The volume growth of the fertiliser sector appears cautious in the current financial year due to prospects of a weak monsoon, however domestic gas price reduction is a positive for urea, says a report.
ICRA Research, in its fertiliser industry report said that despite good sowing levels due to healthy early monsoons, rainfall in the latter part of the monsoon season has not been encouraging - overall monsoons at 14 per cent lower than the long-term average.
With dwindling monsoon, system inventory levels of non-urea fertilisers increased to a five-year high as of end-August 2015.
As rainfall has been weak in several parts of the country and increase in the inventory levels, fertiliser volumes may witness moderation in the coming months, the report said.
Due to monsoon and cost pressures on the industry especially non-urea fertilisers, overall urea demand may post a minor 1-2 per cent growth to 31-31.5 MMT during 2015-16 and P&K segment is expected to witness volume growth at a moderate 2-5 per cent, it said.
Overall, the outlook remains cautious on two fronts -- profitability for the P&K segment and agro-climatic pressures and its impact on Rabi volumes, ICRA said.
"With the domestic gas price to decline to USD 4.2/mmbtu from USD 5.12/mmbtu in H1 FY16 as per the modified Rangarajan formula and long-term R-LNG prices also set to decline further from the current levels of USD 13.5/mmtbu, the pooled gas price is expected to decline to USD 9.1-9.3/mmbtu during H2 FY16.
"This would be positive for the urea sector as the energy cost base and hence, subsidy requirements would decline to that extent," ICRA Research Senior Vice President and Co-Head, Corporate Ratings, K Ravichandran said.
For every USD 1/mmbtu fall in gas prices, the variable cost declines by Rs 1,800-2,000/MT, leading to subsidy savings of Rs 12-13 billion for the Government for second half of 2015-16 assuming the currency to remain stable.
Lower subsidy for the industry would in turn lead to lower working capital borrowings for the companies and enable them to reduce their interest cost. Further, lower pooled gas prices would favourably impact the profitability of revamped urea capacities earning IPP-based pricing, Ravichandran said.
