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2009

The Indian Fertilizer Industry



ContentsIntroduction: ............................................................................................................................... 3

1 . Fertilizer Sector ± Background & History ............................................................................... 3

1 .1 Pre Liberalization .............................................................................................................. 3

1 .2 Post Liberalization ............................................................................................................ 4 2. Major Segments in Fertilizers.................................................................................................. 4

2.1 Nitrogenous Fertilizers ...................................................................................................... 5

2.1 .1 Urea ........................................................................................................................... 5

2.1 .2 Other Nitrogenous Fertilizers ...................................................................................... 6

2.2 Phosphatic Fertilizers ........................................................................................................ 6

2.2. 1 DAP (Di-Ammonium Phosphate) ............................................................................... 6

2.2.2 SSP (Single Super Phosphate) .................................................................................... 7

2.3 Potassic Fertlizers.............................................................................................................. 7

3. Fertilizer Consumption ............................................................................................................ 7

4. Factors affecting Fertilizer Availability ................................................................................... 8

4.1 Economic Reforms and Its Impact ..................................................................................... 8

4.2 Investment in fertilizer industry -Public, Private and Cooperative sectors .......................... 9

4.3 Imports of fertilizers .......................................................................................................... 9

4.4 Distribution of fertilizers ................................................................................................... 9

5. Policy Initiatives ................................................................................................................... 10

5.1 Pricing policy .................................................................................................................. 10

5.2 Fertilizer subsidy ............................................................................................................. 10

5.2. 1 Current Scenario with regards to subsidies ................................................................ 11

5.3 Fiscal concessions ........................................................................................................... 1 2

5.3. 1 Impact of Budget 2 00 9 ............................................................................................. 1 2

5.4 Transport infrastructure ................................................................................................... 1 3

6. Global demand for Indian fertilizers ...................................................................................... 1 3

7. Impact of Recession on the Fertilizer Sector .......................................................................... 1 5

7.1 Rise in FII Stake .............................................................................................................. 1 5

8. Impact of Other Factors On Fertilizer Industry ...................................................................... 1 6

9. Conclusion: Predictions for the Fertilizer Industry for the year 2 00 9-10 ................................ 1 6

Some Interesting Facts: ............................................................................................................. 1 7

Bibliography: ............................................................................................................................ 1 8



I ntroduction:India has always had a predominantly agrarian economy that affects the lives of millions of

people. The government of India has from time to time taken several steps for the upliftment of this sector.

Keeping this in mind, it makes sense to assume that the fertilizer sector is very crucial to theIndian economy because it provides a very important input to agriculture. The fertilizer industryin India has played a pivotal role in achieving self-sufficiency in food grains as well as rapid andsustained agriculture growth. India is the third largest producer and consumer of fertilizers in theworld after China and the United States. The growth of the Indian fertilizer industry has beenlargely determined by the policies pursued by the government. The government exercisesextensive controls on the pricing, distribution and movement of fertilizers.

Presently there are 56 large fertilizers plants in the country producing urea, DAP, Complexfertilizer, Ammonium Sulphate (AS) and Calcium Ammonium Nitrate (CAN).

1. Fertilizer Sector ± Background & History

The Indian fertilizer industry in the past 6 0 years has grown in size and stature and presentlyranks third in the world. One of the main priorities of the economic planning initiated after independence was to achieve self sufficiency in food grain production. The increase in fertilizer use along with irrigation facilities, use of improved seeds and adoption of better agronomic

practices paved the way for increasing crop productivity and production. By 2 00 4, the fertilizer use in India had increased from 66 thousand tons of major plant nutrients in 1 951 -52 to 22.7million tons. The use of fertilizers contributes to a 4 0 -50% increase in food grain production, and

they have a vital role to play in any strategy to meet the challenges of rising demand of food,fiber, forage and fuel.

However, the fertilizer consumption of plant nutrients per unit of gross cropped area in India isstill very low, the average being approximately 9 1 .5 kg/ha. The productivity of food crops is alsoquite low, around 1 .6 t/ha, which can certainly be doubled by enhancing the per unit averagefertilizer use.

1.1 Pre LiberalizationIn India the per hectare consumption of fertilizer in 1 950 -51 was less than 1 /4th of the globalaverage. Production was by and large in the purview of the public sector and co operative sector.

In 1 977, the government introduced the Retention Price Scheme (RPS) with the goal of providing fertilizers to farmers at reasonable rates without affecting the profitability of themanufacturers. Under this policy, the government would pay the manufacturers the difference

between the administered price (sale price) and the retention price (cost of production).

Over and above the retention price subsidy, the equated freight subsidy was introduced to enablethe manufacturers to cover the cost of transportation.



1.2 Post LiberalizationThe policy of economic liberalization had its effect on the fertilizer industry too. Thegovernment, in a move aimed at reducing subsidy, decontrolled all the phosphatic and potassic

fertilizers in 1 992.This strained the ratio of fertilizer utilization. With this policy of liberalization,the retention pricing scheme (RPS) which had been introduced in 1 977, got confined only tourea.

Post liberalization, the government strategized a long-term fertilizer policy to be completed inthree different phases, beginning in 2 000 -01 and ending in 2 00 6-2 00 7.

2. Major Segments in Fertilizers

The Indian fertilizer industry is broadly divided into nitrogenous, phosphatic and potassicsegments . In addition to these, nutrients are combined to produce several complex fertilizers. Toexpress the nutrient constitution of fertilizers, the grade of a fertilizer is expressed as a set of three numbers in the order of percentage of its Nitrogen (N), Phosphate (P) and Potash (K)constituents. The nitrogenous fertilizers produced in the country are urea, ammonium sulphate,calcium ammonium nitrate (CAN) and ammonium chloride. The only phosphatic fertilizer being

produced in the country is SSP. There are also complex fertilizers such as DAP, several grades of nitrophosphates and NPK complexes. Urea and DAP are the main fertilizers producedindigenously.

Figure 1: Classification of Fertilisers Produced in I ndia



As on 3 1 Jan 0 8, the country has an installed capacity of 1 20 .61 lakh MT of nitrogen and 56.59lakh MT of phosphate. Presently, there are 56 large-size fertilizer plants in the countrymanufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Out of these, 3 0

(as on date 28 are functioning) units produce urea, 21

units produce DAP and complexfertilizers, 5 units produce low-analysis straight nitrogenous fertilizers and the remaining 9manufacture ammonium sulphate. Besides, there are about 72 medium and small-scale units inoperation producing SSP. The sector-wise installed capacity is given in the table below:

S.No Sector Capacity( Lakh MT)

Percentage Share

Nitrogen Phosphatic Nitrogen Phosphatic

1 Public Sector 34.98 4.33 29. 00 0 7.65

2CooperativeSector 31 .69 1 7.1 3 26.27 3 0 .27

3 Private Sector 53.94 35. 1 3 44.73 62. 0 8

Total 1 20 .61 56.59 100 .00 100 .00 Table 1: Sector -wise and Nutrient - wise I nstalled Capacity of Fertilizer Manufacturing Units (as

on 1st January, 2008)

2.1 Nitrogenous Fertilizers

The use of urea dominates nitrogenous fertilizer consumption in India, consuming almost 85 % of the total nitrogen production capacity. DAP consumes about 5 % of the nitrogen capacity,CAN ± 2 % and other complexes the remaining 8 % .

2.1.1 Urea

Urea, the most widely used fertilizer, is under government control, as urea manufacturers arereimbursed on a cost plus basis under the RPS. The farm gate price of urea in India is amongstthe lowest in the world and is heavily subsidized. The top six producers of urea in India are

1 . Indian Farmers Fertilizers Co-operative Ltd. (IFFCO)2. Krishak Bharati Co-operative Ltd. (KRIBHCO)3. National Fertilizer Ltd. (NFL)4. Rashtriya Chemicals and Fertilizers Ltd. (RCF)5. Nagarjuna Fertilizers and Chemicals Ltd. (NFCL)6. Tata Chemicals Ltd. (TCL).

The production of urea involves the production of ammonia, which is then converted to urea.Ammonia can be synthesized using any of the following feedstock: natural gas (NG), naphtha,low sulphur heavy stock (LSHS), fuel oil and coal. The urea segment of the industry is likely to

be affected by significant changes in government policy in the medium term. These changes can



be broadly categorised into two types²those that affect profitability by modifying the currentrules of competition and the more fundamental ones that replace the existing rules themselves.

2.1.2 Other Nitrogenous Fertilizers

The major CAN producers in the country are NFL, Steel Authority of India Ltd. (SAIL) andGujarat Narmada Valley Fertilizers Company Ltd. The total installed capacity of AS is 864,5 00 tpa. AS contains about 2 1 percent nitrogen and 24 percent sulphur. It has traditionally been

popular in some parts of the country. The principal raw materials for its manufacture areammonia, sulphuric acid and gypsum. The major manufacturers of AS are Fertilizer Corporationof India (FCI), Hindustan Fertilizer Corporation Ltd. (HFCL) and Gujarat State Chemicals andFertilizers (GSFC). AC is used as a fertilizer for rice and some other crops. It is manufactured inIndia by Tuticorin Alkali Chemicals & Fertilizers, and Punjab National Fertilizers and Chemicals(PNFC).

2.2 Phosphatic Fertilizers

DAP consumes nearly 42 percent of the installed capacity for this type of fertiliser and SSParound 32 percent, while the remaining 26 percent is consumed by other complexes. DAP andother phosphatic fertilizers were decontrolled in 1 992 following which their prices shot up. Thisresulting price differential between urea and phosphatic fertilizers led to the excessive use of urea, which resulted in a distorted NPK ratio. To rectify the imbalance, the Government startedannouncing ad hoc subsidies on these fertilizers. While phosphatic fertilizers are officiallydecontrolled, in reality, the Government controls both the selling price and the level of concession on it.

2.2.1 DAP (Di-Ammonium Phosphate)

The top five producers of DAP in the country are Paradeep Phosphates, IFFCO, GSFC, SPIC andGodavari Fertilizers. The demand for DAP is estimated to grow by 10 to 1 2 percent. DAP ismanufactured using phosphoric acid (PA) and ammonia. PA is either imported or manufactured.The manufacture of PA requires rock phosphate (RP) and sulphuric acid. Thus DAP units areeither PA based or RP based. Also units can either produce ammonia in-house or purchaseimported ammonia. In India, 69 percent of DAP capacity is based on PA, and 8 0 percent of thisPA requirement is met through imports. The balance 3 1 percent of DAP capacity meets itsrequirements of RP and sulphur largely through imports. Since phosphatic fertilizers are notsubsidised on a cost plus basis, escalations in raw material prices have a major impact on the

profitability of the manufacturers. The subsidy on phosphatic fertilizers is set on the basis of the prevailing international prices of ammonia and PA. The subsidy on DAP is ascribed to both thenitrogen and phosphate content. With the new policy, it makes sense for DAP manufacturers toimport ammonia, given the low prevailing international price. Since the subsidy is linked tointernational prices of ammonia, units using indigenous ammonia have suffered, as they do notget compensated for the increase in the costs of production. DAP is imported by India insignificant quantities. The concession on indigenous DAP is higher than that on imported DAP,which keeps the Indian industry competitive.



2.2.2 SSP (Single Super Phosphate)

Unlike urea and DAP, the concentration of major players in SSP is low, with the top five players

contributing to barely 30

percent of the total production. At present, about 79 medium and smallscale units are engaged. The major raw materials for SSP are RP and sulphur.

2.3 Potassic Fertlizers

In the absence of potash deposits of commercial significance in India, the entire requirement of potassic fertilizers is imported. The major potassic fertilizer consumed in the country is Muriateof Potash (MOP). The major importers of MOP in India are Indian Potash Ltd. (IPL), ParadeepPhosphates Ltd. (PPL), Southern Petrochemical Industries Chemical Ltd. (SPIC), IFFCO, andHind Lever Chemicals. The quantity of imports is governed by the international price of MOPand the subsidy given by the Government to MOP traders.

3. Fertilizer Consumption

Although the average per hectare consumption of fertilizer nutrients has increased steadily, thelevel of fertilizer use is low with reference to the objective of accelerating growth in theagriculture sector, as well as the consumption levels prevailing in other countries, includingsome of the developing countries in Asia. Moreover, the consumption of chemical fertilizers inthe country is unevenly distributed, being much higher in regions with assured irrigation. In viewof the limited scope for increasing the land area under cultivation, further increase in agricultural

production can be achieved only through better water management, expansion of the area under irrigation, improved farming practices, research and development in the use of scientific inputsand seeds, and last but not the least, more extensive and balanced use of fertilizers throughfertilizer education. Hence, the critical importance of the fertilizer sector in the Indian economy,especially in creating a prosperous rural base. The following table shows the production, importand consumption data for different types of fertilizers.



Table 2: Production, Consumption & I mport Data for Fertiliser I ndustry

4 . Factors affecting Fertilizer Availability4 .1 Economic Reforms and I ts I mpact

When the Indian Economic Reforms Programme was launched, liberalization andmacroeconomic stabilization were high on the government¶s agenda. The Fertilizer Sector wasalso affected because of these reforms which resulted in increased prices of fertilizers initiallyand decontrol of P&K fertilizers subsequently. With effect, the government implemented threemajor policy decisions

(i) decontrol of ammonium sulphate and ammonium chloride(ii) increase in the selling prices of all other fertilizers by 4 0% and(iii) introduction of a subsidy ceiling on SSP.

However, within a span of three weeks, the government revised the extent of the price hike to30% w.e.f. 1 4th August, 1 991 and exempted the small and marginal farmers from it completely.With effect from 25th August, 1 992, the government decontrolled all phosphatic and potassicfertilizers and abolishing the RPS covering the former, brought back ammonium sulphate, CANand ammonium chloride within the purview of the control and subsidy and reduced the selling

Column1 1960-61 1970-71 1980-81 1990-91 2000-01 2003-04 2004-05 2005-06 2006-07b

1 2 3 4 5 6 7 8 9 10 11A. Nitrogenous fertilizersProduction 98 830 2164 6993 11004 10634 11338 11354 1

Imports 399 477 1510 414 154 132 411 1385 2689Consumption 210 1487 3678 7997 10920 11076 11714 12723B. Phosphatic fertilizersProduction 52 229 842 2052 3748 3631 4067 4221 45Imports 32 452 1311 396 338 296 1122 1322Consumption 53 462 1214 3221 4215 4124 4624 5204 5C. Potassic fertilizers bImports 20 120 797 1328 1541 1548 2045 2747 206Consumption 29 228 624 1328 1567 1598 2060 2413 23

D. All fertilizers (NPK)Production 150 1059 3006 9045 14752 14265 15405 15575Imports 419 629 2759 2758 2090 2018 2752 5254 608Consumption 292 2177 5516 12546 19702 16798 18398 20340



price of urea by 10 per cent while retaining this under control of the RPS. These policy changeswere expected to achieve

(i) reduction in subsidy(ii) continued growth in foodgrain production and

(iii)

keeping healthy soil intack. Unfortunately none of these could be achieved.4 .2 I nvestment in fertilizer industry -Public, Private and Cooperative sectors

The Indian fertilizer industry witnessed a phenomenal growth in the eighties. However, thegrowth tapered off in the nineties, and in the recent past only public and cooperative sectors havemade major investments in this industry. Presently public, private and coop. sectors share 45, 33and 22 % of N capacity, respectively, whereas their share in P2O5 capacity is 26, 64 and 10 % respectively. New proposals to the government for setting-up fresh capacities in the country aremainly from the public and cooperative sectors.

4.3

Imports of fertilizers

The fertilizer consumption in India has always exceeded the domestic production both in the caseof nitrogenous and phosphatic fertlizers. The entire requirement of potassic fertilizers isimported, as there are no indigenous raw materials available. India has been a net fertilizer importer and the volume of fertilizer imports is also substantial. India mainly imports Urea, Di-Ammonium Phosphate (DAP) and Muriate of Potash (MOP). Imports constitute about 2 0% of the total fertilizer consumption. Import of nitrogenous fertilizer in India is in the hands of Multi-import state agencies, although the government is attempting to coordinate buying based on thedemand, international prices and warehousing capacity etc. The government efforts would be toincrease indigenous capacity in such a way that about one million tons of nitrogen could be met

from imports.4 .4 Distribution of fertilizers

In the beginning, the government of India established the "Central Fertilizer Pool" as the officialagency to ensure equitable distribution of all available, imported and indigenous, fertilizers atfair prices all over the country. In 1 965, the Shivaram Committee laid the policy foundationregarding production, promotion, distribution and consumption of fertilizers. In 1 966, themanufacturers were given the freedom to market upto 5 0% of their production to the farmers.Fertilizer shortages in the early 1 970 s led the government to pass the Fertilizer MovementControl Order in 1 973 which brought the fertilizer distribution and its interstate movement under government control and supply and distribution was regulated under the Essential CommodityAct (ECA). In order to encourage the availability of fertilizer in interior areas, the Governmentstarted the block level delivery scheme in 1 980 -81 in which the transportation cost upto block headquarters is borne by the government. Under ECA, supply plans were formulated by thegovernment in consultation with the state departments of agriculture and the fertilizer industryduring 'Zonal Conferences' held twice a year. The objectives of such exercises were to minimizetransportation cost, avoid criss-cross movement of material and to ensure availability as per requirement all over the country.



In August, 1 992, phosphatic and potasssic fertilizers were decontrolled and their distributionover taken by the manufacturer or importers. The government however continues to keep a closewatch and any imbalance is brought to the notice of the industry. Urea continues to be under control and its distribution is governed by ECA allocation.

5 . Policy I nitiatives5 .1 Pricing policy

The government¶s fertilizer policies are aimed at increasing consumption to meet the food andfiber requirement of a growing population through setting up of the required productioncapacities, ensuring that quality fertilizers are made available to farmers throughout the countryat uniform and affordable prices. It was also recognized that fertilizer use should be profitable tothe farmers and they must get a certain minimum return for the produce. This led to theannouncement of procurement prices and minimum support prices for several crops from 1 970 onwards. The Marathe Committee was assigned the task of resolving the issue of keeping farm

gate prices of fertilizers at an affordable level in the face of rising production/import costs. Itsrecommendations in 1 977 led to the birth of the RPS. This scheme was intended to ensure that

both the fertilizer producers as well as the farmers should find it worthwhile to produce and usefertilizers. The policy aimed that each manufacturer was able to achieve 1 2% post-tax return oninvestment on efficient operation regardless of the location, age, technology and cost of

production. In addition, the government agreed to reimburse the cost of transportation fromfactory gate to railhead and also take care of the distribution margin. The RPS is now restrictedto urea only.

5 .2 Fertilizer subsidy

The RPS system helped in achieving the objective of increased indigenous availability andsupplying it to farmers on affordable and uniform price. The difference between Farm gate pricesand RPS is paid to the industry as subsidy. With the growth in fertilizer production along withescalation in price of raw material and plant cost, the subsidy amount swelled to huge

proportions over the years. However, the subsidy bill after the decontrol of phosphatic and

potassic fertilizer declined and remained below 1 990 -91 level.



5 .2.1 Current Scenario with regards to subsidies

It seems that the days of unlimited fertilizer subsidy in India are numbered as the governmentweighs different options to rein in the rising fiscal deficit. The government¶s fertilizer subsidy

bill is projected to jump to Rs. 1 , 00 ,000 crore in the current financial year 2 00 8-0 9 from Rs.

47,979 crore in the preceding fiscal, thanks to the sharp rise in the cost of production due to thespike in the global crude oil prices in the early part of the year. However, softening of oil priceshave eased the pressure substantially, but the overhang of the enormous fertilizer subsidy is

pulling down the economy.

Unable to take so much fertilizer subsidy on the Union Budget, the government has resorted toissuance of special bonds to domestic fertilizer manufacturers towards payment of its subsidy

bills. However, these special bonds are not accepted by banks as collateral for lending due tolack of SLR status. And the fertilizer manufacturers cannot hold these bonds for their life-periodof 26 years or so. So they have no options but to dispose of these special bonds at fire-sale pricesin the open market for raising cash to meet their investment expenditure. According to The

Fertilizer Association of India (FAI) Chairman K.S. Raju, fertilizer manufacturers have soldthese special bonds at a 1 5-2 0 percent to banks in recent months. The slowdown of the economyand the reluctance of the banks to lend is exacerbating their problems.

Despite a sharp increase in the international prices of fertilizers in recent years, the governmenthas kept domestic farmers insulated from its effects by increasing subsidy allocations. Accordingto statistics available with the fertilizer minister, during the period 2 00 2-0 7, 88 percent of thereported increase in subsidy was due to the sharp rise in international prices of fertilizers inputsand finished fertilizers, while only 1 2 per cent stemmed from the enhanced consumption of fertilizers.

India has emerged as the world¶s biggest fertilizer consumer in recent years. To meet the surgingfertilizer demand from farmers, the government had to resort to fertilizer imports on a massivescale despite the high international prices. Combined imports of DAP and MAP fertilizers byIndia in 2 00 7-0 8 was pegged at 3 million tones while the figure for MOP was 4.4 milliontones.Even in urea where the domestic production capacity was enough to meet demand until2001 , imports reached near 7 million tones in 2 00 7-0 8.

Year Urea DAP MAP MoP

2000 -01 Nil 0 .861 0 .0 78 2.6462001 -0 2 0 .22 0 .933 0 .1 25 2.8 1 200 2-0 3 0 .11 9 0 .383 0 .100 2.6 0 3200 3-0 4 0 .1 43 0 .734 0 .0 65 2.579200 4-0 5 0 .64 1 0 .644 0 .0 22 3.3 10 200 5-0 6 2. 0 57 2.438 0 .0 45 4.578200 6-0 7 4.7 1 9 2.875 0 .0 97 3.448200 7-0 8 6.928

Table 3: I ndia¶s fertilizer imports between 2000-01 and 2007-08 (Million Tones)



5 .3 Fiscal concessions

Before the budget, the Fertiliser Association of India had pointed out that imports have beenrising in the recent period with serious implications for the food security of the country. In

particular, there has been no significant investment in the fertiliser industry in the recent period,

because the industry does not offer any remunerative returns.

The government has been following a short-sighted policy of delaying the payment of fertiliser subsidies leading to a severe cash crunch situation in the industry. The industry has, as a result,

been forced to rely on trade credit from the oil marketing majors, who are themselves, however,starved of resources because of the mistaken policies of the Government in regard to petroleum

pricing.

The fertiliser industry is thus saddled with an arrear bill of nearly thousands of crores, which ithas to meet by borrowing. This has led, in turn, to shortage of working capital and a clear inability of the factories to buy raw materials and utilise even a reasonable proportion of

production capacity. As this leads to further losses, a vicious cycle ensues.

The fertiliser industry has been crippled as a result and condemned to further losses as a result of the ill-designed policies of the government withholding legitimate subsidies.

5 .3.1 I mpact of Budget 2009

In order to ensure a balanced application of fertilizers to increase agricultural productivity, thegovernment intends to move towards a nutrient-based subsidy regime so as to cover a larger

basket of fertilizers with innovative fertilizer products available in the market at reasonable prices.

Besides, the government also intends to move to a system of direct transfer of subsidy to thefarmers. The system of direct transfer of subsidy to farmers is laudable, but only if competitionis allowed amongst fertilizer companies to price their products.

Here, the problem arises due to substantial differences in the cost of production depending on thefeedstock used, like natural gas, regassified LNG, naphtha, other alternate fuels etc. So, while itwas the government which encouraged fertilizer capacity additions through feedstock other thangas, it cannot shy away from its responsibility.

Also, if Indian fertilizer production comes down and domestic consumption continues to rise, the

country may have to pay heavy price of sharp spike in global prices and import in larger quantities at such high prices.

Customs duty on rock phosphate was reduced to 2 % from 5 % earlier. Excise duty on naphthawas also reduced to 1 4% . Although the lower customs duty and excise duty on rock phosphateand naphtha respectively will enable the fertilizer manufacturers to reduce their production cost,important issues like the timely subsidy payment, measure to attract new investment wentunaddressed.



There was also no time slab announced within which the nutrient-based subsidy regime and thedirect payment of subsidy to the farmers are implemented. Thus the budget was really a dullaffair for the fertilizer sector.

5 .4 Transport infrastructure

The increased fertilizer production has also necessitated development of infrastructure tofacilitate smooth distribution of the material. The modem plants producing between 25 00 -4000 tons of fertilizers require at least one and ideally two goods trains per day. Transportationthrough trucks cannot be a substitute for railways at it is costly and inadequate. Moreover, roadsare primarily used for passenger traffic, it will also add pressure to the availability of diesel. Thegovernment of India has opened participation from users by way of 'OWN YOUR WAGONS'scheme. The scheme is now becoming popular. Besides imports of urea, DAP and MOP, themajor intermediaries in the production of phosphatic and complex fertilizers viz. ammonia,

phosphoric acid and potash are also imported. The congestion at ports often leads to berthingdelays. The government is keen to create additional facilities at the major ports in the country

and also opening this sector for privatization.

6. Global demand for I ndian fertilizers

Demand has been steadily rising and so have fertilizer imports. India at present holds the fourth position as an exporter of fertilizer in the global market.

But its own demand for fertilizer almost equals its exporting capacity. The rapid rate of population growth and the rising demand for food products has increased the demand of fertilizer in India. The primary factor behind the demand of fertilizer in India is the nature of Indian soil.Although the soil for agriculture is rich in silt, it is deficient in nutrients such as potassium,

phosphate and nitrogen. To supplement these nutrients, India has to produce and also importfertilizers.

Amongst the major fertilizers exported from India is urea. The following table shows the major importers of fertilizers from India (all figures are in 000 tons):



Table 4 : Major I mporters of Fertilizers from I ndia

Apart from the inorganic fertilizers, the demand for organic fertilizers produced in India hasincreased in recent years. Many countries prefer organic fertilizers because of the lower risks of environmental hazards.

Private fertilizer companies in India are now taking their business to foreign shores, setting up plants in other countries. This is a positive gesture towards increasing the global demand for Indian fertilizer and also meeting the same. Soon after Reliance Industries' declaration of

building two two-million ton capacity fertilizer units, National Fertilizer Limited has announcedits negotiations and talks with International Chemical Group to start joint ventures in Brunei,Qatar and Egypt. Kribhco is planning to set up plants in collaboration with a Tunisian fertilizer company named GCT. The venture will see increased production of phosphoric acid and Muriateof Potash (MOP). The future, thus, looks bright for the Indian fertilizer industry in the globalmarket. The Government of India is lending all support to the fertilizer companies by subsidizingthe raw materials, relaxing the export policies and so on.

The global fertilizer demand as a whole shows a sharp rise in recent years. The demand for nitrogen fertilizers has been the highest, surpassing the demand for potassium and phosphatefertilizers. If the demand is analyzed on the basis of regions, then North America shows thegreatest demand for fertilizer with an annual demand growth of 9.9 % , followed by West Asia(8. 1% ) and South Asia (5.5 % ).

Product Country 1996-1997

1997-1998

1998-1999

1999-2000

2000-2001

2001-2002

2002-2003

2003-200 4

200 4

-200 5

200 5

-2006

2006-2007

Urea Nepal 10 .00

1 4.69

- - 56.83

1 5.72

1 8.75

63.37

4.66 - 1 4.77

AS Bangladesh

- - - - - - - - 6.76 - -

NPK

UAE 0 .60

- - 0 .0 4 0 .0 4 - - 0 .0 6 0 .0 6 0 .0 6 0 .0 6

MOP Bangladesh

- - - - 1 2.84

- - 4.67 5.9 0 - -



7. I mpact of Recession on the Fertilizer Sector

Early results for the June quarter in 2 00 9 showed a 9.4 percent fall in income. This was onaccount of a sharp fall in raw materials prices as raw materials cost fell by 23.8 % . In the fertilizer industry, subsidies are given on a cost plus basis. Hence, with the fall in raw material expensesthe subsidy income of the companies also fell.Of the 1 7 companies declaring their June 2 00 9 quarter results, 8 reported a double digit fall innet sales. This included leading companies like National Fertilizers. Net sales of NationalFertilizers fell by 23.8 % . Fertilizers and Chemicals, Travancore (fact) and Nagarjuna fertilizerswere some other companies reporting more than 2 0% fall in net sales.On the other hand, some companies ± Tata chemicals, Coromandel fertilizers and Southern

petrochemicals - recorded a double digit growth in income. Tata chemicals posted a 1 9.2% growth in income. Coromandel fertilizers was up by 1 3.8 % whereas Southern Petrochemicals

rose by1

9.5%

.On the profitability front, the industry staged a decent performance. The PAT margin improvedto 3. 1% from 1 .6% in the year ago quarter. This was due to a sharp fall in raw material expensesand energy costs. The PAT margin of Tata chemicals rose to 6.4 % from 4.7 % in the year agoquarter. This was due to healthy profits reported in the shipping and textile business. Somecompanies however reported a fall in the PAT margin. These include Gujarat State Fertilizers,Coromandel Fertilizers and National Fertilizers.

7.1 Rise in F II Stake

However despite the recessionary trend, after the positive election, FII¶s raised their holding inthe Indian companies and the fertilizer sector was not an exemption. FII holding jumped to four percent from 3.6 % in the march 2 00 9 quarter. The FII stake in Tata Chemicals spiked by 1 70 basis points to 9.9 % . Some other scripts attracting FII interest include Chambal Fertilizers,Gujarat state fertilizers and Nagarjuna Fertilizers.Promoters also raised their holding to 59.9 % from 58. 1% . On the other hand, non-institutionalinvestors offloaded some stake. This was due to fall in individual holdings. It fell by 7 0 basis

points in the June 2 00 9 quarter, pulling down non-institutional holdings by 9 0 basis points to 23 per cent.Among the top 10 companies by market capitalization, Rashtriya Chemicals & Fertilizers,

National Fertilizers, Travancore did not have any change in the shareholding pattern. In fact

National fertilizer and Fertilizers & Chemicals, Travancore witnessed no change in share holding pattern.Southern Petrochemicals Industries., a loss making company, witnessed no change in the

promoter¶s holdings. However, FII¶s offloaded their stakes. It fell to 8.4 % from 11 .5% in march200 9 quarter. Consequently, institutional holdings also slipped by 3 10 basis points to 1 2.9 per cent. Individual invertors turned be buyer raising their stake in the company by 1 80 basis pointsto 25.8 per cent.



8. I mpact of Other Factors On Fertilizer I ndustryEarly results of the fertilizer industry indicate a 9.4 percent fall in the income. This was expectedas the subsidy income of fertilizer companies declined in the June 2 00 9 quarter. The fall inincome is expected to aggravate in the September and December quarters. However, with a fallin raw material cost, the PAT margin of the industry is expected to improve and will be in therange of 3-3.5 %

The south west monsoon is expected to be deficient this year. The cumulative rainfall during 1 stJune to 29 July 2 00 9 was 1 9 percent below normal. The temporal distribution of precipitationwas even worse. States like Uttar Pradesh, Punjab, Haryana and Andhra Pradesh, which aremajor producers of rice, cotton and sugarcane, have been hit hard. This will affect the productionof these crops, which is expected to decline by 8 % in 200 9-10 . These crops are major consumersof fertilizers. Hence with a fall in their production, the consumption of fertilizers will alsodecline.Despite a fall in the consumption of fertilizers, its production is expected to rise. The cumulative

production of fertilizers during April-May 2 00 9 indicates the same, reporting a 7.4 percentgrowth. We expect it to grow by 8.3 percent in 2 00 9-10 . This is because of:

1 . Availability of gas: Natural gas is a key raw material for fertilizers. In the last two years, production of fertilizers was adversely affected due to shortage of natural gas. However,with the availability of 1 5 mmscmd (metric million standard cubic metres per day) gasfrom the KG- basin, fertilizer companies are unlikely to face any shortage of gas in 2 00 9-10 . This will allow them to increase fertilizer production.

2. Reduction in imports: As the domestic production of fertilizers is not sufficient to meetthe aggregate demand , India relies heavily on imports. During April- February 2 00 8-0 9,India imported 1 58 lakh tonnes of fertilizers. However, in 2 00 9-10 , if consumption falls,India can reduce the imports of fertilizers and allow domestic fertilizer companies to

produce more.

9. Conclusion: Predictions for the Fertilizer I ndustry for theyear 2009-10The total income of the fertilizer industry will fall by 5.4 % . A reduction in the subsidy income isexpected to pull down the revenue of the fertilizer companies. In spite of this, the PAT margin of the industry will improve by 1 20 basis points to 2.8 % .In the fertilizer industry, subsidy is given on a cost plus basis. With the rise in raw materialexpenses due to the global economic scenario, subsidy income of the companies also increased

during two quarters ended December 2 00 8. However raw material prices declined sharply in thelast few months and are unlikely to rise in 2 00 9-10 . Moreover, raw material is expected todecline by more than 25 % in the coming quarter, hence bringing down the expenses of the totalindustry. As the subsidy income is linked to total cost, with a fall in the total expenses, theincome of the industry will also decline this quarter.In fact, with a fall in raw materials prices, the subsidy burden of the government is expected tocome down in 2 00 9-10 . As per the estimates of the department of fertilizer, the fertilizer subsidyfor 2 00 9-10 will be Rs. 5 0 ,000 crore compared to Rs. 1 ,20 ,000 crore in 2 00 8-0 9.



The industry will improve its profit margin in 2 00 9-10 . This is due to low raw material cost andintroduction of various policies like IPP (Import Parity Pricing) and nutrient-based subsidyscheme. Urea and DAP manufactures are expected to gain with the introduction of the IPPwhereas the nutrient based subsidy scheme is expected to push up the revenues of the complexfertilizer manufactures. Similarly, introduction of the uniform freight subsidy scheme will push

up margins.With the fall in the raw materials prices, working capital requirements of the industry will alsocome down. This will result in lower short term borrowings by the companies and will bringdown their interest expenses.Lower input costs and interest expenses will help the industry in improving its profit margins.The PBDIT margin of the industry will increase to 11% in 2 00 9-10 .

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Some I nteresting Facts:

y Gardeners often make compost 'teas' to use as a liquid fertiliser - a drench made fromsteeping compost in water, diluting it, with high levels of plant nutrients.

y Minerals and their effectsy Potassium makes things flower y Nitrogen makes things leafyy Pine needles makes soil acidicy Lime makes soil alkaline

y Fertilizers have been used for bomb making by many Irish terrorist groups and Al Queda

y The most commonly used fertiliser is known as 'Growmore', and it contains 3 mainnutrients needed for healthy plant growth- Nitrogen, Potassium, and Phosphorous (N, P,and K respectively). In Growmore, these are present in equal quantities, known as a ratioof 7:7:7.

y Potassium is the seventh most abundant element in the earth's crust and is found in everycell of plants and animals.

y The source of phosphorus in fertilizer is fossilized remains of ancient marine life



Bibliography:

1.

http://indiabudget.nic.in/es99-2000/chap812.pdf

2. www .economy w atch.com/ india n-fertilizer -industry /

3 . www .fert.nic.in/production/gro w th.asp

4 . www .india netzone.com/24/ fertilizer _industry _india .htm

5 . http:// www .thaindian.com/ne w sportal/business/fertiliser-industry-unimpressed-over-budget-proposals_10022735.html

6 . http:// www .thehindubusinessline.com/2009/02/16/stories/2009021650230900.htm

7 . www .faidelhi.org/

8. http:// www .thehindu.com/2009/07/07/stories/2009070760071500.htm

9. http://business.mapsofindia.com/national-fertilizers/

ferti final

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