisers and asked the DoF to implement a uniform policy without discrimination against the three players, i.e. Rashtriya Chemicals & Fertilizers Ltd. (RCF), Gujarat State Fertilizers & Chemicals Ltd. (GSFC) and DFPCL. Meanwhile, the decision of Inter Ministerial Committee (IMC), which was constituted by the GoI to review its decision of cut in gas supply to P&K fertiliser producers, is awaited. ICRA Research expects clarity on the above issues to emerge in the near term.
Regarding the outlook for the fertiliser sector, Mr. K. Ravichandran, said that, “The financial performance of the P&K segment is expected to continue to remain impacted in the near term due to cost pressures and recent currency depreciation, given that the increase in costs may be difficult to pass on to the farmers. Urea segment should witness some improvement in margins due to lower gas prices and change in policy for production beyond re-assessed capacity (RAC). Nevertheless, subsidy delays are expected to continue, albeit to a somewhat lower extent as the GoI is expected to save on subsidy due to lower gas prices and international urea prices. Overall, the outlook remains cautious on two fronts: (i) profitability for the P&K segment (ii) agro-climatic pressures and its impact on Rabi volumes.”
