The Hindu Business Line : Divestment delay dampens fertiliser sector consolidation process: Fitch

THE Centre's delay in the disinvestment of the State-owned fertiliser units has dampened the process of consolidation in the sector, the rating agency Fitch has said.

The sell-off exercise is now expected to gain momentum only after a new Government is in place after the Lok Sabha polls. Once this happens, it will reduce the public sector share in the production of fertilisers and lead to the emergence of a few large private players with multi-product businesses and an all-India presence.

Following the notification of the new energy norms, raw material mix and the mechanism for providing escalation and de-escalation in the prices of inputs for urea units during the second stage (Stage-2) of the group concession scheme (GCS), which commenced on April 1 this year, the tightening of the energy consumption norms is expected to affect all urea manufacturing units.

The least impact, obviously, will be on the efficient players. As a thumb rule, the gas-based plants operating in the country are said to be largely efficient, comparable to the best operating plants internationally.

Since the immediate demand outlook for the domestic market continues to be positive, coming as it does on the back of expectation of a good performance for the 2003 rabi harvest and yet another normal monsoon in the current year, the industry is expected to move at a faster pace to add more capacity. This may be through revamp, modernisation, de-bottlenecking and expansion of the existing units as also the creation of new capacities as soon as the Government is able to provide clarity on the pricing of gas/LNG.

Clarity on gas/LNG pricing, according to Fitch, will also accelerate conversion of the more expensive naphtha-based plants into cheaper and efficient gas-based plants and thus lower the subsidy burden on the exchequer.

The efficiency gains arising out of the switchover to NG/LNG, says Fitch, is expected to lead to improved competitiveness of the erstwhile naphtha-based producers. This, in turn, will have a positive impact on their credit quality. True, that the demand-supply scenario is likely to turn deficit, exacerbated by the shutdown of inefficient capacities. This, however, could be bridged, to a large extent, by the low-cost urea producers stepping up their operating rates.

Investments in energy conservation projects, in any case, are expected to accelerate as units strive to improve operational efficiency by benchmarking their costs and processes against international norms to enhance their long-term competitiveness. In the long term, units with flexibility in feedstock use, wide product range and focus on operational efficiencies will be better placed in the sector.

Regulatory uncertainties in the fertiliser sector today, Fitch notes, are lower compared to 18 months ago. The current regulatory framework is equipped to make the industry internationally competitive and geared to take on competition from imports in the event of full decontrol, according to the rating agency.

Looking back, Fitch notes that in 2002, the inadequate monsoons affected all the three fertilisers — nitrogenous (N), phosphatic (P) and potassic (K) — with consumption levels declining by 7.4 per cent, 8.3 per cent and four per cent, respectively. The Government moved ahead and made policy-related announcements during the year for players in both nitrogenous and phosphatic sector (both DAP and complex fertilisers) with regard to capital related charges and energy consumption norms for Stage-2 of GCS.

Thus, the changes in Government policy through the announcement of 7th and 8th pricing policy and vagaries of monsoons took a toll on the profitability of the nitrogenous fertiliser manufacturers during the 2003 fiscal. The impact of GCS was largely on expected lines with a premium being placed on energy efficiency. Plants which were not energy-efficient suffered, and some of them have had to close down operations.

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