SECTOR REPORT

FERTILIZER INDUSTRY

India Economics 1 March 2001

Ajit Ranade , Chief Economist, Ajit.Ranade@ap.abnamro.com +91.22.281.8251
Gaurav Kapur, Associate Economist, Gaurav.Kapur@ap.abnamro.com +91.22.281.8008 x 2187

HIGHLIGHTS

Ø India is the third largest producer and consumer of fertilizers in the world with an
installed capacity of Nitrogen (N) and Phosphate (P) nutrients at 14 million tonnes
p.a.

Ø The Indian Fertilizer Industry is broadly divided into Nitrogenous, Phosphatic and
Potassic segments. In addition to these, nutrients are combined to produce several
complex fertilizers.

Ø Urea, a nitrogenous type of fertilizer, is most widely consumed in India. Currently the
urea capacity is 20.2 million tonnes while consumption is 21.7 million tonnes. The
demand of urea is expected to grow at a CAGR of 4 percent. Urea segment currently
subsidised under the Retention Price Scheme, with controls on distribution, to be
decontrolled by 2006. First phase of reform in this segment initiated through a move
towards Group Retention Scheme, as announced in FY02 Budget.

Ø The total production of phosphate in the country was 3.36 million tonnes per
annum in FY00–a 6 percent increase over FY99. Main phosphatic fertilizers produced
in India are Diammonium Phosphate (DAP) and Single Super Phosphate (SSP).

Ø Entire requirement of potassic fertilizers is imported. The major potassic fertilizer

consumed in the country is Muriate of Potash (MOP).

Ø Fertilizer production is highly energy intensive with cost of feedstock and fuel alone
accounting for between 55 to 80 per cent of the cost of production. Plants in India are
based primarily on three feedstock -- naphtha, fuel oil/LSHS and natural gas with a
significant proportion of domestic capacity of urea plants based on naphtha or fuel
oil /LSHS which cost more than natural gas. High cost feedstock and increased
production / consumption have caused a steady increase in fertilizer subsidy.

TABLE OF CONTENTS
1. OVERVIEW..................................................................................................................2
2. MAJOR SEGMENTS ...................................................................................................3
2.1 NITROGENOUS FERTILIZERS.................................................................................4
2.2 PHOSPHATIC FERTILIZERS ...................................................................................5
2.3 POTASSIC FERTLIZERS...........................................................................................7
3. IMPORTANT ISSUES AFFECTING THE INDUSTRY.........................................7
3.1 SUBSIDY ON FERTILIZER PRODUCTION & RETENTION PRICE SCHEME...7
3.2 COST OF FEEDSTOCK ............................................................................................9
4. FUTURE PROSPECTS ..............................................................................................10
The material contained herein has been obtained from sources believed to be reliable but is not necessarily complete and cannot be guaranteed. Any opinion expressed is subject to
change without notice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any financial
instruments. ABN AMRO BANK N.V. does not assume any responsibility, whatsoever, in this respect
Sector Report: Fertilizer Industry
1. OVERVIEW
The continuing growth in population calls for
an increase in food grain production from its
current level of 202 million tonnes to about
240 million tonnes per annum in the next five
years. In face of serious limitations on
increasing land area under cultivation which is
saturated at 143 million hectares the only
other option appears to be raising farm
productivity. Fertilizers are an essential input
for increasing productivity of food grains and
other agricultural crops. With installed
capacity of about 14 million tonnes per annum
(mtpa), India is the third largest producer and
consumer of fertilizers in the world.
The fertilizer industry in India has played a
pivotal role in facilitating the required
increase in the use of plant nutrients for
achieving the goal of self-sufficiency in food
grains production on one hand and rapid and
sustained agricultural growth on the other. At
present, there are 64 large size fertilizer units
in the country, manufacturing a wide range of
nitrogenous and phosphatic / complex
fertilizers. Of these, 39 units produce urea, 18
units produce Diammonium Phosphate (DAP)
and complex fertilizers, 7 units produce low
analysis straight nitrogenous fertilizers and 9
of the above units produce ammonium
sulphate as a by-product. Besides, there are
about 79 small and medium scale units
producing single super phosphate (SSP). The
phenomenal growth of the industry during the
last two and half decades, was made possible
by an overall conducive policy environment
(specially during 70s and 80s) and assured
availability of various feedstock viz., naphtha,
natural gas, fuel oil/LSHS.
The domestic fertilizer industry has attained
high levels of capacity utilization. The
capacity utilization during FY99 was 99.6
percent for nitrogen and 99.1 percent for
phosphate and is estimated at 103.0 percent
for nitrogen and 94.2 percent for phosphate
during FY00. The total fertilizer production in
terms of nitrogen and phosphate nutrients
increased from 1.06 million tonnes in FY71 to
14.28 million tonnes in FY00. The growth rate
of production in FY00 for nitrogenous and
phosphatic fertilizers was 3.8 percent and 7
percent respectively and the consumption was
2
India /Economics
up by 4.7 percent, 15.6 percent and 30.1 per
cent for N, P, K type of fertilizers
respectively.
The most widely used fertilizers include
nitrogenous (N) – 70 percent of consumption,
phosphatic (P) – 22 percent and potassic (K) –
7 percent. Potassic fertilizer is not
manufactured in India and consumption is out
of imports. Urea, the nitrogenous type of
fertilizer accounts for 60 percent of total
fertilizer consumption in India. An
appropriate balance in the consumption of
different fertilizer nutrients is critical to
productivity enhancements. The appropriate
NPK ratio under Indian soil conditions is
stated to be 4:2:1 and at present it stands at
10:4:1 which points towards an imbalance in
consumption. Although the average per
hectare consumption of fertilizer nutrients has
increased from less than 1 Kg. in FY52 to
about 95 Kg. at present, this level of fertilizer
use is low with reference to the objective of
doubling food grains production in the by
2010, as well as the consumption levels
prevailing in other countries, including some
of the developing countries in Asia like
Pakistan and Bangladesh.
In the wake of rising fertilizer prices due to
sudden increases in crude oil and feedstock
prices the Government of India introduced the
Retention Price Scheme (RPS) in 1977 with
the twin objective of providing fertilizers to
farmers at affordable rates without harming
the interests of the manufacturers.
Under the scheme the government pays the
difference between the administered price
(sale price) and the retention price (cost of
production as assessed by the government
plus a reasonable return on net worth) to the
manufacturers, which guarantees a post – tax
12 percent return on net worth. The
Government also sets the farm gate price,
which is the price at which fertilizer is sold to
the farmer and the fixing of the retention price
is done by the Fertilizer Industry Co-
ordination Committee (FICC) and pricing
policy is determined for three-year period.
The retention price varies from one producer
to another and for the same producer from
plant to plant. The retention price broadly
Sector Report: Fertilizer Industry India /Economics

reimburses two broad categories of costs - the
variable costs and the fixed costs.
In addition to the retention price subsidy,
equated freight subsidy is paid to the
manufacturers of controlled fertilizers to cover
the cost of transportation from the production
points to the consumption centres. Since the
consumer prices of both indigenous and
imported fertilizers are fixed uniformly,
subsidy is also paid on imported fertilizers in
order to bridge the difference between the cost
of imports and the statutorily fixed consumer
price.
The National Industrial Policy, unveiled in
July 1991, announced the delicensing of the
fertilizer industry. Promoters are now free to
set up fertilizer plants in the country without
obtaining licence from the government
provided they obtain environmental clearance.
In an another major policy initiative taken in
August 1992, with a view to reducing the
subsidy, all distribution of phosphatic,
potassic and complex fertilizers was
decontrolled and imports were decanalised
and retention pricing scheme thus confined to
urea. Consequently, the prices of these
fertilizers increased sharply leading to fall in
their consumption. In order to cushion the
impact of increase in prices of these fertilizers
and to arrest decline in their consumption, the
Ministry of Agriculture introduced a
concession scheme on sale of decontrolled
fertilizers from FY93 itself at the rate of INR
1000 per tonne. In another major policy
initiative taken by the Government on 5th July
1996, the scale and coverage of this special
concession was substantially increased to give
impetus to the stagnating demand for these
fertilizers and to ameliorate the nutrient
imbalance in the soil which is essential for
sustaining the desired growth in agricultural
productivity. The scope and coverage of
concession scheme have been significantly
enhanced in subsequent years.
To encourage investment in the fertilizer
sector by the domestic industry Government
offers concessional customs duty benefit on
import of capital goods for setting up of new
plants/substantial expansion / renovation /
modernisation of existing units and deemed
export benefits to indigenous supplies of
capital goods to new / revamped /retrofit /
modernisation of fertilizer projects subject to
the condition of bidding for them at
international market prices.

Table 1 CONSUMPTION, PRODUCTION & IMPORTS OF FERTILIZERS

(Figures in ‘00’000 tonnes)
Year Consumption Production Imports
FY92 127.28 98.63 27.69
FY93 121.55 97.36 29.08
FY94 123.66 90.47 31.67
FY95 135.63 104.38 29.65
FY96 138.77 113.35 39.55
FY97 143.08 111.55 20.26
FY98 161.88 130.62 31.74
FY99 167.98 136.24 31.45
FY00 191.45 144.12 39.84
(Provisional)

2. MAJOR SEGMENTS

The Indian fertilizer industry is broadly divided into nitrogenous, phosphatic and potassic
segments . In addition to these, nutrients are combined to produce several complex fertilizers. To
express the nutrient constitution of fertilizers, the grade of a fertilizer is expressed as a set of three
numbers in the order of percent of Nitrogen (N), Phosphate (P) and Potash (K). The straight
nitrogenous fertilizers produced in the country are urea, ammonium sulphate, calcium ammonium
nitrate (CAN) and ammonium chloride. The only straight phosphatic fertilizer being produced in
3
Sector Report: Fertilizer Industry India /Economics

the country is SSP. The complex fertilizers include DAP, several grades of nitrophosphates and
NPK complexes. Urea and DAP are the main fertilizers produced indigenously.

2.1 NITROGENOUS FERTILIZERS

The total installed capacity of nitrogen in India as of 31st March, 2000 is 11.07 mtpa. This
includes the nitrogen capacity corresponding to the urea capacity of 20.2 mtpa. The use of urea
dominates nitrogenous fertilizer consumption in India, consuming almost 85 percent of the total
nitrogen capacity. DAP consumes about 5 percent of the nitrogen capacity, CAN - 2 percent and
other complexes the remaining 8 percent. The production of nitrogen increased from 10.08
million tonnes (m.t.) during FY98 to 10.48 m.t. during FY99. This was led by the increase in the
production of urea, which increased, from 18.6 m.t. in FY98 to 19.3 m.t. in FY99.

2.1.1 UREA The urea segment of the industry is likely to

Currently, the urea capacity is about 20.2 m.t.
while consumption is about 21.7 m.t. The
demand is expected to grow at a CAGR of 4
percent and by FY03 demand would grow to
around 23 m.t. while the estimated production
would be about 21 m.t. The top six producers
of urea in India are Indian Farmers Fertilizers
Co-operative Ltd. (IFFCO), Krishak Bharati
Co-operative Ltd. (KRIBHCO), National
Fertilizer Ltd. (NFL), Rashtriya Chemicals
and Fertilizers Ltd. (RCF), Nagarjuna
Fertilizers and Chemicals Ltd. (NFCL) and
Tata Chemicals Ltd. (TCL).
be affected by significant changes in
Government policy in the medium term.
These changes can be broadly categorised into
two types—those that affect profitability by
modifying the current rules of competition and
the more fundamental ones that replace the
existing rules themselves. The principal
change in the first category is the
reassessment of capacity of major urea
manufacturers in the country which would
affect their profitability and principal
changes in the second category are the
removal of quantitative restrictions (QRs) and
decontrol of urea.

Urea, the most widely used fertilizer, is under
government control, as urea manufacturers are
reimbursed on a cost plus basis under the
RPS. The farm gate price of urea is fixed at
INR 4,600 per tonne w.e.f February 29th,
2000, excluding local levies, which is
amongst the lowest in the world and is
heavily subsidised. In addition to the RPS,
urea manufacturers are also reimbursed for the
freight expenses incurred on transporting the
product from the factory to markets. The
equated freight subsidy reimburses the
manufacturer a fixed sum per tonne of urea
transported.
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.
Traditionally, as production of ammonia
worked out to be cheaper than import, urea
players preferred to set up ammonia
manufacturing facilities.
Till now the imports of urea have been subject
to QRs. Urea is imported by designated State
agencies based on estimates of domestic
demand and production. The international
price of urea is currently quite low. The c.i.f.
cost of urea in July 2000 was around USD 140
per tonne. This implies that the import cost of
urea is about INR 7000-7500 per tonne at the
current exchange rate after accounting for port
handling and freight charges whereas the
retention price of manufacturers varies
roughly between INR 5,000 and INR 11,000
per tonne. In case the import of urea is
decanalised the viability of Indian producers is
likely to be threatened. However, one must
keep in mind that the current low international
price of urea is partly because of the reduced
imports by India and China. Once India enters
the international market, urea prices are likely
to rise again. It is estimated that a purchase of
2 to 3 million tonnes of urea from the
international market by India, the purchase
price of imported urea would jump between
150 and 250 percent.

4
Sector Report: Fertilizer Industry India /Economics

However in the medium term the
international price of urea is expected to
remain depressed and the removal of
quantitative restrictions (QRs) can hurt the
industry. The World Trade Organisation
(WTO) demands removal of QRs by March
31, 2001. A logical outcome of this demand
could be the concurrent removal of pricing
and distribution controls. The fertilizer
ministry has already decided to decontrol urea
completely in three phases by FY07. The
transition period will be used to gradually
reduce subsidy by increasing the selling price
at regular intervals thus making the cost
competitiveness of domestic urea units
critical.

Table 2 UREA DEMAND - SUPPLY (Figures in ‘00’000 tonnes)

Year Demand Supply

FY99 204 193
FY00 210 201
FY01 217 210
FY02 224 210
FY03 232 210

2.1.2 OTHER NITROGENOUS FERTILIZERS

The other nitrogenous fertilizers — CAN, ammonium sulphate (AS) and ammonium chloride
(AC) — were decontrolled in 1991. They were brought back under the RPS in 1992 but
decontrolled again in 1994. As there are no subsidies on these fertilizers, the profitability of their
manufacturers has been hit by the recent increases in feedstock prices.

The total installed capacity of CAN in the country is 942,500 tonnes per annum (tpa). The major
CAN producers in the country are NFL, Steel Authority of India Ltd. (SAIL) and Gujarat
Narmada Valley Fertilizers Company Ltd.

The total installed capacity of AS is 864,500 tpa. AS contains about 21 percent nitrogen and 24
percent sulphur. It has traditionally been popular in some parts of the country. The principal raw
materials for its manufacture are ammonia, sulphuric acid and gypsum. The major manufacturers
of AS are Fertilizer Corporation of India (FCI), Hindustan Fertilizer Corporation Ltd. (HFCL) and
Gujarat State Chemicals and Fertilizers (GSFC).

AC is used as a fertilizer for rice and some other crops. It is manufactured in India by Tuticorin
Alkali Chemicals & Fertilizers, and Punjab National Fertilizers and Chemicals (PNFC).

2.2 PHOSPHATIC FERTILIZERS

The total production of phosphate in the country was 3.36 mtpa in FY00 – a 6 percent increase
over production in FY99. DAP consumes nearly 42 percent of this capacity and SSP around 32
percent while the remaining 26 percent is consumed by other complexes. DAP and other
phosphatic fertilizers were decontrolled in 1992 following which their prices shot up. This
resulting price differential between urea and phosphatic fertilizers led to the excessive use of urea,
which resulted a distorted NPK ratio. Following the decontrol the consumption of phosphatic
fertilizers fell from 3.32 m.t. in FY92 to 2.67 m.t. in FY93. To rectify the imbalance, the
Government started announcing ad hoc subsidies on these fertilizers. While phosphatic fertilizers
are officially decontrolled, in reality, the Government controls both the selling price and the level
of concession on it.

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Sector Report: Fertilizer Industry
2.2.1 DAP
The top five producers of DAP in the country
are Paradeep Phosphates, IFFCO, GSFC,
SPIC and Godavari Fertilizers. Together with
the domestic production of 4 m.t. and an
opening stock of 0.9 m.t., the total
availability of DAP in the country in FY00
was 8.2 m.t. with highest ever DAP imports of
3.3 m.t. in the country. The estimated sales of
DAP in FY00 was 6.4 m.t. Thus, there was an
excess supply of around 1.8 m.t. The DAP
capacity of the country is expected to increase
by 2.80 mtpa by the end of FY01 and the
demand for DAP is estimated to grow by 10 to
12 percent.
The subsidy is INR 4,450 per tonne on
indigenous DAP and INR 1050 per tonne on
imported DAP. With the selling price for DAP
fixed at INR 8,700 per tonne, total realisation
for DAP manufacturers is at INR 13,100 per
tonne.
DAP is manufactured 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 are either PA based or
RP based. Also units can either produce
ammonia in-house or purchase imported
ammonia. In India, 69 percent of DAP
capacity is based on PA, and 80 percent of this
PA requirement is met through imports. The
balance 31 percent of DAP capacity meets its
requirements of RP and sulphur largely
through imports. Since phosphatic fertilizers
are not subsidised on a cost plus basis,
escalations in raw material prices have a
Table 3 DAP DEMAND - SUPPLY (Figures in ‘00’000 tonnes)
Year
FY99
FY00
FY01
FY02
FY03
2.2.2 SSP
The total installed capacity of SSP in the country is 6.48 m.t. per annum. 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 small scale units are engaged
India /Economics
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.
Earlier, the subsidy calculation was ad hoc
and subsidised only the P component. Under
the new subsidy structure, both the N and the
P component are subsidised. The subsidy on
DAP is ascribed to both the nitrogen and
phosphate content. With the new policy, it
makes sense for DAP manufacturers to import
ammonia, given the low prevailing
international price. Since the subsidy is linked
to international prices of ammonia, units using
indigenous ammonia have suffered, as they do
not get compensated for the increase in the
costs of production.
DAP is imported by India in significant
quantities. The concession on indigenous
DAP is higher than that on imported DAP,
which keeps the Indian industry competitive.
The differential concession acts as a kind of
import duty. In the past the differentials were
about INR 1000 and INR 1500 a tonne. In the
first two quarters this year, they were INR
3400 a tonne and INR 2350 a tonne
respectively. However, even this differential
cannot prevent DAP imports from being
relatively more profitable when the
international prices fall sharply. Since DAP
imports are decanalised and with the
international price of DAP in FY00 falling by
USD 50 per tonne in two months led to a glut
of imports and an ensuing price war in the
domestic market on account of large imports
competing with local supplies.
Demand Supply
58 39
67 39
74 55
82 62
91 62
6
Sector Report: Fertilizer Industry India /Economics

in the production of SSP. The major raw materials for SSP are RP and sulphur. The current level
of subsidy on SSP is INR 700 per tonne.

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 Muriate
of Potash (MOP). The major importers of MOP in India are Indian Potash Ltd. (IPL), Paradeep
Phosphates Ltd. (PPL), Southern Petrochemical Industries Chemical Ltd. (SPIC), IFFCO, and
Hind Lever Chemicals.

The quantity of imports is governed by the international price of MOP and the subsidy given by
the Government to MOP traders. In FY99, 2.58 m.t. of MOP was imported compared to 2.38 m.t.
in FY98. The increase in subsidy on MOP announced in December 1998, from INR 2000 per
tonne to INR 3000 per tonne, triggered this growth. The growth would have been higher had the
subsidy been announced earlier in the financial year. Concession on MOP was increased from
INR 3000 to INR 3250 per tonne in FY00, which would provide a further impetus to MOP
imports.

Table 4 SECTOR WISE PRODUCTION OF NITROGENOUS & PHOSPHATIC

FERTILIZERS (Figures in ‘00’000 tonnes )
FY97 FY98 FY99 FY00
Target Actual Target Actual Target Actual Target Estimated
Nitrogen (N)
Public 31.87 27.34 33.85 33.41 35.11 33.53 34.70 34.76
Sector
Cooperative 17.51 17.28 20.62 23.17 24.28 25.40 25.31 26.14
Sector
Private 40.85 41.38 41.64 44.34 47.43 45.86 50.66 50.71
Sector
Total 90.23 86.00 96.11 100.86 106.83 104.80 110.67 111.61
Phosphate (P)
Public 7.13 6.23 8.05 7.28 7.38 7.70 7.78 7.52
Sector
Cooperative 3.41 3.50 3.30 4.77 3.91 5.00 6.00 7.02
Sector
Private 16.26 15.82 17.24 17.70 18.97 18.71 19.67 19.16
Sector
Total 26.80 25.56 28.60 29.76 30.26 31.41 33.45 33.70
Grand Total 117.03 111.55 124.70 130.62 137.10 136.20 144.12 145.30
3. IMPORTANT ISSUES AFFECTING THE INDUSTRY

3.1 SUBSIDY ON FERTILIZER PRODUCTION AND RETENTION PRICE SCHEME

The steady increase in fertilizer subsidies over phosphoric acid, electricity, etc., as also the
the years has largely been the result of cost of transportation went up significantly
increasing production/consumption and during the eighties. The gas-based fertilizer
increases in the costs of inputs of indigenous units commissioned during this period also
fertilizers and prices of imported fertilizers involved higher capital investment per tonne
from time to time. The cost of various of installed capacity, necessitating constant
inputs/utilities, such as coal, gas, naphtha, upward revisions in the retention prices.
rock phosphate, sulphur, ammonia,

7
Sector Report: Fertilizer Industry
The selling prices of fertilizers to the farmers,
however, remained almost at the same level
between July, 1981 and July 1991. The
Government effected an increase of 30 percent
in the issue prices of fertilizers in August,
1991 after a gap of a decade, when it was
hiked to INR 3300 per tonne. It was gradually
raised to INR 3320 per tonne on July 10 ,
1994 and to INR 3360 per tonne on February
21, 1997. At present the price is INR 4600 per
tonne. However, even these price hikes did
not materially alter the position in absolute
terms, as there has not been any decline in
amount of annual subsidy bill, because of the
steady growth in production to meet the
growing demand and rise in the costs of
inputs.
Though the RPS has served its purpose of
increasing the fertilizer consumption, fertilizer
consumption has gone up from about 32g. per
hectare in 1977 to about 95 kg. per hectare at
present, the irrationalities in the basic formula
for calculating retention price has had serious
implications on the industry. Any increase in
price of inputs including feedstock / fuel
inevitably leads to higher subsidy in the face
of continued control on the selling price on the
lower level, thus manufacturers are more
interested in getting their costs approved
rather than focusing on cost cutting and there
is no incentive to improve operational
efficiency.
The subsidy on urea has also lead to a
distortion in the NPK ratio in the fertilizer
8
India /Economics
consumption. In the post reform period with
the decontrol of K and P fertilizers, after a
period of almost fifteen years the price of K
and P fertilizer was increased substantially
and the price of MOP was raised by about
300 percent. This had a direct impact on
fertilizer usage. There was a shift to using
more nitrogenous fertilizers and urea. The
ideal average of NPK ratio for the country as a
whole is 4:2:1. The NPK ratio which was
almost at an ideal level prior to decontrol of K
and P fertilizers in August, 1992 witnessed
steep deviation after decontrol. The ratio
increased to 9.5:3.2:1 in FY93 and currently
is 10:4:1. These proportions are attributed to
distortions in pricing policies and are expected
to improve once the price distortions arising
from relatively low price of nitrogenous
fertilizers get corrected.
RPS has been under review for the last four
years. High Powered Fertilizers Pricing Policy
Review Committee (HPC) set up in 1997 by
the Ministry of Fertilizers, had proposed
replacing the existing retention price with
uniform Normative Referral Price (NRP), with
higher subsidy being given to fuel-oil/LSHS
and naphtha based plants. The difference
between the NRP, which is calculated on the
basis of long run marginal cost (LRMC) of
production and the selling price will be the
subsidy paid to each manufacturer. The NRP
will be calculated with respect to natural gas
based plants. Unlike a unit wise pricing
scheme, the proposed scheme is a group –
Sector Report: Fertilizer Industry
pricing scheme, which will reimburse a fixed
amount to each manufacturer. The naphtha
and the fuel –oil / LSHS based plants will get
an additional amount as Feedstock
Differential Cost Reimbursement (FDCR) for
a period of 5 years, during which they are
expected to switch over to LNG. There would
be one single rate of concession on urea across
all units irrespective of the feedstock by the
end of the year 2005.
The Expenditure Reform Committee (ERC,
2000) has proposed a Group Retention
Scheme (GRS) in line with the HPC report.
Under the GRS, there will be no separate
retention price for each plant. Instead, the
retention price would be fixed group-wise. For
that, the ERC suggested that urea plants be
divided in to five different groups based on
the feedstock used – pre-1992 gas-based
units, post 1992 gas-based units, naphtha–
based, fuel oil-based and mixed feedstock
based. Thus there would be a single, uniform
3.2 COST OF FEEDSTOCK
Fertilizer production, particularly nitrogenous
fertilizers, is highly energy intensive with cost
of feedstock and fuel alone accounting for
between 55 to 80 percent of the cost of
production, depending upon the type of
feedstock used, technology, age of plant etc.
Plants in India are based primarily on three
feedstock -- naphtha, fuel oil/LSHS and
natural gas with a significant proportion of
domestic capacity of urea plants based on
naphtha or fuel oil /LSHS whose cost is much
higher than natural gas, on which most of the
global capacity is based.
The cost competitiveness of urea units in a
liberalised scenario for imports would be a
function of two factors—the domestic cost of
production and the international price of urea.
An important reason for domestic cost of
production being high in India is that a
significant proportion of domestic capacity is
naphtha or fuel-oil/LSHS based. Naphtha and
furnace oil plants account for 40 percent of the
production or 8 million tonnes of urea. The
cost of these feedstock is much higher than
natural gas, on which most of the global
capacity is based.
9
India /Economics
retention price for all pre-1992 gas based
plants and similarly one each for all naphtha
and fuel oil based units, and so on. These rates
would be determined on the basis of weighted
average of retention prices under the existing
unit-wise dispensation. Implementation of the
scheme can lead to distortions within the
industry as it can lead to closure of the plants
whose retention price is higher than the
weighted average.
ERC has also recommended an immediate
removal of distribution control on urea, 7
percent increase in the urea price p.a.
beginning FY02 for a period of six years and
a phased programme of complete decontrol
of urea by April 1, 2006. In the recent
budget (FY02) the move towards decontrol
has been initiated with the a proposed
implementation of the first phase of urea
decontrol with a move towards GRS.
Even though the industry has generally
maintained high levels of efficiency, the high
cost of feedstock with Naphtha at USD 7.5 per
million BTU, Fuel oil at USD 6 per million
BTU and Gas at USD 1.9 – 2.5 per million
BTU which is substantially higher than the
price of feedstock in the Middle East and
other Urea exporting countries renders Indian
fertilizer industry incompetitive. Until
October 1997, the fertilizer companies availed
of concessional prices for naphtha, fuel oil and
LSHS. But now the prices of these liquid fuels
are linked to the their international prices and
hence to the global crude oil prices. Between
1980 and 1999, Naphtha prices have increased
22 times, Furnace Oil price increased 12
times, Gas price increased between 9 to 12
times depending upon location and rail freight
increased 5 times.
Even as there has been mounting concerns
over the increasing subsidy on fertilizers, bulk
of increase has been contributed by steep
increase in the prices of feedstock. In this
context Fertilizer Association of India (FAI),
an industry body, estimates that out of a total
increase in subsidy payments on domestic
urea of INR 66 billion between FY91 and
FY00, the increase on account of increase in
Sector Report: Fertilizer Industry India /Economics

the price of the feedstock alone (after setting
off extra realisation from increase in selling
price) was about INR 45 billion which works
out to be over two-third of the total increase.
Of late, imported LNG is being talked about
as the feedstock for the future. For the
fertilizer sector several committees including
the HPC, ERC, as well as the Ministry of
Fertilizers’ Background paper have
recommended switchover of all naphtha and
fuel oil based plants to LNG. In fact, based on
the assumed switchover, while, the HPC had
recommended conversion to LNG at the end
of 5 years, the ERC has recommended
switchover by 2006.
Notwithstanding assumed time frame of 5
years by both the committees, there is still a
long way to go before the use of the LNG by
fertilizer plants will become a practical reality.
This is because of unavoidable delays in
completion of projects under implementation.
At the same time, the need for restructuring of
the existing plants to switchover to LNG has
also to be considered. That apart, a
fundamental question relates to whether LNG
will be priced at a level significantly lower
than the prevailing cost of naphtha and fuel
oil. Putting up fertilizer plants in countries
where natural gas is available at cheap
price thus seems to be a good business
proposition.

Producing Urea in Oman -- Oman India Fertilizer Company

In 1997 India signed up for a setting up a urea plant based on LNG feedstock in Oman.
This is a 50:50 joint venture of USD 950 million with Oman Oil Company on the
Oman side and IIFCO and KRIBHCO on the Indian side. It will produce up to 1.5
million tonnes of urea and 0.25 million tonnes of merchant grade ammonia. The
project, whose bankers include JP Morgan and BNP Paribas, and whose debt-equity
ratio is 2:1, is expected to be completed by 2004.
Since 1997 the project has run into rough weather several times. India wants a hundred
percent buy-back arrangement for 15 years at a pre-negotiated price (cost plus 10
percent) which is not agreeable to Oman. IFFCO wants freedom to sell the urea
independent of the buy-back arrangement, especially anywhere in the Indian market.
There is also concern among Indians about committing to a total buy-back for 15 years,
at a cost plus price formula, which is not linked to international prices, with no
downside risk for Oman and the lenders. There is also no penalty for Oman on the non
availability of natural gas. But most of these concerns have been ironed out in recent
negotiations, with the Indian Cabinet committee approving of the new terms.
Table 5 THE GAS ADVANTAGE
Variable cost per tonne of Urea (in INR)
Year Gas Naphtha Fuel Oil Coal
FY92 1797 2724 2252 3461
FY96 2242 4308 3672 5421
FY99 2806 6160 5045 7904

4. FUTURE PROSPECTS

While the imports of P and K fertilizers have been decanalised, urea imports are still controlled by
the government. The removal of all QRs on urea import by April 1, 2001 will put the viability of
Indian manufacturers into question, as their costs of production are higher than the currently
prevailing international price of urea. The availability of LNG will play a critical role in
determining the competitive strength of Indian manufacturers. The existing naphtha and fuel oil
based plants will have to switch to natural gas to be able to sell at competitive rates. The domestic
availability of LNG will fall short of the demand and gas will have to be imported in the form of
LNG. But this requires the setting up of LNG terminals, which is a very capital-intensive exercise.
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Sector Report: Fertilizer Industry India /Economics

The issue of urea selling price is expected to remain sticky because of political factors. On the
cost side, urea manufacturers are facing sharp increases in feedstock costs. Thus, the subsidy
burden on the exchequer in the current financial year i.e. FY01 is likely to be higher than in the
previous fiscal.

The profitability of urea manufacturers would also be affected by the reassessment of capacity
announced by the Government. Further, the draft of the proposed long-term fertilizer policy also
mentions the decontrol of urea distribution in 2000. It is stated that this would save equated
freight subsidy by INR 7 billion. Removal of freight subsidy, will put pressure on the margins of
manufacturers.

The profitability of nitrogenous fertilizers other than urea will continue to come under pressure on
account of sharp increases in input costs. For complex fertilizers, the decision by the Government
to subsidise the nitrogen content in addition to the phosphatic content will improve realisations
and profitability.

The issue facing the DAP sector in the short term is the abolition of differential subsidy support
for the sale of domestically produced DAP by April 1, 2001 and low global prices of DAP and
the cost of raw materials in medium term. Excess capacity in DAP existing globally is expected to
keep the international prices down in the medium term and this along with the commissioning of
the Oswal Chemicals and Fertilizers Ltd. (OCFL) plant in Orissa is likely to lead to a significant
increase in DAP supplies in the domestic market. This may result in an excess supply situation in
the medium term till the time the domestic DAP demand is able to catch up. The problem is
compounded by the fact that the bound rate of duty on imported DAP committed to the WTO is as
low as 5 percent. The re-negotiation of this rate upward is crucial in sustaining the viability of the
domestic industry with abolition of subsidy (in form of ad-hoc concessions) support to DAP under
WTO commitments.

Ajit Ranade , Chief Economist, Ajit.Ranade@ap.abnamro.com

Gaurav Kapur, Associate Economist, Gaurav.Kapur@ap.abnamro.com
The material contained herein has been obtained from sources believed to be reliable but is not necessarily complete and cannot be guaranteed. Any opinion expressed is subject to
change without notice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any financial
instruments. ABN AMRO BANK N.V. does not assume any responsibility, whatsoever, in this respect

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