Itís a Serious Business, Govt Must Pull its Socks Up

Suresh Krishnan,
Managing Director, Zuari Agrochemicals Ltd
The growth of Indian fertiliser sector has been saddled with various issues right from raw material deficit to market volatilities in gas prices to policy paralysis. This sector has gone through the most turbulent phase over the last decade. With the new government in place, fertiliser manufacturers are very optimistic about the growth of this sector and hoping that they take the much required initiatives to put the growth of this sector back on track. In an exclusive interview, with CEW, Suresh Krishnan, Managing Director, Zuari Agrochemicals Ltd, shares his views on these issues.

Please share an overview of the fertiliser consumption patterns in Indian market.
The total consumption of urea last year was close to 30 million tonnes of which 23 million tonnes was produced locally and 7 million tonnes was imported. As far as the Diammonium Phosphate (DAP) segment is concerned, which is the larger Nitro Phosphate (NP) segment, India imported 3.2 million tonnes while the domestic production was 3.6 million tonnes. We also produced 7 million tonnes of Nitrogen, Phosphorous and Pottassium (NPK) in India.

In a good year, India consumes about 30 million tonnes of urea and 20 million tonnes of NP and NPKs. NP and NPKs have seen a decrease in sales and production over the last two years largely due to two reasons - 1st, the uncertain period of monsoons and 2nd, pricing. Consumption in the last 24 months has declined in India in this segment.

Last decade has been very tough for Indian fertiliser sector, where the growth was saddled with various factors including the ones related with the policy. May we have your comments?
Yes, it is true. Over the last 10 years, the fertiliser industry has had a challenging time. The one positive thing for the industry has been the introduction of Nutrient Based Subsidy (NBS) scheme in 2010. It was indeed a good move by the government. However, the benefits of NBS have been partially neutralised in the last 18 months.

I must say that the fertiliser segment of our business in the last two years has not been able to hold on to profitability. However, our dominant market position, built over many years along with diversification into agri-inputs has stood us in good stead and allowed us to remain profitable.

Subsidy burden has been an ongoing debate for the fertiliser industry, but we have not yet reached a conclusion yet. What is your take on that?
Let us understand very clearly that the industry is just a conduit to deliver subsidy, not being subsidised itself. The Indian fertiliser industry is very efficient as the cost structure of the industry is highly competitive when it comes to the conversion cost. However, feedstock price is one of the major reasons for the high manufacturing cost of the fertilisers. This is because the raw materials such as natural gas, phosphatic rock and potash required for manufacturing are not available in India.

Hence, the industry is totally exposed to global prices of raw materials and foreign exchange fluctuations.

Being a conduit, the industry needs to be paid on time, but somehow, it has been forced to carry the burden of subsidy in the books for a very long period. The primary principle of the fertiliser subsidy pay out being followed for the last couple of decades has been that the subsidy is released within a period of 45 to 60 days after the material has been produced and delivered.

But we have noticed that the subsidy period has now increased stretching upto 180 days as well. There are certain elements of the subsidy which have not been paid for more than 12 months. This is exerting enormous pressure on the fertiliser industry.

What are your thoughts on the plans of the government to set up Sovereign Wealth Fund (SWF)?
The SWF is a very good thought the government has come up with. I think the allocation of money should be far more serious here and the statement of intent should be very clear in terms of what kind of participation this fund will finally end up doing. One of the good ways of doing this would be to provide long term money to the Indian fertiliser industry wanting to invest and integrate in the upstream of this sector which means buying into mines and buying into resources which are being imported into India. For this, the quantum of money required would be more serious and the same will have to be truly long term.

How have the overall dynamics impacted the performance of the company and what are the key strategic decisions that the organisation has taken towards maintaining positive growth momentum?
As a long term growth strategy, we are going ahead with the backward integration for our DAP/NPK fertiliser segment and have planned investments of ` 4000 crore in the Middle East (ME) to supply DAP to the Indian market. India is a net importer of finished fertiliser and 3.2 million tonnes of DAP was imported last year (which was about 7 million tonnes a few years back). Zuari Agrochemicals is a major supplier of DAP in Indiaís south and south western markets and it is now expanding in the northern part of India as well. This project is a strategic move in the direction of converting part of trade supplies into manufactured products for our markets.

Currently, the project is in the planning stage with basic approvals already in place and feasibility studies are in progress. We are targeting to achieve the financial closure during this year and it would take another 3 years to commission the facility.

Do you plan to set up urea ammonia based fertiliser units in the ME?
The first and foremost criterion for setting up a nitrogenous facility is to locate a site where gas is available at a competitive price. It may be a good idea to set up such a plant in the ME but most of the recent gas finds or expected finds are seen largely in the African markets. There is no surplus gas available for investment in the ME, as per our information.

India is setting up single phosphate greenfield project in Rajasthan. Is there a possibility of such projects elswhere in the country as well?
In India, the Single Super Phosphate (SSP) manufacturing units have come up in the last two decades. However, the capacity utilisation of the local industry is not even 50 per cent today. The manufacturers have not been able to procure adequate material to run their plants at full capacity due to their location and their linkages for the supply of these raw materials.

Today, even the local producers are importing rock phosphate. In this scenario, expecting a local project based entirely on local raw material to materialise is quite a challenge. Unless investments are made in the upstream, it will not be possible to have any new local projects based on local raw materials. I do not see any major change in the availability of local raw materials for the NP/NPK sectors in the near future.

How do you propose dealing with the challenge of technology upgradation?
The Indian industry has evolved over the last four decades as far as the ammonia urea manufacture is concerned. At any given point of time, India has always had projects which have been most competitive in terms of energy consumption and conversion cost.

The overall efficiency and the input output ratio of any new plant to be set up in India will be far more competitive than what we have today. There is a good possibility for most of the units in India to be upgraded to the contemporary competitive global level. To achieve this, the Government of India must have a programme wherein they give incentives to the industry to modernise their technology and expand their capacity, resulting in ROI, which is beneficial both to the industry and to the government in the long term. This way, the government will be able to convert all the existing capacities to more competitive and efficient long term capacities over the next five years for the good of the Indian industry.

What would a perfect model for India?
India is one of the largest fertiliser markets and the business environment for this sector is completely different from the rest of the world. Hence, there has to be an Indian model in place best suited to meet our needs. Other large countries such as the US have a different dynamics in terms of availability of raw materials and consumption drivers. Furthermore, other large consumption centres such as China, are still very comfortable in terms of availability of raw materials. It is essential to have a unique model for India as it is a big consumer with literally no availability of raw materials. Time has come for pooling of gas prices for the urea industry so that it can bring all manufacturers to a common platform, wherein all of them can compete, perform and extend the NBS scheme across all nutrients.