Fertilisers: Lower budgeted subsidies dilute positives

Fertiliser stocks which notched up 4-5 per cent gains during the initial part of the Budget presentation had lost much of their sheen by market close on Monday. The actively traded Chambal Fertilisers, Coromandel International and Nagarjuna Fertilisers closed the day with declines in price. This stock market reaction is justified as the budget has failed to address the key near-term concern for most listed fertiliser producers – the spiralling costs of inputs – which would have required much higher subsidy allocations by the government for 2011-12. The budget documents reveal that though both input costs and import prices of fertilisers have shot through roof in recent times, the fertiliser subsidy for 2011-12 (at Rs 49,998 crore) has actually been pegged lower than the revised estimates for 2010-11 (Rs 54,976 crore).

As it is unlikely that the volume of fertilisers consumed this year will be lower than last year, the government obviously expects players either to make do with lower subsidies or higher selling prices. With inputs for major fertilisers pegged to oil-linked inputs such as naphtha, LNG and ammonia, the recently announced rates of subsidy for complex fertilisers for 2011-12 already fall short.

NBS: a minus for urea

Though it is much-awaited, the introduction of nutrient-based subsidy (NBS) for urea, too is unlikely to be immediately positive for urea producers. First, it is likely to force a uniform cost structure on urea producers who today have widely varying costs owing to different feedstock (naphtha, gas and LNG). It is also likely to do away with the artificially low urea selling prices and tilt fertiliser consumption away from urea and towards phosphatic and complex fertilisers, to help balanced fertilizer use.

In the absence of clarity about crucial facets of their operations- the subsidy mechanism, selling prices and whether their costs will be covered in full for the coming fiscal- it is doubtful if fertiliser producers will hasten to line up new capital expansion plans. Seen in this light, the various incentives doled out by the government for encouraging capital investments in the fertiliser sector – the infrastructure status for capital investments, investment-linked incentives, etc – may be of limited use to players for now.

Cash transfers

The one budget proposal that can solve all of the fertiliser industry's complex problems is the intention to move to direct cash transfers for all major subsidies. Such a move would completely do away with the current complications for the fertiliser producers, caused mainly by routing fertiliser subsidies through the industry. Direct transfers would allow fertiliser makers to freely price their products, force them to adopt the most efficient cost structures and feedstock, develop a greater degree of global competitiveness and stick to the products that are most in demand, instead of those that can beget the maximum subsidy. However, direct cash transfers for delivering fertiliser subsidies have been talked about for quite a few years now and it would be premature to react to this development based on just a statement of intention.

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