Ripples from the rupee’s sharp depreciation are impacting the import-sensitive fertiliser sector in many ways.
Fertiliser companies are cutting imports, delaying shipments and negotiating hard for discounts from suppliers. On the domestic front, weak demand may trigger a price cut, adding to existing worries.
The sector faces a huge demand and supply gap in India. While urea is completely regulated, supply and pricing of two other major varieties, diammonium phosphate (DAP) and muriate of potash (MoP), is deregulated.
“For urea, the government imports and allocates to fertiliser companies, MoP is completely imported and DAP demand is met by 70 per cent imports. In such a scenario, the government adopts a floating market price (MRP) and a fixed subsidy for DAP and MoP , with a fixed MRP and floating subsidy for urea,” explained a fertiliser company official.
They say demand for fertiliser in the domestic market is weak till May-June, when the kharif season starts, except for the south where there is some activity due to the retreating monsoon.
The total installed capacity of the industry is 17.7 million tonnes. According to 2009-10 data, annual domestic consumption of fertilisers has increased from 70,000 tonnes in 1951-52 to 26.4 million tonnes in 2009-10.
So, companies are proposing special discounts for dealers to stock fertilisers and clear their own inventory before March 2012. “Direct selling to farmers will be too difficult, even with discount and no sale will increase inventory cost for the companies. Therefore, we propose to lure dealers with credit to buy the product and pay when they offload it to the farmer", said a company source.
“The prices will have to be revised downwards from January - February,” said an official.
Indian Farmers Fertiliser Cooperative Limited (Iffco) has already announced price cuts in DAP, and announced this move would amount to a Rs 400-crore loss in its balance sheet. Iffco buys in bulk and thus has secured $35 per tonne discounts from foreign suppliers in DAP.
All other companies are negotiating existing contracts even if the shipment is done. The payment is done at the prevailing spot rate of the rupee- dollar, even when the contracts have been cleared three months before. “Overseas suppliers are offering 3.5-4 per cent discount to the MRP and not more. This is because many global suppliers are also running on lean capacity due to easing in global demand,” said officials of a private fertiliser company.
However, many companies are delaying the shipment if the letter of credit (credit period) has a few months time to expiry , hoping for recovery in the rupee-dollar exchange rate. Some have decided to go slow on imports and cut the shipment quantity as well. Currently, the annual fertiliser subsidy stands at Rs 90,000 crore.
