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Aarati Krishnan

THE players in the phosphatic fertiliser industry are certainly in better shape to face the challenges thrown up by decontrol than their counterparts in nitrogenous fertilisers. After all, unlike urea manufacturers, players in phosphatic fertilisers are used to keeping a tight leash on costs, thanks to a subsidy system which ensures uniform selling prices and a flat subsidy across players. Over the past couple of years, players in the industry have been actively researching opportunities for backward integration, more efficient procurement and scale economies.

But going forward, pressures on costs are only likely to intensify. With the Government looking to recast the fertiliser subsidy Bill, a further streamlining of the concessions now granted to phosphatic/complex (combinations of nitrogen and phosphate nutrients) fertilisers is likely. In fact, the Tariff Commission is currently examining a proposal to revamp the system of concessions for the industry. So how are the players preparing themselves for this changing situation?

Chasing scale economies

A free-pricing regime would automatically make domestic complex fertiliser manufacturers vulnerable to import competition and a larger scale appears to be one of quickest routes to cost efficiency. For one, players such as Coromandel Fertilisers, Godavari Fertilisers, GSFC and Zuari Industries have recently commissioned brownfield expansion projects at their existing facilities for DAP (di-ammonium phosphate) and complex fertilisers. They have also been actively scouting for acquisition opportunities. Even greenfield capacities such as those of Oswal Fertilisers in Paradeep (15-lakh tonnes of DAP a year) have embraced scale.

The divestment programme, which has put some PSU fertiliser capacities on the block, has hastened the process of consolidation. For instance, the recent acquisition of Paradeep Phosphates by the Zuari-Chambal group has put DAP capacities of around 20-lakh tonnes under the group's control, roughly a third of the total DAP capacity in the country. Similarly, the EID-Parry group currently markets around 15-lakh tonnes of phosphatic and complex fertilisers. If the company is successful in acquiring Godavari Fertilisers, it would control around 22-lakh tonnes of phosphate capacity.

The consolidation could have a two-fold impact on the market. One, it could help larger players reduce costs through scale economies and put them in a better position to counter competition from imports. And two, it could endow the larger players with greater pricing power, a valuable weapon in a decontrolled pricing regime.

Rejigging the supply chain

Pressures on the subsidy bill have ensured that the net realisations to the manufacturers of phosphatic/complex fertilisers have remained largely unchanged over the past five years (see accompanying piece). However, the prices of key inputs such as phosphoric acid, ammonia, naphtha and fuel oil have been quite volatile over this period. The players have tried to manage this situation through backward integration, better procurement practices and tie-ups for sourcing of raw materials.

In the late 1990s, the bulk of complex and phosphatic fertiliser capacities were dependent on imported intermediates such as phosphoric acid and sulphuric acid. Similarly, a significant proportion of the complex fertiliser manufacturers used naphtha or urea for manufacture of complex fertilisers.

However, of late, players have been integrating into the manufacture of phosphoric acid for cost savings. Though they still have to depend on imported rock phosphate for the basic input, globally, rock phosphate prices have historically been more stable than phos acid prices. Coromandel Fertilisers, which is among the lowest cost producers of complexes is backward integrated into phos acid and sulphuric acid and runs a captive power plant. One of the first moves by the Zuari-Chambal group after its takeover of Paradeep Phosphates was to initiate de-bottlenecking and expansion of its phos acid plant.

Dynamic make-or-buy

While backward integration has proved economical in the case of phos acid, it has proved detrimental in the case of ammonia. High naphtha prices have made it much cheaper for companies to import ammonia for use in complex fertilisers. However, only a few companies have actually made the changeover. Companies such as FACT, Madras Fertilisers and Zuari Industries continue to rely on indigenously manufactured urea for producing complex fertilisers. Unless they changeover, they could continue to have higher cost structures than players such as Coromandel Fertilisers which have switched over to imported ammonia. However, going forward, the decision to make or buy a particular intermediate will have to be constantly reviewed if companies are to retain their cost advantage.

Better procurement practices

Companies have also sought to manage procurement costs through collective buying and long-term sourcing arrangements. In April 2002, the Fertiliser Association of India floated a bulk tender for procurement of phos acid on behalf of a consortium of private manufacturers, which resulted in cost savings of around $15 per tonne. Companies have also entered into joint ventures with large phosphate producers in Africa and the Middle East for sourcing of rock phosphate and phos acid. But despite their recent efforts at trimming costs, the next few years are likely to be difficult for manufacturers of complex/phosphatic fertilisers.

Capacities race ahead

Despite an uncertain policy dispensation, capacities for phosphatic/complex fertilisers have shot up over the past three years. Between 1999 and 2002, phosphate capacities have risen by close to 20-lakh tonnes to 52-lakh tonnes and now almost match the annual consumption requirements. With both public and private sector players looking to pep up the productivity of their existing facilities through modernisation and de-bottlenecking operations, the surplus supply situation is only likely to worsen.

Import competition

However, though domestic producers have augmented their capacities, part of the domestic capacities could well be rendered unviable by imports.

Given the low levels of import duty on fertilisers such as DAP (the WTO-bound rate is just 5 per cent), companies may have to live with the threat of low-priced competition from imports.

How the industry shapes up on this front will hinge mainly on the subsidy regime for complex/phosphatic fertilisers going forward. Any move towards free pricing of phosphatic/complex fertilisers would level the playing field between domestic manufacturers and imports, forcing them to compete with imported products.

Spike in input prices

A near-term threat for domestic manufacturers could also arise from a reversal in price trends for key inputs such as ammonia and rock phosphate. In 2001-02, the prices of imported ammonia were around 17 per cent lower than in the previous year, that of rock phosphate 10 per cent lower, sulphur 23 per cent , and naphtha 20 per cent. In the past few months, international prices of both ammonia and phosphates have continued to be either stable or declining.

But the situation could be reversed with a recovery in fertiliser offtake or a spike in oil prices. If this does happen, given their stable realisations, the profit margins of complex/phosphatic fertiliser makers could be hit.

On an overall analysis, from an investment perspective, there seem to be a number of uncertainties surrounding the prospects of complex/phosphatic fertiliser companies. However, the move towards a stable policy dispensation for the sector and the recent consolidation are positive developments for shareholders in some of the private sector companies.

This would make for greater predictability in the financials and prospects of companies operating in the sector. After all, managing the dynamics of demand, supply and prices in a free market, can scarcely be more difficult than anticipating and managing the whims of the policy-makers.

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