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Aarati Krishnan

Private fertiliser producers such as Tata Chemicals are now well-prepared and eager to operate in a competitive environment where market forces will hold sway.

THE fertiliser sector would seem far from exciting to any investor scouting for money-making opportunities in the stock market. But with some of the private producers pursuing overseas opportunities with newfound aggression, this could soon change.

Selling prices on fertilisers, which are fixed by the government, have not been hiked enough to cover spiralling costs in the last two years. In the meantime, production volumes have been curtailed by paucity of raw materials and rising material costs. Inputs such as gas, phosphoric acid and ammonia — the key inputs for manufacture of fertilisers — are sourced mainly through imports. But the changing market dynamics have prompted some fertiliser producers to seek unconventional solutions to these problems.

Looking beyond the borders

To start with, the last two years have seen fertiliser companies acquire equity stakes in raw material suppliers located in resource-rich countries and regions such as South Africa and West Asia. Coromandel Fertilisers, a major phosphatic fertiliser producer, has acquired an equity stake in Foskor of South Africa, a leading global supplier of phosphoric acid. It also proposes to provide technical consultancy services to Foskor, with which it has a long-term supply arrangement for phosphates.

A joint venture with Groupe Chimique Tunisien (GCT) and Compagnie des Phosphates de Gafsa (CPG) to manufacture phosphoric acid in Tunisia, is also on the anvil. In January, Tata Chemicals was inducted as a one-third partner in Indo-Maroc Phosphore SA, a joint venture between the Chambal group and OCP, one of the largest phosphate material suppliers of the world. Tata Chemicals says that it expects this venture to "securitise" its phosphate supplies, so that it can avoid production outages of the kind it experienced last year.

Strengthening ties with global suppliers may not provide much protection to these producers from an upward spiral in input prices, which are bound to mirror market trends. But these deals have ensured that the three major private business groups that dominate the phosphatic sector now have secure supply arrangements in place. They would not have to cut back production because of raw material constraints.

Exploring new markets

Raw material supplies apart, some companies are also looking to the overseas markets to open up new export avenues for their products. Tata Chemicals was one of the leading bidders for a large Egyptian fertiliser company that was put on the block in June. The bid was not successful. If it had been, Tata Chemicals would have been able to access natural gas (a key input) at one-fourth of the prices prevailing in India. More important, the company was also hoping to use the Egyptian facility to export urea, a nitrogen fertiliser, at lucrative international prices of about $300 a tonne. This would have helped the company side-step domestic price controls on urea for at least a portion of its output. Now that the bid has failed, Tata Chemicals plans to explore options to set up new fertiliser manufacturing facilities in Bangladesh, which will cater to the local market.

Toning up domestic distribution

Companies have also been unveiling new marketing initiatives to tap domestic potential. Indo Gulf Fertilisers, a leading urea producer, rolled out neem-coated urea a couple of years ago, and reports a substantial increase in demand for this product.

This has helped create a differentiated product in a largely commodity-oriented business. It has requested the government to allow it to charge a marginally higher price for this product.

Players are also improving their distribution machinery to woo farmers to their brands.

Over the past couple of years, Indo Gulf Fertilisers has toned up its distribution machinery in select "command areas" that are close to its manufacturing facilities to save on freight costs. Through this, it hopes to improve market share for its brand — Shaktiman — in chosen markets.

The Tata group has set up a dedicated network of retail outlets — the Tata Kisan Sansars — that attempt to provide comprehensive crop solutions to the farmer. Apart from vending fertilisers, these outlets claim to provide knowhow to farmers on better agronomic practices and facilitate farm credit, all under one roof.

These initiatives seem to signal that the major private fertiliser producers are now well-prepared and even eager, to operate in a competitive environment where market forces will hold sway. It seems to be up to the government to nudge reforms in the fertiliser sector forward.

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