The operational cost of import-export dependent agriculture chemicals has shot up sharply following the geopolitical tensions around the Red Sea and the Suez Canal. The shipping cost has risen sharply as there are huge traffic restrictions on the alternative shipping route through the Panama Canal region. The development is expected to push agrochemical prices amid slowing demand.

Most of the exporters tapping the European regions are using the alternative route to ship their produce. Moreover, the Panama Canal region is experiencing drought and the Canal Authority has capped the number of vessels that can cross the channel. These limits imposed late last year are the strictest since 1989. The current daily capacity is 24 ships against the pre-drought’s 38. Moreover, the government has lowered the complex fertilizer subsidy rates for the second half by more than 40 per cent, which would lead to pressure on the profit margin of fertilizer producers.

Some of the companies have already taken price hikes and lowered discounts to dealers to protect their margins. Since subsidy reduction on phosphate-heavy fertilizers is high, companies have not been pushing for volume aggressively.

Prashant Biyani, Research Analyst, Elara Securities said the earnings trajectory of agrochemical companies is expected to be divergent with producers with less high-cost inventory on the distribution channel benefiting the most while earnings of others coming under pressure.

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Demand slowdown

Even as the sowing of rabi crops is almost complete across the country, the overall area under coverage was down marginally at 687 lakh hectares (lh) against 689 lh in the year-ago period due to lower paddy and pulses coverage.

Paddy acreage was down at 28.25 lh against 29.33 lh while that of pulses dipped to 155.13 lh against 162.66 lh in the previous year.

Demand for fertilizers in the key markets of Maharashtra and Karnataka has been hit due to deficient monsoon. Fungicide liquidation also has been slow in Maharashtra due to the lower sowing of onion crops.

Internationally, demand continues to be weak, especially in North America, which has a huge pile of herbicides inventory. Demand is slightly better in Brazil.

Prathamesh Sawant, Research Analyst, Axis Securities said the outlook expressed by fertilizer companies in the coming quarters has to be watched closely as the global growth engine slows and Western economies grapple with inflationary pressures.

The companies’ ability to handle current inflationary pressure and global slowdown would be key as they are struggling to protect their market share and margins, said Sawant.