FOR the Indian fertiliser industry, which remained severely constrained under the government regulation for more than a decade, some light appears at the end of the tunnel. The past couple of years have witnessed a gradual but positive change in the government policies towards the industry. The changes so far may not boost the industry’s profitability in the short run, but they do impart flexibility and cut the manufacturers dependence on subsidy.
Recently the government announced nutrient-based subsidy (NBS) policy and price decontrol for non-urea fertilisers, while raising the urea prices by 10% to be effective from April 1, 2010. Henceforth, the subsidy component for non-urea fertilisers will remain fixed while the retail price will fluctuate in line with international prices. However, the government has so far not disclosed the specific subsidies or the implementation mechanism.
Since competitive pricing becomes possible, companies that have better sourcing, distribution or operational efficiencies and can keep their costs low can see an improving profit margin. The new policy also proposes incentive for innovative products and investment in superior technology or greater capacities. For urea manufacturers, the 10% increase in retail prices means little apart from reduced subsidy dependency, which had gone up to 65% - 75% of its fertiliser revenue in FY09.
During the December 2009 quarter, the domestic fertiliser companies showed an excellent performance with the aggregate profit of 24 fertiliser companies growing 88.5% against the year-ago level, although the sales fell 28.5%. Nagarjuna Fertilisers, Tata Chemicals, Deepak Fertilisers and Aries Agro led the charge with multi-fold jump in their profits.
The industry, which had been a darling for investors, appears to have hit a slow lane in the past few months. The ET Fertiliser Index, which outperformed the markets gaining 122.5% against 91.5% gain in benchmark ET 100 index over the past one year, has underperformed in the past three months.
The global population continues to grow and is expected to reach nine billion by 2050. At the same time, the economic growth is changing the food habits of the people as the preference towards high-protein food, such as meat, rises. Since fertilisers play a key role in improving the productivity of land, the industry’s future looks bright.
Although there has been a little investment in the domestic fertiliser industry over years, globally the industry is witnessing a flurry of takeovers. World’s largest urea manufacturer Norwegian company Yara recently paid $4.1 billion to acquire its American peer Terra. Similarly, Brazilian mining major Vale Corporation recently acquired local fertiliser businesses of two US-based companies for over $4.8 billion. BHP Billiton, the world’s largest mining company, also bought out Canadian fertiliser manufacturer Athabasca Potash for $320 million in January. In the meanwhile, Canada-based Agrium continues to woo the shareholders of rival fertiliser player CF Industries for an acquisition valuing it at $5.36 billion. Industry experts are expecting more such deals in the near future, including deal such as between USbased Mosaic and Brazil’s Copebras.
The future appears exciting for the fertiliser industry globally, and the Indian industry is gradually coming out of the government-imposed shackles. The recent changes have been slow, but mark a positive trend. In July 2008, the government shifted to import-parity pricing from earlier cost-plus approach. April 2009 onwards, the industry benefited from the increasing availability of natural gas. Now the nutrient-based pricing is introduced. Although, these won’t boost the industry’s profitability much, they will incentivise further investments. While the gradual process of deregulation moves ahead, the industry will continue to gain from higher volumes or cost controls.
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