Fertiliser makers to benefit from gas disruptions in Europe 

With the Ukraine-Russia war continuing unabated, countries that are part of the European Union have been impacted the most. Given the region’s heavy dependence on Russia for cheap gas supply, the cessation of supplies by Russia Gasprozm- supplying almost 50 per cent of Europe’s gas requirement (about 55 billion cubic metres of over 100 billion cubic metres needed by Europe)- has put the entire economy in jeopardy. The unprecedented gas shortage in the region has already led to slowdown in several manufacturing units.

Topping the list of industries that have been impacted by the gas shortage is fertilisers and chemicals, where gas is a key raw material. Particularly, the production of ammonia, which is a key raw material for nitrogenous fertilisers such as urea, ammonium nitrate and industrial chemicals such as nitric acid, has declined sharply. Several fertiliser makers across Europe have already announced production cuts. For instance, last month, Norway-based Yara International SA, one of the largest manufacturers of nitrogenous fertilisers, said that utilisation at its ammonia plant has been cut to 35 per cent, implying a production loss of 3.1 million tonnes (mt). Across Europe, ammonia production has almost halved now, thanks to the gas supply crisis.

So, what does it mean for India? India ranks fourth in ammonia production globally, with a total production of 12 mt in 2021. China is the largest player globally producing 39 mt, followed by Russia (16 mt) and the US (14 mt).

Ammonia production cut in Europe will bode well for Indian ammonia makers for two reasons. One, ammonia demand from European fertiliser and chemical players is expected to see a significant increase. This will mean higher exports for Indian ammonia producers. Second, the shortage will lead to a sharp rise in global ammonia prices. This can also push up the prices of nitrogenous fertilisers such as ammonium nitrate, urea and chemicals such as nitric acid which use ammonia as the key raw material, in the global market. Indian companies such as GNFC, RCF and GSFC will benefit from higher realisation for industrial chemicals. Any increase in global urea prices will possibly increase the subsidy burden for the Government. Even as the global urea prices may move in tandem with the global demand-supply dynamics, the domestic urea price will be largely driven by the cost of gas, naphtha and fuel oil, which are used as raw materials. Any increase in gas or other raw materials will be absorbed by the Government by way of higher subsidy to insulate the farmers from price volatility. While this will have a positive impact on the chemicals segment, there will be no negative impact on the fertiliser division.

Beneficiaries

Who will benefit from the ammonia export opportunity? All fertiliser makers produce ammonia as part of their backward integration. However, only a few of them have surplus ammonia, which can be imported by others in anhydrous form. KRIBHCO, which is a cooperative sector fertiliser maker, is among the fertilisers makers with significant excess ammonia.

In the listed space, Rashtriya fertilisers and Chemicals (RCF), National Fertilisers Limited (NFL)and Gujarat Narmada Valley Fertilisers and Chemicals (GNFC) currently sell their surplus ammonia to other chemical and fertiliser makers. Consider RCF. The company’s ammonia sales (₹225 crore) accounted for 5 per cent of its total revenue in FY21. NFL, on the other hand, sold 37,774 tonnes of anhydrous ammonia in FY21. Besides this, the company also sold the excess ammonia amounting to 17,168 tonnes produced by Ramagundam Fertilisers and Chemicals, which is a Joint venture of NFL, Fertiliser Corporation of India and Engineers India Limited.

Besides, companies such as RCF and GNFC which use ammonia for Nitric Acid manufacturing also have to flexibility to sell them as ammonia, should the market conditions favour ammonia, instead of producing nitric acid and selling them as value added product.

We had recommended investment in GNFC at ₹607 in June this year and the stock has delivered 28 per cent returns since then.

Thanks to the expectation of strong demand and resilience in the home market, we believe fertiliser stocks are well placed to capitalise on the domestic and global opportunities (for chemicals). We covered the long-term demand drivers for all agri-input makers in a recent story and believe that the strong medium to long-term prospects for the industry will continue to support their stock prices.