After two very difficult years, the fertiliser industry performance witnessed some improvement in the operating environment during FY15, primarily on account of normalisation of system level inventories, relatively stable currency rates and modest global prices of fertilisers and key inputs, as per a recent report release by ICRA Research on the fertiliser sector. ICRA Research, in its April 2015 update of its Fertiliser Industry Report series entitled “Policy Movement on Gas for the Fertiliser Industry”, says that the fertiliser volumes are estimated to have grown by 5-7% during FY15 driven by sales of P&K fertilisers, which have been driven by significantly lower systemic inventory levels, although agro-climatic conditions have not been as suitable with moderate drought during Kharif 2014 and unseasonal rains during Rabi 2014-15. ICRA Research estimates urea sales volumes to have remained at similar levels as in FY14, while P&K sales are estimated to have grown by ~15% during FY15.
Regarding the recent approval for the gas pooling mechanism, Mr. K. Ravichandran, Senior Vice President, noted that, “The net impact of pooling for fertiliser industry would be levelling of gas cost for the industry (landed gas price expected to be ~USD 9.5-10/mmbtu based on prevailing prices), though some of the companies who were largely using domestic gas for producing urea will face higher gas costs and hence higher subsidy receivables. Also, companies that had de-bottlenecked their capacities under the government’s earlier investment scheme and were using R-LNG would be benefitted as they would receive gas at a pooled price and sell part of the urea quantity (beyond a certain cutoff level) at import-parity prices. In ICRA Research’s view, pooling of gas could be the step towards NBS for urea over the medium-to-long term as all the plants get gas at a uniform price and the new plants being set up under NUIP 2012 would get clarity on the gas price which would be more affordable.”
ICRA Research notes that the domestic gas price has declined from earlier US$ 5.6/mmbtu to US$ ~5.18/mmbtu w.e.f April 1 2015 for H1 FY16. The fall in domestic natural gas prices would benefit the government in the form of lower subsidy. Impact on individual companies would vary now based on the pooled gas price. Subsidy outgo for the GoI will reduce by ~Rs. 12-13 billion as per ICRA Research’s estimates.
ICRA Research also noted that the reforms for the fertiliser sector have not been at the expected pace. 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, and would impact the liquidity and profitability of fertiliser industry. Further, while gas pooling is being implemented, there is little clarity for introduction of NBS or increasing retail prices of urea. Besides, the alternative policy for the revamp units under 2008 policy has not yet been announced, due to which the some of the industry players had announced shutdowns as production of urea is unviable at the currently low international urea prices. Additionally, huge investments are on hold as GoI is not approving urea projects under NIP-2012 as the urea prices in the international markets remain low. As per Mr. K Ravichandran, “While easing energy prices provide some breathing space to the GoI, it is imperative the GoI comes out with the Comprehensive Fertiliser Policy at the earliest which should provide more clarity on urea pricing reforms going forward and measures to reduce the subsidy burden 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 volatile prices of imported raw materials for P&K fertilisers remains a concern for the industry.
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