Subsidy glitch halts DAP production

The onset of monsoon means agricultural production could be impacted too; govt meeting today

Fertiliser companies have suspended the production of diammonium phosphate (DAP) as the central government has not yet fixed the subsidy for it. Consequently, supplies have shrunk and agricultural production in south India is likely to be adversely impacted as the monsoon has already set in over Kerala.

The government has called for a meeting of its officials and some industry representatives on June 8, where the subsidy issue may be resolved, said industry sources.

The extent of subsidy is linked to phosphoric acid price. Unless the subsidy is revised to account for the changed price, fertiliser units are reluctant to produce.

However, even if final decisions are taken tomorrow, it may be too late to insulate paddy, maize and sugarcane crops in South India from the fallout of the delay in fixing subsidy.

Officials of other fertiliser companies contacted by Business Standard declined to confirm on record the stoppage of production.

A Fertiliser Association of India (FAI) official said production has also been suspended at units in Uttar Pradesh, though this too, could not be confirmed independently. The official confirmed the suspension was not limited to the south, but was an all-India phenomenon.

Another FAI official, D D Khose, who is based in Mumbai, said, "Large companies such as Iffco, Zuari, Hindalco and Paradeep Phosphates have suffered. This is mainly because the contract for phosphoric acid is yet to be finalised by the Phosphoric Acid Consumer Group."

A Hindalco official refused to comment on the issue.

The current maximum price for a tonne of DAP is Rs 9,350. Following a steep increase recently in the price of phosphoric acid, a key raw material in DAP production, industry sources said that they would lose about Rs 2,500 for every tonne of DAP sold.

Urea and DAP are the main products of the Indian fertiliser industry. In 2004-05, DAP consumption in India was 6.3 million tonne, and along with urea Last year, the subsidy ( the reimbursement offered by the government to bridge the gap between manufacturing cost and sale price) was fixed by end-April said a company official. He added that the efficacy of fertilisers hinged on timing. A delay in usage would limit their impact.

Even if the subsidy is fixed tomorrow and phosphoric acid related supply issues sorted out, it could take almost six weeks before contracts are tied up and the material shipped from key production centres in North Africa, said industry sources.

The impact of the delay would not be significant in states such as Uttar Pradesh and Harayana because fertiliser consumption there is more in September, said an industry source.

Central to the problem that fertiliser companies face is the recent increase in the price of phosphoric acid. On April 30, contracts entered in to earlier were running at $402 a tonne (with 150 days credit), while the "counter" was running at $502 a tonne.

Industry officials said that following negotiations last month, most companies are willing to pay about $445 a tonne, while phosphoric acid suppliers have said that they would supply at a price of $480 a tonne.

This has resulted in companies producing low grade complex fertilisers and curtailing production of DAP.

An official at one fertiliser company said there was a possibility that the government initiated meeting on June 8 could reach a consensus on the phosphoric acid price that Indian industry should negotiate for.