The weak monsoon and Government control over pricing pose a major challenge for fertiliser companies. The outlook for P&K (phosphatic and potassic) fertilisers, in particular, may remain subdued due to sharp increase in prices. This has already led to a fall in demand in the last few months.
There are expectations that the Nutrient-based Subsidy (NBS) rates for P&K fertilisers may be reduced next fiscal, leading to a further increase in retail prices. The absence of any major decontrol of urea prices indicates challenging times ahead for P&K fertilisers, said an ICRA report.
Despite partial decontrol of non-urea fertilisers in the past, the fertiliser sector remains one of the most regulated sectors, said the report. Amongst these, the urea sector, which accounts for about 50 per cent of fertiliser consumption, is completely regulated, where the retail price is fixed and subsidy is variable in order to ensure cost plus return (of 12 per cent post-tax RoE).
In the case of non-urea sector such as DAP (di-ammonium phosphate) and NPK (nitrogen, phosphorus and potassium) fertilisers, the subsidies are fixed with considerable pricing freedom — granted since April last year. The outlook for the urea sector is neutral with delayed action on policy announcements leading to a status quo, it said.
Urea consumption
K. Ravichandran, Senior Vice-President and Co-Head, Corporate Ratings, ICRA, said price-driven factors are increasingly impacting consumption pattern among fertilisers. Partial price deregulation, lower subsidies and weak rupee have significantly widened the retail price difference between urea and non-urea fertilisers, thus skewing the consumption in favour of urea.
“In the near term, poor monsoon indications and inventory overhang of non-urea fertilisers, should, however, negatively impact demand in the P&K sector,” he said.
India’s dependence on fertiliser imports has increased at a rapid pace due to the delay in completion of various expansion projects. Currently, imports constitute about 27 per cent of urea consumption and 68 per cent for DAP. Additionally, India is deficient in primary sources of fertiliser inputs such as natural gas, rock phosphate and potash. It is also dependent on imports for intermediates such as phosphoric acid and ammonia.
In order to contain the overall fertiliser subsidies, the Government is likely to continue reducing NBS rates for P&K, which may necessitate further increase in retail prices. In the absence of major decontrol of urea prices, this may continue to impact the demand for P&K fertilisers, said ICRA.