India’s domestic fertilizer production may face a contraction as the West Asia war threatens to choke the supply of raw materials, according to a new report by Crisil Ratings. Urea and other nutrient output could plunge by as much as 15% if maritime and diplomatic disruptions in the region persist for three months.
The supply crunch hits at a tough time for the world’s most populous nation, which relies on West Asia for 40% of its fertilizer imports. With domestic manufacturing units of liquefied natural gas (LNG) and ammonia, 80% of which is sourced from the conflict-prone region, capacity utilization is expected to fall, hurting the efficiency and bottom lines of major producers.
To prevent a domestic shortage during the crucial kharif sowing season, the government may be forced to absorb soaring international costs. Crisil has estimated that this could increase the central fertilizer subsidy bill by as much as ₹25,000 crore, adding fresh pressure to a budget already projected at ₹1.71 trillion for the upcoming fiscal year.
While a three-month inventory cushion and a government mandate to prioritize gas for urea plants offer some protection, the industry’s profitability remains at the mercy of geopolitical stability.
Mint reported on 2 March that the West Asia conflict . Currently, the fertilizer subsidy is projected at ₹1.71 trillion for the next financial year.
“The ongoing issues in the Middle East could disrupt the fertilizer supply chain at a crucial time for the kharif season. Disruption in LNG and ammonia supplies continuing for about three months could cut domestic urea and complex fertilizer production by 10-15%. The impact on production will be cushioned to some extent by the recent government directive for allocation of 70% gas to urea manufacturers,” said Anand Kulkarni, director, Crisil Ratings.
Operational hurdles, fiscal pressure
Urea accounts for 45% of fertilizer consumption in India, complex fertilizers (diammonium phosphate, or DAP, and nitrogen, phosphorus and potassium, or NPK) for one-third, and single super phosphate (SSP) and muriate of potash (MOP) for the rest. The fertilizer sector dependence on imports remains high, with about 20% of urea and one-third of complex fertilizers, primarily DAP, being imported. Furthermore, the key raw materials for urea, such as natural gas, which accounts for about 80% of the raw material cost, and complex fertilizers such as ammonia and phosphoric acid, are largely imported due to limited domestic reserves.
The profitability of urea players primarily hinges on the difference between prescribed energy norms and actual energy consumption, as natural gas costs are fully passed through. The energy consumption of efficient players is about 5% below the prescribed norms, directly boosting their profitability. However, with a decline in capacity utilization, energy efficiency will take a hit, affecting operating profits. Nonetheless, players with multiple plants may optimize gas use across plants to reduce the impact.
The industry will require additional government subsidy support to mitigate the impact. Given the sector’s strategic importance, the government has supported it in the past by raising NBS rates and providing additional subsidies for DAP players.
“Factoring in the elevated input costs and imported fertilizer prices for a quarter, the overall subsidy budget is likely to increase by 12-15% from initial estimates of ₹1.71 trillion for fiscal 2027. While the government has been prompt in clearing subsidy dues in the past five years, the timeliness and adequacy of subsidy support will have a bearing on the working capital cycle of players,” said Nitin Bansal, associate director, Crisil Ratings.
The ability of fertilizer makers to source key raw materials and fertilizers from alternative sources, and the government’s intervention in this regard, will be worth watching if the West Asia conflict stretches on.
The government is looking to boost purchases from a group of nations, including Indonesia, Belarus, Morocco, Russia and China.
Further, the government is working on a plan for which it has constituted seven empowered groups, including one for fertilizer.
Going forward, the extent and duration of geopolitical tensions will be critical in determining the depth of the impact on production, pricing, and fiscal outgo.