Fertiliser companies dig in for hard times amid Russia-Ukraine war

Russia-Ukraine war leaves them prey to rising costs, supply disruptions even as administered prices are unchanged

The forthcoming kharif sowing season, which begins in the monsoon, could be hard on both fertiliser companies and farmers on account of the Russia-Ukraine war. Urea prices are projected to soar because the war has pushed up prices of natural gas, a key raw material that accounts for nearly 70 per cent of the cost of production. Non-urea fertiliser prices are likely to rise sharply, too.

In the rabi season, for which harvesting begins in spring, DAP or Di-Ammonia Phosphate is the most widely consumed fertiliser apart from urea. In the kharif season, the consumption of various grades of compound fertilisers, comprising nutrients nitrogen (N), phosphorus (P), potassium (K), sulphur (S) and collectively known as NPKS, goes up significantly in western and southern parts of India.

Overall, DAP is the most consumed fertiliser in the country after urea. Ever since the Russia-Ukraine crisis, not only have the prices of finished DAP, NPKS and Muriate of Potash (MoP) risen sharply, but that of the raw materials that go into their manufacturing has also jumped. The latest price spike has come on top of the already high rates prevailing for almost a year, which prompted the Centre to twice raise its subsidy share for non-urea fertilisers in this fiscal.

“The spike in global fertiliser prices will now start hitting home for domestic firms as typically, production starts 30-45 days after the purchase of raw materials. So, whoever will buy raw material to meet the expected kharif demand will have to pay a much higher price,” an industry official said.

He said fertiliser demand in the coming kharif season is expected to be robust because of the likelihood of a normal monsoon and increase in acreage of major crops due to better price realisation in the preceding rabi season.

India imports almost all of its MoP requirements, and around half its DAP consumption. In the case of NPKS, the country produces around 80 per cent of the annual requirement. In the case of urea, a third of its annual demand needs to be imported.

But more importantly, a bulk of the raw materials that goes into making non-urea fertilisers — phosphoric acid, potash, sulphur and ammonia — is imported. The war has thrown the industry into disarray because Russia, Ukraine and neighbouring Belarus account for almost 20 per cent of phosphoric acid imports. Russia is also one of the world’s largest exporters of ammonia and 10-15 per cent of India’s annual ammonia supplies come from Russia. That apart, almost 20 per cent of the finished MoP supplies come from Belarus.

The war and the consequent breakdown of the supply chain in the whole of that region has impacted the prices of all (see chart: “Growing pains”). Ammonia prices are also directly linked to natural gas availability, which has also seen a price spike since the war began.

 

Ever since the Russia-Ukraine crisis broke out in late February, the landed price of finished DAP in India has risen between 17 and 22 per cent. The landed price of phosphoric acid, fixed on a quarterly basis, has jumped almost 15 per cent. Though this price is not directly impacted by the war because supply contracts have been signed before the conflict, market players anticipate a sizable appreciation in rates in the next round of negotiations. Already, trade sources said the January-March quarter prices are among the highest in recent times.

MoP, which has been imported under contract till November 2021, has seen prices rise a steep 79 per cent once the conflict broke out. Ammonia prices were quoting at around $900 per tonne before the conflict, and are now at the highest ever since 1995 even for West Asian supplies.

Sulphur, prices of which closely mirrors global Brent crude, too, has jumped 50 per cent.

As far as availability of fertilisers is concerned, data from official websites show that in February 2022 around 10.05 million tonnes of all fertilisers (including urea, DAP and NPKS) was available in the country, 39.38 per cent less than the same period last year.

So how is the industry coping? A section of non-urea fertiliser makers thinks that unless the government shifts its focus from DAP to other grades of complex fertilisers (namely NPKS) and encourages farmers to go for the latter, the goal of promoting balanced fertiliser use could take a hit.

The government, according to industry sources, raised the subsidy on DAP to almost 50 per cent of the cost against 20-30 per cent for NPKS.

“This needs to be corrected immediately otherwise NPKS production will suffer. Already, plants are running at 70-80 per cent of capacity,” another manufacturer said.

Between DAP and NPK some experts suggest that the latter is more beneficial for ushering a more balanced application of nutrients.

Companies also want the Centre to enter into long-term raw material contracts with producing nations so that the reliance on open tenders is minimised. This is something Indian Potash Ltd, a public sector company under the department of fertilisers, did by signing a five-year deal with Israel Chemical Ltd to import 0.6-0.65 million tonnes of MoP a few days ago. The agreement will run from 2022 to 2027.

“We want such government-to-government agreements for other raw materials as well so that domestic DAP and NPKS manufacturers can benefit,” another industry official said.

The industry also wants price controls on DAP and NPKS to be removed and linked to the market. This would not only save the Centre a high subsidy burden, pay-outs of which are often delayed creating operational problems for manufacturers. Before FY21, Rs 30,000-40,000 crore was carried forward as the fertiliser subsidy backlog every year owing to under-provisioning in the Budget. At current rates, the subsidy could be significantly higher than the Budget Estimates for FY23.