The Hindu Business Line : New policy may boost complex fertilisers demand

The recent policy move to introduce a nutrient-based subsidy regime for fertilisers, in place of the present product-based system, may reduce selling prices for complex fertilisers, boost their demand and encourage a more rational and varied product mix from manufacturers of complex fertilisers (fertilisers which combine the nutrients Nitrogen-N, Phosphorus-P and Potassium K). However, the move is unlikely to result in any near term financial gain to producers, as more important aspects of the subsidy regime relating to delays in disbursement and possible under-recovery of costs, remain unresolved.

The transition to a nutrient-based subsidy will put complex (NPK) fertilisers on par with straight fertilisers such as urea and DAP, when it comes to pricing. Once the new system takes effect, farmers will no longer have reason to choose urea over complex grades that also offer ‘N’, just because of the price factor.

With the selling prices and thus the subsidy to be decided based on the relative proportions of N, P & K in different products, manufacturers too may be able to offer more product variants, without tuning their product mix entirely to the subsidies available.

This shift may promote more balanced fertilizer use – translating into higher offtake of complex grades and lower demand for urea, over the medium to long-term.

Players such as Coromandel Fertilizers, Tata Chemicals, RCF, Madras Fertilizers and Zuari Industries, makers of complex products, may be among the key beneficiaries of such a trend. However, the near-term uncertainty over earnings prospects of these companies remains.

The sharp upward spiral in input costs for fertilisers is expected to lead to a sharp expansion in the fertilizer subsidy bill this year, far beyond outlays projected in the budget.

There is still considerable uncertainty about how the additional outlays will be funded. This latest move to reduce complex fertiliser prices will also result in a further expansion in the subsidy bill.

The government has also made a simultaneous decision to reimburse fertiliser manufacturers for the freight cost on their products, at actual rates.

This move is positive for all fertiliser makers, as they may be in a position to expand their distribution reach to areas of tights supply, with the costs for this expansion being borne by the Government.