Fertilizers And Pesticides

Fertilizers

Background

Fertiliser is a vital input to agricultural produce and contributes to increase in the yield of the agricultural acreages which in constrained acreage scenario, is the only way of increase in agricultural production. In a country like India, wherein the farmer database is not well maintained, fertiliser subsidies (and other input subsidies) are a more effective form of distributing the farm incentives.

The fertiliser subsidies have been high at around 6%-8% of the Government finances. The Indian fertiliser industry contributes around 0.6% to the GDP on the basis of value added.

Fertilisers can be classified into organic fertilisers and chemical fertilisers, of which chemical fertilisers are more widely used. The chemical elements nitrogen (N), phosphorus, and potassium are the primary nutrients.

Nitrogenous fertilisers impart colour to plants and increase vegetative growth. Nitrogenous fertilizers contain ammonia in the form of ammonium sulphate and ammonium chloride or nitrate nitrogen in the form of ammonium nitrate and calcium ammonium nitrate or amide nitrogen as in urea.

Phosphatic fertilisers include triple superphosphate (TSP), double superphosphate (DSP) and single superphosphate (SSP), and are used to strengthen the roots of a plant. SSP is a straight phosphatic fertiliser whereas DAP is a complex fertilizer. SSP production and consumption have been declining over the years, due to lower subsidies and the farmers’ preference for DAP because of its ammonium and phosphatic content.

For Urea, there has been an increase in capacity mainly on account of set up of joint venture projects in the Middle East. In case of other fertilisers, although the extent of over-capacity is lower, the level of imports is higher.

Size

The installed capacity as on 31-10-2005 has reached a level of 120.61 lakh MT of nitrogen (including installed capacity of 205.12 lakh MT of urea after reassessment of capacity of which the non functional capacity is estimated at 3.30 lakh MT) and 56.20 lakh MT of phosphatic nutrient, making India the 3^rd largest fertilizer producer in the world.
India is also the third largest consumer of urea in the world, following China and the US of Nitrogenous fertilizers. Urea accounts for over 95 % of total nitrogenous fertilisers.
Phosphatic fertilisers account for around 25 per cent of the total fertiliser consumption. Of the total consumption of phosphatic fertilisers (nutrient-wise), SSP accounts for 7-8 per cent, while the balance is met by DAP. Of the total domestic phosphatic capacity estimated to be 5.6 million tpa, DAP accounts for 60 per cent, SSP for 18 per cent, and others (nitrophosphates and NPKs) for 22 per cent.

Structural Characterstics

The sector is highly capital intensive with fixed assets in the industry in excess of Rs 270 billion.
The government controls influenced the degree of competition as also marketing and distribution strategies of fertiliser companies. Besides, it also provided a 12 % post-tax return on investment. The norms on marketing and distribution of fertilizers determined the level of competition in the industry by specifying the states as well as the quantum of supply to be sold in these states by each company.
The fertiliser industry, especially the nitrogenous fertiliser segment, is very energy intensive. Energy sources are used not only as feedstock, but also to meet the power and fuel requirements of the industry. The feedstocks are used to produce ammonia, which is then converted into nitrogenous fertilisers.
Presently there are 57 large sized fertilizer plants in the country manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Of these, 29 are urea units, 20 units produce DAP and complex fertilizers, 7 low analysis straight nitrogenous fertilizers and 9 manufacture ammonium sulphate as by-product.
There are also about 64 medium and small scale units in operation producing SSP.
Presently, most of the new plants are being set up near the feedstock sources to exploit the locational advantage. With the unavailability of cheap natural gas, the Indian urea producers are cost uncompetitive. Natural gas prices are much higher in India than prices prevailing in the Middle East where the cost of gas is nearly zero, as it is otherwise flared. Such feedstocks are a major cost element and account for over 44 % of the net sales.
The fertiliser industry is very capital intensive and the average cost of setting up a Greenfield urea project is anywhere between Rs 14,000-16,000 per tonne. Consequently, the fertiliser sector's debt-equity levels have been high.
Dependence on rainfall is a highly distinct characteristic of the fertiliser industry for growth in demand. Fertiliser demand picks up during seasons of good rainfall, which helps fertiliser companies to improve their profitability through volume growth while drought conditions lead to high inventory levels and decline in profitability.
Access to technology is a key performance determinant in the fertiliser industry as it is generally imported. Consequently, the basic process designs in the fertiliser industry have been licensed. In the case of ammonia, urea and phosphatic plants, established international processes have been installed. Technology acquisition costs are high due to the limited number of suppliers worldwide.
The Indian fertiliser industry is provided assured returns linked to a particular level of efficiency. Changes in concessions are primarily on account of changes in prices of phosphoric acid, ammonia and di ammonium phosphate. Therefore, there is lower level of cyclicality in the industry
In case of urea, the level of competition has been low. Imports are allowed only through state owned agencies and are therefore controlled. India is not competitive in case of other fertilisers as well as it does not possess cost effective phosphatic raw materials. However, the differential subsidy provided to the phosphatic manufacturers provides protection to these players

Policy

Fertiliser sector is provided with the subsidies from the Government. The fertiliser subsidies have been successful in increasing fertiliser consumption, improving agricultural yields, and increasing indigenous foodgrains production. Fertiliser subsidies have been high at around 6%-8% of Central Government’s revenue receipts. Further, they have increased at a fast rate on account of deregulation of fuel prices and removal of fuel price preference for the fertiliser sector (for urea), and depreciation of the rupee exchange rate (for decontrolled fertilisers).
It is not considered economically prudent for a country, which does not possess any cost-effective indigenous raw material for the production of any fertiliser, to target 100% self-sufficiency in fertiliser production. This is supported by the fact that the freight costs for all the key raw materials (natural gas for nitrogenous fertilisers and phosphate rock for phosphatic fertilisers) are very high. Therefore, the recent committees set up by the Government for deregulation of the fertiliser sector have recommended that the self-sufficiency target be lowered.
Self-sufficiency currently being high, the Government of India has been tightening the cost parameters thereby reducing the extent of returns to the producers. The Government has also replaced the erstwhile retention pricing scheme for urea with the group concession scheme. The shift to group concession scheme has cut returns to the inefficient producer but has not provided any gains to the efficient producers.

Outlook

With the likelihood of area expansion under crops looking difficult, fertilisers are crucial inputs for improving the agricultural output and yields.
Assuming the slow growth in agricultural production, the fertiliser demand growth can be assumed at a slow rate of around 2%-4.0%. This reflects the slowdown in demand growth in the recent past compared to the growth witnessed till the mid-nineties.
The slow growth rate of fertiliser demand is also corroborated by the tenth plan working group demand estimates of urea demand growing at a rate of 4.0% per annum over the next five years
The larger urea companies are setting up joint ventures abroad for fertiliser plants, particularly in the Middle East, and the output of these plants is expected to be exported to India.

References: ICRA, CRISIL reports

Annual Report 2005-06, Department of Fertilizers, Ministry of Chemicals & Fertilizers