Agrochemicals feel margin pressure in ensuing Kharif season
- With the markets remaining well supplied and the fourth quarter of the FY2020 being an off-season period for the domestic industry, the impact of the Chinese shutdown is expected to be muted
- As per estimates, a $1/mmbtu reduction in the pooled gas price reduces the cost of urea production by around Rs. 1500-1600/MT; and thereby a lower subsidy outgo for the GoI and lower working capital borrowings for the companies
The spread of the novel coronavirus (2019-Nov) in the Hubei province of China and the consequent shutdown of several industries have brought several commodities under pressure. The fertilizer sector, however, is not expected to witness any major impact on the global front, given that the fertilizer production in China remains low in the month of January every year, owing to the Chinese New Year holidays. As per ICRA’s analysis of the impact on Indian players, too is expected to be soft despite the domestic industry importing a major portion of the raw materials for phosphatic fertilizers, mainly phosphoric acid and finished fertilizers – mainly DAP (47% of total imports in FY2019) from China.
Commenting more on the impact, Mr. K Ravichandran, Group Head & Senior Vice President ICRA says, “The Hubei province is a major centre for the production of phosphoric acid and phosphatic fertilizers. Even though the production is down in the province, the overall fertilizer market remains well supplied due to the build-up of inventories at the producer’s end in China as international prices remained weak. Thus, the international prices are not expected to be affected by the Chinese industry dynamics, unless the shutdown is extended towards the latter half of February. As for the Indian fertilizer industry, with the markets currently remaining well supplied and the fourth quarter of the financial year being an off-season period for the industry, the impact of the Chinese shutdown is expected to be muted. Also, the global urea markets have remained well supplied in recent years with new capacities coming online in Africa, the Middle-East and Africa. With the downward trend in Chinese exports continuing for the last couple of years, the impact of the Chinese urea industry on the global market has reduced.”
A silver lining for the Indian urea industry in this crisis is on the natural gas pricing front. R-LNG, which now meets around 57% of the natural gas consumption for the domestic urea industry, has been witnessing a downtrend in prices. With the decline in the term LNG prices and the weak spot gas prices, the pooled price for the urea players will moderate leading to a lower cost of production and a lower subsidy outgo for the GoI. As per ICRA estimates for the reduction in $1/mmbtu change in the pooled gas price, the cost of production of urea declines by around Rs. 1500-1600/MT, resulting in a lower subsidy outgo for the GoI and lower working capital borrowings for the companies.
On the agrochemicals front, China is the largest producer of agrochemicals in the world and has considerable influence on the pricing of agrochemicals globally. Any disruption in the supply chain from China can have a widespread impact on the profitability of agrochemical players in India as a large part of the intermediates/technicals for manufacturing agrochemicals are imported from China. However, the initial phase of the spread of n-Cov coincided with the Chinese New Year holidays, which were extended till February 10, 2020, by the Chinese Government to help contain the spread of the virus. However, post-February 10, 2020 several agrochemical companies began production and as of now, ICRA sees no major impact on the production in China. Though disruptions in logistics and clearances for any material coming in from China for the virus could affect the supply chain and may result in intermittent spikes in the prices of technicals.
Adds Mr. Varun Gogia, Senior Analyst, ICRA ratings “The impact on gross margins will be evident in the upcoming kharif season since the fourth quarter is an off- season for the agrochemical players in India, with the impact being different for different players, depending on their relative level of dependence on Chinese imports. On the positive side, players involved in the Custom Synthesis Manufacturing (CSM) business could see some volume shift from Chinese players to the Indian market, leading to improved order books and an upside in the long run as well. Moreover, Indian companies who are integrated into the technicals, will benefit from the spike in imported prices.”
