Recent changes in the policy for fertilisers are welcome, but some concerns remain
How has the domestic fertiliser industry shaped up over the past few decades?
The fertiliser industry has always been a strategically important industry for India due to its role in ensuring India’s food security. Ever since the pre-independence era, the government has had an interventionist policy with the aim of keeping the industry under its control. Even after liberalisation in 1991, fertiliser remained the only sector which bypassed reforms. As input prices shot up and the government didn’t hike fertiliser prices, the subsidy burden became manifold. But rather than tackling the problem in a straight-forward manner, policy makers started squeezing the industry in a bid to control their subsidy bill and kept fertiliser prices unchanged. As a result, the investment and capacity addition in this industry came to a standstill. The domestic fertiliser industry has not added any fresh capacity since 1999.
The past one year has been extraordinary, as the prices of fertilisers and their inputs shot up abnormally. As a result, the subsidy bill, which used to stay at Rs 10,000-20,000 crore annually, jumped up to Rs 50,000 crore in FY08 and this year, it is expected to cross the Rs 100,000-crore mark. At present, in phosphatic and potassic fertilisers, 80% of realisation comes from government subsidy. In the case of urea, it is 55%. This is unprecedented with no parallel in history. Just three years ago, only 20% of the fertiliser industry’s revenues used to come from subsidies and 80% from the market.
Fertiliser and input prices have crashed since the government changed its policies for fertiliser subsidy. What does this mean for the industry? When the government realised that its fertiliser pricing policy had made the sector unattractive for investors, it made some policy changes, hoping to attract investments in the fertiliser sector. For the first time, there was a departure from the cost-plus method, linking the subsidy payments to benchmark import parity prices. Earlier, there used to be two subsidies— one for domestically-produced fertilisers and another for imported fertilisers. But now, there is just one subsidy linked to the import parity prices. These is an important departure from the earlier policies, which is a good sign. However, there are certain concerns, particularly due to the recent crash in prices in the international market. Now there is a need to fine-tune the cap and floor prices to make it relevant in the current scenario.
Over the next five years where will RCF’s growth come from? What can retail shareholders expect from the company?
We have lined up several new capacity additions over the next five years that will add to revenues. Two of our plants were shut down in Trombay — a 300,000-tpa urea plant due to lack of gas, and a 350,000-tpa complex fertiliser plant due to an accident. Both these plants will be up and running by mid-’09. A further 2.5 lakh-tonne capacity will come on stream from the debottlenecking of the Thal plant and around 2.5 lakh tonnes of DAP capacity will come up in Rajasthan. Similarly, some of these large capital projects will capitalise in five years’ time, which includes expansion of more than one million tonne at Thal, revival of the Barauni unit, coal gassification and some joint venture projects. We may not have resources for all these large projects, but whatever materialises first, we will proceed with that. Profitability is limited in the fertiliser sector. We have been distributing nearly 40% of our profits by way of dividends. However, due to our huge equity base, that doesn’t result in an attractive dividend yield. We can’t raise the payout because we need some profits to plough back into the company. We are investing in our plants and good projects to create long-term value for our shareholders.
Increasing natural gas availability is expected to benefit the fertiliser industry. What is the ground reality?
At the moment, the requirement of natural gas-based fertiliser plants is 42 million metric standard cubic metres per day (mmscmd), against the supply of 28 mmscmd. Then the revamp, conversion of naphtha-based plants to gas, debottlenecking, brownfield expansion and so on will bring up more demand. At the same time, the availability of natural gas is expected to grow by 15 mmscmd by mid-’09, as Reliance Industries’ KG basin fields start production. So, as per the government’s current stand of giving first priority to the fertiliser industry, this will be entirely consumed by the industry against the existing shortfall. It will bring down the government’s subsidy burden, while the industry will benefit from higher volumes.
Is diversifying away from fertilisers a viable option for RCF?
As our core area has strategic importance for the country, we will have to continue with that. But at the same time, we are investing in the chemicals sector. We recently ramped up all our chemical plants. We will be adding an argon plant at Thal this year and are revamping methanol and nitric acid plants. RCF became the first company to introduce Rapidwall load-bearing panels made from gypsum, which is a substitute for bricks in building houses. The commercial production is expected to start by January ’09. We have set up a joint venture with Fertilisers and Chemicals Travancore (FACT) for the gypsum project. We are also planning to foray into wind power. However, since fertiliser projects are highly capital-intensive — for example one ammonia-urea plant will cost Rs 4,500 crore — they will get a larger share in our capital expenditure plans.
The government is also trying to revive some old fertiliser plants, which were earlier shut down. How far is this feasible technologically?
When you talk of revival of old plants, it is not really a revival. It is basically setting up a new plant at the same location. So, the only thing from the old plant that will be put to use is the land and supporting infrastructure. The existing machinery, if any, will have to be replaced with totally new equipment. As such, the capital expenditure will be huge. At the moment, the government is reviving one plant at Barauni through the public sector, for which, a special purpose vehicle has been set up between RCF, National Fertilisers and Kribhco. The economics of these plants will greatly depend on the availability and price of natural gas.
(For the complete text of the interview, log on to www.etintelligence.com)
How has the domestic fertiliser industry shaped up over the past few decades?
The fertiliser industry has always been a strategically important industry for India due to its role in ensuring India’s food security. Ever since the pre-independence era, the government has had an interventionist policy with the aim of keeping the industry under its control. Even after liberalisation in 1991, fertiliser remained the only sector which bypassed reforms. As input prices shot up and the government didn’t hike fertiliser prices, the subsidy burden became manifold. But rather than tackling the problem in a straight-forward manner, policy makers started squeezing the industry in a bid to control their subsidy bill and kept fertiliser prices unchanged. As a result, the investment and capacity addition in this industry came to a standstill. The domestic fertiliser industry has not added any fresh capacity since 1999.
The past one year has been extraordinary, as the prices of fertilisers and their inputs shot up abnormally. As a result, the subsidy bill, which used to stay at Rs 10,000-20,000 crore annually, jumped up to Rs 50,000 crore in FY08 and this year, it is expected to cross the Rs 100,000-crore mark. At present, in phosphatic and potassic fertilisers, 80% of realisation comes from government subsidy. In the case of urea, it is 55%. This is unprecedented with no parallel in history. Just three years ago, only 20% of the fertiliser industry’s revenues used to come from subsidies and 80% from the market.
Fertiliser and input prices have crashed since the government changed its policies for fertiliser subsidy. What does this mean for the industry? When the government realised that its fertiliser pricing policy had made the sector unattractive for investors, it made some policy changes, hoping to attract investments in the fertiliser sector. For the first time, there was a departure from the cost-plus method, linking the subsidy payments to benchmark import parity prices. Earlier, there used to be two subsidies— one for domestically-produced fertilisers and another for imported fertilisers. But now, there is just one subsidy linked to the import parity prices. These is an important departure from the earlier policies, which is a good sign. However, there are certain concerns, particularly due to the recent crash in prices in the international market. Now there is a need to fine-tune the cap and floor prices to make it relevant in the current scenario.
Over the next five years where will RCF’s growth come from? What can retail shareholders expect from the company?
We have lined up several new capacity additions over the next five years that will add to revenues. Two of our plants were shut down in Trombay — a 300,000-tpa urea plant due to lack of gas, and a 350,000-tpa complex fertiliser plant due to an accident. Both these plants will be up and running by mid-’09. A further 2.5 lakh-tonne capacity will come on stream from the debottlenecking of the Thal plant and around 2.5 lakh tonnes of DAP capacity will come up in Rajasthan. Similarly, some of these large capital projects will capitalise in five years’ time, which includes expansion of more than one million tonne at Thal, revival of the Barauni unit, coal gassification and some joint venture projects. We may not have resources for all these large projects, but whatever materialises first, we will proceed with that. Profitability is limited in the fertiliser sector. We have been distributing nearly 40% of our profits by way of dividends. However, due to our huge equity base, that doesn’t result in an attractive dividend yield. We can’t raise the payout because we need some profits to plough back into the company. We are investing in our plants and good projects to create long-term value for our shareholders.
Increasing natural gas availability is expected to benefit the fertiliser industry. What is the ground reality?
At the moment, the requirement of natural gas-based fertiliser plants is 42 million metric standard cubic metres per day (mmscmd), against the supply of 28 mmscmd. Then the revamp, conversion of naphtha-based plants to gas, debottlenecking, brownfield expansion and so on will bring up more demand. At the same time, the availability of natural gas is expected to grow by 15 mmscmd by mid-’09, as Reliance Industries’ KG basin fields start production. So, as per the government’s current stand of giving first priority to the fertiliser industry, this will be entirely consumed by the industry against the existing shortfall. It will bring down the government’s subsidy burden, while the industry will benefit from higher volumes.
Is diversifying away from fertilisers a viable option for RCF?
As our core area has strategic importance for the country, we will have to continue with that. But at the same time, we are investing in the chemicals sector. We recently ramped up all our chemical plants. We will be adding an argon plant at Thal this year and are revamping methanol and nitric acid plants. RCF became the first company to introduce Rapidwall load-bearing panels made from gypsum, which is a substitute for bricks in building houses. The commercial production is expected to start by January ’09. We have set up a joint venture with Fertilisers and Chemicals Travancore (FACT) for the gypsum project. We are also planning to foray into wind power. However, since fertiliser projects are highly capital-intensive — for example one ammonia-urea plant will cost Rs 4,500 crore — they will get a larger share in our capital expenditure plans.
The government is also trying to revive some old fertiliser plants, which were earlier shut down. How far is this feasible technologically?
When you talk of revival of old plants, it is not really a revival. It is basically setting up a new plant at the same location. So, the only thing from the old plant that will be put to use is the land and supporting infrastructure. The existing machinery, if any, will have to be replaced with totally new equipment. As such, the capital expenditure will be huge. At the moment, the government is reviving one plant at Barauni through the public sector, for which, a special purpose vehicle has been set up between RCF, National Fertilisers and Kribhco. The economics of these plants will greatly depend on the availability and price of natural gas.
(For the complete text of the interview, log on to www.etintelligence.com)
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