Fertiliser price cut unlikely to impact private players

Markets seem to believe that the new price will be applicable to all fertiliser companies who are producing these products

Fertiliser stocks were in for a surprise with the government deciding to reduce prices of non-Urea fertilisers. Coromandel International, which largely deals in non-urea fertilisers took the brunt of the attack falling by 11.38% to Rs 221, EID Parry fell by 4.8%, Madras Fertiliser by 3.36% and Deepak Fertiliser by 2.64%.

The reaction was on account of a press conference held by Ananth Kumar, Minister of Chemical and Fertiliser where he said that major public sector fertiliser manufacturers – RCF and NFL have decided to bring down the MRP of DAP (Di ammonium phosphate) fertiliser by Rs 2,500 per tonne and of MOP (Muriate of Potash) by Rs 5,000 per tonne with immediate effect.

In reaction to the cut in price, stock prices naturally fell as market believed that fertiliser companies would take a hit on account of this reduction. However, markets seemed to have generalised the statement thinking that the new price will be applicable to all fertiliser companies who are producing these products.

In an interview with CNBC, Satish Chander of Fertiliser Association of India (FAI) pointed out that the rates were only meant for the two public sector companies. As government is the owner of these companies it can ‘order’ them to cut prices.

But one would expect market forces to come in play if two national level fertiliser companies and other state government producers start reducing prices. Chander pointed out that the two companies mentioned by the minister do not even account for five per cent of the market in DAP and MOP. Thus these companies will have little impact on pricing power of the private sector players.

Further, private sector players are already selling these products below the MRP. Take for example DAP, which has an MRP of Rs 24,000 per tonne. The minister had pointed out that its price will be reduced by Rs 2,500 per tonne; however, private players are already selling it at Rs 22,000 per tonne.

Chander pointed out that private sector players had already taken a price cut in the range of Rs 1,000 – Rs 1,400 per tonne for NPK and Rs 4,000 per tonne for potash fertiliser which has been passed on to the farmers. This was informed to the minister during their meeting with him. There was no case for any further reduction immediately.

The government seems to be making most of the situation by announcing the reduction in the press conference, which did not go well with market participants who felt that government interference has once again increased. Prakash Gaurav Goel of ICICI Securities pointed out that market reaction has more to do with government intervention in the sector rather than ground realities. Market price of fertilisers are trading closer to the reduce price recently announced. Goel however pointed out that the way the announcement was made will make send a message to the farmers that government is reducing prices that might pressurise the companies to reduce prices further.

Though the government might try to score brownie points by claiming it to be a farmer friendly move, the fact is the reduction has been necessitated on account of market conditions and falling raw material prices. Government to their credit has taken steps to change the consumption pattern of fertiliser trying to persuade farmers to reduce usage of nitrogen rich Urea and move towards other complex fertilisers that supply potassium and potash.

However, the difference in price is still too huge for farmers to shift to other fertilisers. Urea, which is subsidised by the government sells at Rs 5,360 per tonne while MOP sells for Rs 11,000 per tonne and DAP at Rs 22,000 per tonne.

The present set of price reduction is unlikely to have a long standing impact on the stock prices. Ironically, RCF which has been ‘told’ to reduce prices closed early 1.8% higher over previous day’s close.