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Aarati Krishnan

The Paradeep Phosphates factory... One of the PSUs acquired by private players.

AFTER greeting the government's initial attempts at restructuring subsidies with protests and misgivings, the fertiliser industry appears to be adapting quite well to the transition. Players are getting together to extract a better bargain from raw material suppliers, working hard to derive greater efficiencies from their manufacturing and marketing processes and bidding aggressively for capacities which are on the block, to attain economies of scale.

These are, no doubt, trying times for the players in both the urea and phosphatic segments of the industry. Recently, urea producers switched from a cost-plus system of subsidy payment, to one that pays each producer a flat rate of subsidy per tonne of fertiliser produced. In phosphatic fertilisers, the Government has tightened its purse strings by reworking the formula for calculating subsidies and mopping up part of the subsidy, which was being paid earlier. Both measures are likely to knock down the sales realisations for majority of players. That too, at a time when input prices appear to be on an upward spiral.

But, for a change, the key players in the sector are busy preparing for the challenge, rather than complaining about it. One, players have been giving their raw material suppliers a taste of what collective bargaining can do. A couple of months ago, some phosphatic fertiliser producers decided to combine their requirements of a key input — phosphoric acid — and procure it through a global tender floated through the Fertiliser Association of India (FAI).

After some tough bargaining, the FAI managed to clinch the purchase at $356 per tonne, at a good 10 per cent discount to the price initially quoted by the supplier's cartel. Cartelised buying may continue to benefit Indian producers. As one of the largest buyers of fertilisers and fertiliser materials in the world markets, it is about time India started to leverage its bargaining power to procure materials at finer prices. Players are also driving a harder bargain with other major suppliers such as the oil and gas companies and Petronet LNG which is slated to initiate LNG supplies to the industry in 2004.

Second, major private producers such as Indo Gulf Fertilisers, Coromandel Fertilisers and Tata Chemicals are making an all-out effort to finetune their manufacturing and marketing for cost savings. Apart from procuring raw materials from the cheapest source, these players are streamlining inventory and straightening out bottlenecks in the distribution chain, for savings in working capital. Even the co-operative fertiliser giants — Iffco and Kribhco — have embarked on a restructuring exercise. Both have mooted proposals to return part of the government's equity, so as to attain greater autonomy in their operations.

Third, with the increasing realisation that better competitiveness can come only from scale, some of the long-term players in this business are investing aggressively in capex programmes. Players, such as the Zuari-Chambal group in the northern markets and the Murugappa group in the south, have aggressively bid for, and acquired, PSU fertiliser capacities that were on the block. Both groups have lined up large investments over the next few years to modernise the facilities at the acquired units and result in more integrated, low-cost operations.

Along with these intiatives, the industry is also giving brands and marketing networks a push. Innovative efforts designed to provide farming solutions, rather than stand-alone products to farmers, are underway. The extensive Tata Kisan Kendra network, a retail distribution network developed by the Tata group to market an entire range of farm inputs, is one such pioneering move. As government controls on marketing and distribution of fertilisers are relaxed, it is clear companies will have to focus to a larger extent on their brands. Advertising and brand building are receiving renewed attention as companies brace themselves up for a free marketing regime.

True, there are still quite a few hurdles to be crossed before the fertiliser sector makes the transition to complete decontrol. But the constructive action that the major players have taken to meet the challenges of transition, suggest that the biggest battles have already been won.

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