On the whole, FY16 has been a reasonably good year for the fertilizer industry with overall volumes rising by 7 per cent to 58.2 MMT from 54.1 MMT in FY15. There has been moderate volume growth, despite a second consecutive year of weak monsoons.
ICRA research, in its July 2016 update of the Fertilizer Industry Report series entitled “Fertilizer Volumes, Prices Trends & the Green Vision,” says: “The volume growth during FY2016 has been driven by relatively low opening inventory levels compared with the previous years, and low base effect and was supported by moderate growth in the domestic production of urea and higher import for non-urea fertilizers. However, higher volume growth has increased the systemic inventory levels as on end-Mar 2016.
The domestic production of urea witnessed healthy 8 per cent growth during FY16, driven by favourable policy changes by the GoI, especially the New Urea Policy 2015 (which altered the policy with regard to reimbursements on the production beyond re-assessed capacity) and the Gas Pooling Policy (which resulted in similar gas costs for all gas-based units).”
K. Ravichandran, Senior Vice President & Co-Head, Corporate Ratings, noted: “Due to high systemic inventory levels as on end of last fiscal, the overall fertilizer sales volumes by manufacturers/traders have fallen by 33 per cent year-on-year to 4.74 MMT during 2M FY17. However, fertilizer consumption at the farmers’ end has been better as the systemic inventory of P&K fertilizers have reduced by end-May 2016, vis-à-vis end-January 2016 levels. The performance of the fertilizer industry is likely to remain subdued in H1 FY217 due to high channel inventories, which are expected to get liquidated by the end of the kharif season. Overall, for the year FY2017, the upside in the overall volumes is likely to be limited at 2-5 per cent due to high systemic inventory levels at the beginning of the year. The urea industry would continue to benefit from subdued energy price environment which is likely to drive cost of production lower.
“However, on the P&K front, profitability pressure should remain for the players in FY2017, due to subdued DAP prices and lower NBS subsidy rates, while raw material prices have not fallen to that extent, besides currency depreciation remains a key risk. However, the recently concluded potash contract, at 32 per cent discount over CY2015 prices, would be beneficial as it provides the scope for growth for domestic MOP consumption during FY2017 by 5-7 per cent, given the low base, expectations of a normal monsoon and with reduction in retail prices,” added Mr Ravichandran.
Regarding energy prices and expected reduction in subsidy backlog, Ravichandran said:”The fertilizer sector continues to benefit from subdued energy prices. Pooled gas prices for urea units have fallen to about $6.5-6.6/MMBTU during April-May 2016 from ~ $7.2-7.3/MMBTU during Feb-Mar 2016, following 20 per cent reduction in the domestic gas prices w.e.f. April 1, 2016 and subdued spot LNG prices.
“Assuming domestic gas prices remain at $6.3-6.4/mmbtu for the entire FY2017, the subsidy savings for the GoI would be about Rs 30-32 billion for FY17. This, along with lower IPP urea prices and lower subsidy rates for P&K fertilizers, should reduce the subsidy backlog for the industry, that is, subsidy receivables should fall from over six months’ outstanding as on March 31, 2016 to four to five months’ outstanding as on March 31, 2017. Lower subsidy for the industry would in turn lead to lower working capital borrowings for the companies and favourably impact their profitability,” he added.
