A potentially weakening rupee and the probability of a disappointing monsoon due to the El Nino effect, along with the subsidy system may impact the fertiliser sector, according a report.
The demand remains under pressure with the Ministry of Chemicals and Fertilisers struggling to pay out subsidies, Rabobank said in its fertiliser Q2 2014 report, adding that a potentially weakening rupee and disappointing monsoons could impact fertiliser demand further.
In terms of urea, the ministry is still struggling to pay out subsidies. In the interim budget, the UPA government dedicated $11 billion to fertiliser subsidies. Last year, the same ministry also struggled to pay out subsidies, and banks had to step in to provide loans, Rabobank said.
Currently, a metric tonne of urea can be purchased by farmers at a maximum retail price (MRP) of Rs 5,360 ($90). The difference between the MRP and the delivered costs of urea is paid as a subsidy to fertiliser producers.
Under a new scheme, the subsidy is based on the production cost of urea, something that will only stretch the budget of the ministry further and reduce cash flow within the Indian domestic urea industry.
Urea demand in India is likely to remain subdued until July, as the country waits with another urea tender until the Chinese export window opens. Some stock building is feeding demand in India, with April stocks at 675,000 tonnes, up more than 200 percent on the previous month, the report said.
There is a deteriorating trend in the price of fertilisers and Rabobank expects this to continue in the coming quarter.
Rabobank said that in terms of phosphates, the Indian story is not rosy either. Based on the MRP and the subsidy system, Indian diammonium phosphate fertiliser (DAP) prices are capped at around $480 per tonne on CFR basis.
A weakening rupee could potentially lower this cap even further and make phosphate imports less affordable. The same applies to all fertiliser imports.
While changes to the heavily subsidised fertiliser industry are much needed, they are likely to occur in small incremental steps, it said.
The application of fertilisers in the second half of 2014 will also largely depend on whether there will be a favourable monsoon this year, the report said.
The greater chance of an El Nino occurring this year increases the probability of a disappointing monsoon, it added.
A less-than-favourable monsoon could cause a switch to less water-intensive crops like corn or cotton instead of rice during the rabi season.
In previous years, the application of fertiliser to corn was much less intensive than for other crops, which may diminish demand for all fertilisers in India, the report noted.
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