Pricing deadlock on MOP imports stirs Indian fertiliser industry

In recent times, there has been a lot of hue and cry surrounding the Indian fertilisers industry. This stems from the domestic fertiliser companies' inability to meet the country’s import requirements due to pricing deadlock issues with their global suppliers.

These concerns over pricing deadlocks have emerged as a result of the sharp depreciation of the Indian rupee against the dollar over the past few months, making imports expensive. As India meets almost 100% of its Muriate of Potash (MOP) requirement via imports, it has been impacted to a great extent.

As a result, the farm gate prices of MOP shot up drastically from Rs 4400 to Rs 11300 over the past one year. This made it very expensive for farmers to buy this fertiliser, and thus, its demand has now come under pressure.

In order to come out with a solution, the Indian fertiliser companies had asked their global suppliers to slash the prices of MOP by around US$ 36/tonne from the current import price of US$ 490/tonne. Some global suppliers accepted their demands and decided to slash prices by around 5%.

This prompted the industry to undertake an austerity measure of deciding against any further price hikes for the current year, so as to avoid over-burdening the farmers. In a press release by the industry body, FAI, the Indian fertiliser industry announced a decision not to increase the MRP of fertilisers to farmers for the present, and also decided not to ask the government for any additional subsidies. The industry unanimously decided to absorb the increased costs.

However, it has recently come to light that the world’s second largest potash producer, Uralkali, has said that it will not slash its potash prices for India. This adds further pressure on the fertiliser companies.

Based on our analysis, we have observed that Zuari Industries is the largest supplier of MOP among the listed players in the domestic market, with MOP sales of Rs 816 cr contributing 15% to its total topline. Even on a raw material consumption basis, MOP contributes only 15% of its raw material costs. Other industry players like MCFL, DFCL and CIL follow closely, with MOP sales contributing less than 10% of their total sales. Hence, it is pretty evident that the contribution of MOP to the total revenues of even the top industry players is not so much as to be alarmed about.

On the overall industry front, we had a discussion with a top official from FAI. According to him, the country’s overall MOP imports stood at 5.29 MT in 2009-10, while the consumption stood at 4.63 MT. For the year 2010-11, while imports stood 6.36 MT, consumption remained pretty much stagnant near the previous year's levels. Accounting for the raw material and captive consumption, the situation remains pretty much in favour of imports being a nudge higher than consumption.

In conclusion, we believe that as far as MOP is concerned, its scarcity in the domestic markets would have a limited impact on the financials of fertiliser companies going forward.