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Amit kumar(PGDMA-1001)

1/15/2011

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EXECUTIVE SUMMARY

The Indian fertilizer industry has come a long way since its early days post-independence. India today is one of the largest producer and consumer of Fertilisers in the world. India's production in terms of nutrients (N & P) reached a level of 155 lakh MT in 2005-06 from 0.39 lakh MT in 1951-52. Similarly, consumption of fertilizers in terms of nutrients (NPK) has also grown from about 0.66 lakh MT in 1951-52 to nearly 184 lakh MT in 2004-05. 

The Indian Fertilizer industry, given its strategic importance in ensuring self-sufficiency of food grain production in the country, has for decades, been under Government control. The Government has over the years, provided subsidies/concessions through the fertilizer companies to farmers and the manufacturers have been compensated through various schemes. Though the Government control helped in meeting the objective of ensuring creation of capacities and ultimately achieving self-sufficiency in food grain production, it did not encourage improving efficiencies in the sector. With the burgeoning subsidy bill and the need to focus on fiscal prudence, Government policies in recent times are aimed at encouraging efficiencies in the sector. Policy measures like the new pricing scheme have made the operations of less efficient players unviable. The Government polices today are oriented towards achieving the stated objective of total deregulation in the sector. However, the uncertainty over exact policy parameters and absence of a comprehensive long term policy has not augured well for the industry. For instance, the financial year 2006-07 began with practically no clarity on the policy parameters for both nitrogenous and phosphatic fertilizers. The policy parameters for third stage of the new pricing scheme for urea which was to be implemented from the beginning of the FY07 are yet to be announced and the implementation of the Prof. Abhijith Sen Committee report on phosphatic fertilizers is also pending. The uncertain policy environment has also not encouraged any major investments in domestic capacity.

Another important issue confronting the sector is with respect to the feedstock. Natural gas which is the main feedstock for production of nitrogenous fertilizers is available in limited quantities and the industry competes with the power sector for its share. With the Government policy favouring conversion to gas based units, the demand for gas is only expected to go up in the future, which may in turn lead to further shortages. Similarly, in the case of phosphates, on account of the limited availability of phosphoric acid and rock phosphate in the country, domestic units are dependent to a large extent on imports. In view of the limited availability of the main feedstock within the country, fertiliser companies today are exploring the possibility of setting up joint ventures abroad to tie up their feedstock requirements. Though a few joint venture agreements have been signed with respect to supply of phosphoric acid, only a couple of joint ventures have been established with respect to urea. Domestic players have also not been able to enter into long term gas supply agreements primarily due to differences over pricing.

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Table of content

1. Introduction 3

2. Industry overview Fertilizer sector

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3. Fertilizer industry in context 4

4. Economic indicators of the fertilizer industry 4

5. Present status of industry 5

6. Consumption of fertilizers 5

7. Different grades of fertilizers(N,P,K) 5

8. Growth and development of fertilizer industry 6-8

9. Rising Demands and it’s determinants 9

10. Major players(Public & Private) 10

11. Policy overview 11

12. Challenges 12

13. Subsidies 12

14. Strategies for industry expansion 13

15. Map showing location of different fertilizer companies 14

16. Conclusion 15

Introduction

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The fertilizer industry presents one of the most energy intensive sectors within the Indian economy and is therefore of particular interest in the context of both local and global environmental discussions. Increases in productivity through the adoption of more efficient and cleaner technologies in the manufacturing sector will be most effective in merging economic, environmental, and social development objectives. A historical examination of productivity growth in India’s industries embedded into a broader analysis of structural composition and policy changes will help identify potential future development strategies that lead towards a more sustainable development path. Issues of productivity growth and patterns of substitution in the fertilizer sector as well as in other energy intensive industries in India have been discussed from various perspectives. Historical estimates vary from indicating an improvement to a decline in the sector’s productivity. The variation depends mainly on the time period considered, the source of data, the type of indices and econometric specifications used for reporting productivity growth. Regarding patterns of substitution most analyses focus on interfuel substitution possibilities in the context of rising energy demand. Not much research has been conducted on patterns of substitution among the primary and secondary input factors: Capital, labour, energy and materials. However, analysing the use and substitution possibilities of these factors as well as identifying the main drivers of productivity growth among these and other factors is of special importance for understanding technological and overall development of an industry. Future energy use depends on the level of production and the technologies employed. Furthermore, different economic and policy settings affect structures and efficiencies within the sector. The final section examines the on-going changes in the fertilizer industry structure. It compares best practice technologies to Indian technologies and identifies potentials and barriers to the adoption of such efficiency improvements.

Industry Overview

Fertilizer sector

The Indian fertilizer industry has succeeded in meeting almost fully the demand of all chemical fertilizers except for MOP. The industry had a very humble beginning in 1906, when the first manufacturing unit of Single Super Phosphate (SSP) was set up in Ranipet near Chennai with an annual capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at Cochin in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in Bihar were the first large sized -fertilizer plants set up in the forties and fifties with a view to establish an industrial base to achieve self-sufficiency in food grains. Subsequently, green revolution in the late sixties gave an impetus to the growth of fertilizer industry in India. The seventies and eighties then witnessed a significant addition to the fertilizer production capacity.

Fertilizer sector is a very crucial for Indian economy because it provides a very important input to agriculture. The fertilizer industry in India has played a pivotal role in achieving self – sufficiency in food grains as well as in rapid and sustained agriculture growth. India is the third largest producer and consumer of fertilizers in the world after China and the United States. The growth of the Indian fertilizer industry has been largely determined by the policies pursued by the government. The government exercised extensive controls on the pricing, distribution and movement of fertilizers.

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The industry is capital intensive and the production process energy intensive with the combined cost of feedstock and fuel accounting for anywhere between 55 and 80 per cent of cost of production, depending on the type of fertilizers.

The Fertilizer Industry in Context

Six industries in India have been identified as energy intensive industries: Aluminum,cement, fertilizer, iron and steel, glass, and paper. Together they account for 16.8% ofmanufacturing value of output (VO) and consume 38.8% of all fuels consumed in themanufacturing sector (Table 2.1). The fertilizer sector holds a considerable share within these energy intensive industries. In 1993, it accounted for 23% of value of output within the six industries and for 3.8% in the manufacturing sector.

Economic indicators of the fertilizer industry

Production in the fertilizer sector has been increasing over the last 20 years. Over thestudy period 1973-1993 real VO increased by an average of 10.1% p.a. The fertilizerindustry shows highest growth in the group of energy intensive industries. Major fertilizer pricing specific policy changes took place in 1977-80 and since 1991. As seen in Table growth of real value of output was rising at around 16.4% during the first period (1973- 1979) and increased slightly lower at 10.4% in the following period of total control (1979- 91) accounting for higher than average growth in both the group of six energy intensive industries and total manufacturing. After 1991, real value of output decreased substantially at –10.6% until 1993 despite major policy changes towards decontrol and liberalization that aimed at spurring the sector.Present Status of Fertilizer Industry

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India being the third largest producer and consumer of fertilizers in the world with an installed capacity of Nitrogen (N) and Phosphate (P) nutrients at 14 million tonnes p.a.

Urea, a nitrogenous type of fertilizer, is most widely consumed in India. Currently the urea capacity is 20.2 million tonnes while consumption is 21.7 million tonnes.

Fertilizer production is highly energy intensive with cost of feedstock and fuel alone accounting for between 55 to 80 per cent of the cost of production. Plants in India are based primarily on three feedstock -- naphtha, fuel oil and natural gas with a significant proportion of domestic capacity of urea plants based on naphtha or fuel oil which cost more than natural gas. High cost feedstock and increased production / consumption have caused a steady increase in fertilizer subsidy.

Installed capacity is 20.8 million MT in the year 2003-04.

Fertilizer consumption in India vis-à-vis neighbouring countriesPer hectare fertilizer consumption (Kg/ha) in neighboring countries during 2001-02

China – 225.1 Bangladesh – 159.7 Sri Lanka – 122.7 Pakistan – 131.9 India – 91.5 World – 89.9

India is the third largest producer and consumer of fertilizers in the world after China and USA and it contributes to 12% of world production of N & P nutrients and 12.6% of world consumption of NPK nutrients.

Different grades of FertilisersBased on consumption pattern in 2001-02:

Nitrogen (N) comes from –Urea (81%), DAP (9.8%), Complexes (7.6%) and Others (1.6%)

Phosphate (P2O5) comes from –DAP (64.9%), Complexes (25.3%), SSP (9.5%) and Others (0.3%)

Potash (K) comes from –MOP (71.6%), Complexes (27.8%) and Others (0.6%)

Growth of the industryAs on 31 Jan 08, the country has an installed capacity of 120.61 lakh MT of nitrogen and 56.59 lakh MT of Phosphate. Presently, there are 56 large size fertilizer plants in the country manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Out of these, 30 (as on date 28 are functioning) units produce urea, 21 units produce DAP and complex fertilizers, 5 units produce low analysis straight nitrogenous fertilizers and the remaining 9 manufacture ammonium sulphate as-product. Besides, there are about 72 medium and small-scale units in operation producing SSP. The sector-wise installed capacity is given in the table below:-

Sector -wise and Nutrient - wise Installed Capacity of Fertilizer Manufacturing Units (as on 1st January, 2008)

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Development of the IndustryCapacity Build-Up

At present, there are 56 large size fertilizer units in the country manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Of these, 30 units ( as on date 28 units are functioning ) produce urea, 21 units produce DAP and complex fertilizers, 5 units produce low analysis straight nitrogenous fertilizers and 9 manufacture ammonium sulphate as by-product. Besides, there are about 72 small and medium scale units in operation producing single super phosphate (SSP). The total installed capacity of fertilizer production which was 119.60 lakh MT of nitrogen and 53.60 lakh MT of phosphate as on 31.03.2004, has marginally increased to 120.61 lakh MT of nitrogen and 56.59 lakh MT of phosphate as on 31.01.2008.

Production capacity and capacity utilizationThe production of fertilizers during 2006-07 was 115.78 lakh MT of nitrogen and 45.17 lakh MT of phosphate. The production target for 2007- 2008 has been fixed at 119.08 lakh MT of nitrogen and 49.14 lakh MT of phosphate, representing a growth rate of 2.85% in nitrogen and 8.79% in phosphate, as compared to the actual production in 2006-2007.Production target for nitrogenous fertilizer is less than the installed capacity because of constraints in supply and quality of natual gas for Rashtriya Chemicals & Fertilizers (RCF), Trombay and Bramaputra Valley Fertilizer Corporation Ltd. (BVFCL), Namrup. Similarly, the production target for phospahtic fertilizer is less than installed capacity due to constraints in availability of raw materials/ intermediates which are largely imported.

Strategy for GrowthThe following strategy has been adopted to increase fertilizer production:

Expansion and capacity addition/efficiency enhancement through retrofitting / revamping of existing fertilizer plants.

Setting up joint venture projects in countries having abundant and cheaper raw material resources.

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Working out the possibility of using alternative sources like liquified natural gas, coal gasification, etc., to overcome the constraints in the domestic availability of cheap and clean feedstock, particularly for the production of urea.

Revival of the closed units by setting up brownfield units subject to availability of gas.

Setting up of Greenfield projects in urea sector.

PRODUCTION AND IMPORT OF FERTILISERS(IN '000'T)

0

2000

4000

6000

8000

10000

12000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

YEARS

PR

OD

UC

TIO

N A

ND

IM

PO

RT

(IN

'00

0 T

ON

NE

S)

N Production

N Imports

P2O2 Production

P2O2 Import

K2O Production

K2O Import

CONSUMPTION OF CHEMICAL FERTILISER( LAKH TON)

020406080

100120140160

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

YEAR

CO

NS

UM

PT

ION

IN

LA

KH

T

ON

Nitrogenous(N)

Phosphatic(P)

Potassic(K)

p consumption

0100200300400500600700800900

states

p con

sump

tion (

000 t

onne

s)

p2o5(2006-07)

P2O5(2007-08)

"N" consumption

0500

10001500200025003000

states

"000

" ton

nes 2006-07

2007-08

"k" fertilizer consumption

0100200300400500600700800900

states

"000

" to

nn

es

2006-07

2007-08

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Determinants of Fertilize Demand • Rainfall and irrigation facilities • Relative prices of fertilizers • Cropping pattern • Government policies

Rising demand for fertilizers There has been significant growth in the consumption of fertilizers in last three years

due to overall good monsoon. The growth in NPK consumption was 9.50% in 2004-05, 10.60 % in 2005-06 and 8.40% per cent in 2006-07.Against the robust growth in consumption, domestic fertilizer production has remained range – bound in the last decades. The surge in fertilizers demand and stagnant to modest increase in production has widened the gap between consumption and production causing larger dependence on imports. Therefore, the rising demand for fertilizers is providing ample scope for the companies in this sector to increase their production capacity and volumes thereby, driving the growth of fertilizer sector.

The installed capacity as on 30.01.2003 has reached a level of 121.10 lakh MT of nitrogen (inclusive of an installed capacity of 208.42 lakh MT of urea after reassessment of capacity) and 53.60 lakh MT of phosphatic nutrient, making India the 3rd largest fertilizer producer in the world. The rapid build-up of fertilizer production capacity in the country has been achieved as a result of a favorable policy environment facilitating large investments in the public, cooperative and private sectors. Presently, there are 57 large sized fertilizer plants in the country manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Out of these, 29 unit produce urea, 20 units produce DAP and complex fertilizers 13 plants manufacture Ammonium Sulphate (AS), Calcium Ammonium Nitrate (CAN) and other low analysis nitrogenous fertilizers. Besides, there are about 64 medium and small-scale units in operation producing SSP.

The Indian fertilizer industry has come a long way since its early days post independence. India today is one of the largest producer and consumer of Fertilizers in the world. India’s production in terms of nutrients (N & P) reached a level of 155 lakh MT in 2005-06 from 0.39 lakh MT in 1951-52. Similarly, consumption of fertilizers in terms of nutrients (NPK) has also grown from about 0.66 lakh MT in 1951-52 to nearly 184 lakh MT in 2004-05.

The Indian Fertilizer industry, given its strategic importance in ensuring self– sufficiency of food grain production in the country, has for decades, been under Government control. The Government has over the years, provided subsidies/ concessions through the fertilizer companies to farmers and the manufacturers have been compensated through various schemes. Though the Government control helped in meeting the objective of ensuring creation of capacities and ultimately achieving self-sufficiency in food grain production, it did not encourage improving efficiencies in the sector.

Burgeoning subsidy bill and the need to focus on fiscal prudence, Government polices in recent times are aimed at encouraging efficiencies in the sector. Policy measures like the new pricing scheme have made the operations of less efficient players unviable. The Government polices today are oriented towards achieving the stated objective of total deregulation in the sector. However, the uncertainty over exact policy parameters and absence of a comprehensive long term policy has not

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augured well for the industry. The financial year 2006-07 began with practically no clarity on the policy parameters for both nitrogenous and phosphatic fertilizers.

Another important issue confronting the sector is with respect to the feedstock. Natural gas which is the main feedstock for production of nitrogenous fertilizers is available in limited quantities and the industry competes with the power sector for its share. With the Government policy favoring conversion to gas based units, the demand for gas is only expected to go up in the future, which may in turn lead to further shortages.

The Indian fertilizer industry has come a long way since its early days post independence. India today is one of the largest producer and consumer of Fertilisers in the world. India’s production in terms of nutrients (N & P) reached a level of 155 lakh MT in 2005-06 from 0.39 lakh MT in 1951-52. Similarly, consumption of fertilizers in terms of nutrients (NPK) has also grown from about 0.66 lakh MT in 1951-52 to nearly 184 lakh MT in 2004-05. The Indian Fertilizer industry, given its strategic importance in ensuring self sufficiency of food grain production in the country, has for decades, been under Government control.

The Government has over the years, provided subsidies/concessions through the fertilizer companies to farmers and the manufacturers have been compensated through various schemes. Though the Government control helped in meeting the objective of ensuring creation of capacities and ultimately achieving self-sufficiency in food grain production, it did not encourage improving efficiencies in the sector. With the burgeoning subsidy bill and the need to focus on fiscal prudence, Government polices in recent times are aimed at encouraging efficiencies in the sector. Policy measures like the new pricing scheme have made the operations of less efficient players unviable. The Government polices today are oriented towards achieving the stated objective of total deregulation in the sector. However, the uncertainty over exact policy parameters and absence of a comprehensive long term policy has not augured well for the industry. For instance, the financial year 2006-07 began with practically no clarity on the policy parameters for both nitrogenous and phosphatic fertilizers.

Another important issue confronting the sector is with respect to the feedstock. Natural gas which is the main feedstock for production of nitrogenous fertilizers is available in limited quantities and the industry competes with the power sector for its share. With the Government policy favouring conversion to gas based units, the demand for gas is only expected to go up in the future, which may in turn lead to further shortages. Similarly, in the case of phosphates, on account of the limited availability of phosphoric acid and rock phosphate in the country, domestic units are dependent to a large extent on imports. In view of the limited availability of the main feedstock within the country, fertiliser companies today are exploring the possibility of setting up joint ventures abroad to tie up their feedstock requirements. Though a few joint venture agreements have been signed with respect to supply of phosphoric acid, only a couple of joint ventures have been established with respect to urea. Domestic players have also not been able to enter into long term gas supply agreements primarily due to differences over pricing.

MAJOR PLAYERS:

Public sector Private sector companies Fertilizer Corporation of India Limited The Scientific Fertilizer Co Pvt Ltd

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(FCIL) Hindustan Fertilizer Corporation

Limited (HFC) Coromandel Fertilizers

Pyrites, Phosphates & Chemicals Limited

Deepak Fertilizers and Petrochemicals Corporation Limited

Rashtriya Chemicals and Fertilizers Limited (RCF)

Apratim International

National Fertilizers Limited (NFL) Devidayal Agro Chemicals Projects &Development India Limited

(PDIL) Aries AgroVet

The Fertilizers and Chemicals Travancore Limited (FACT)

DSCL

Madras Fertilizers Limited (MFL) Gujarat State Fertilizers &Chemicals Limited

FCI Aravali Gypsum & Minerals India Limited, Jodhpur

Tata Chemicals Limited

Chambal Fertilizers Nagarjuna Fertilizers and chemicals

limited Godavari Fertilizers and Chemicals

limited Zuari Industries limited

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Overview of Policies Regarding the Fertilizer Industry

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CHALLENGES IN FERTILISER INDUSTRY Gap between demand and supply Greater dependency of country on imports( also feedstock) Unable reduce burden of government in subsidiary rates Infrastructural bottlenecks Uncertainties in government policies Small size of older plants

CURRENT SCENERIO Most companies are expecting approval for their huge capital expenditure plans from

department of fertilizer and industry Indian fertilizer companies joined hands with Jordan, Senegal, Oman, Morocco,

Egypt etc. The demand for fertilizer has increased by 5% (21 June 2010, Rashtriya Chemicals

and fertilizer) 10% increase in Urea price in April 2010. Fertilizer subsidy has taken largest share for 58.7% of total subsidies in 2008-09

Fertilizer subsidyGiven In both developed and developing countries.

Objectives- Self sufficiency Making available fertilizers to farmers at affordable prices and to promote balanced

application of three main fertilizer nutrients viz. nitrogen, phosphorus and potash. To encourage domestic production by allowing fertilizer producer a reasonable

returns.

Trends in fertilizer subsidies Retention price cum subsidy scheme Fertilizer control order,1985 Nov 1977-nitrogenous fertilizers Feb 1979-complex fertilizers To encourage green revolution Subsidy = retention price*- notified sale price Retention price-normative cost of production of the urea as determined by the

Government plus 12 per-cent post tax return on net worth. Freight subsidy Farm gate price of urea is amongst the lowest in the region and is heavily subsidised. Retention price of controlled fertilizers is fixed in every 3 years. 1992-govt. decontrolled imports of complex fertilizers (DAP & MOP). For each decontrolled fertilizer, the Maximum Retail Price (MRP) is indicated by

Central Government except for Single Super Phosphate, the MRP of which is indicated by each State/UT Government.

New fertilizer pricing policy Started from 1 April 2003 Objective-encouraging efficiency based fertilizer pricing

LIST OF RECENT POLICIES1. Inclusion of imported MAP and MAP produced by granulating imported powdered MAP2. Revised concession scheme for SSP3. Policy for encouraging production and availability of fortified and coated fertilizers

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4. Nutrient based pricing of subsidized fertilizers5. Inclusion of TSP under the concession scheme6. Inclusion of indigenous Ammonium Sulphate under concession scheme7. Policy on P & K fertilizers8. Policy for uniform freight subsidy on all fertilizers9. Policy for new investments in urea sector and long term off take of urea from joint ventures abroad.

NUTRIENT BASED SUBSIDY NBS policy on decontrolled Phosphoric and Potassic fertilizer w.e.f 1st April, 2010. Fix subsidy on N,P,K,S for 2010-11. Additional per ton subsidy for subsidized fertilizer carrying other secondary nutrients

and micronutrients.eg in Zn, Boron. Constitute an Inter-Ministerial Committee under chairmanship of Secretary of

fertilizer. Retail prices fixed by companies at farm gate level.

STRATEGIES FOR INDUSTRY EXPANSION Modernization and revamping of existing fertilizer units. Reviving some of the closed fertilizer units Alternative sources for urea production Establishment of joint ventures where cheaper raw materials can be procured Joint ventures for phosphoric acid procurement

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MAP

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Summary and ConclusionsIn this paper, I investigated India’s fertilizer sector from various perspectives. I developed economic as well as engineering indicators for productivity growth, technical change and energy consumption that allowed us to investigate savings potentials in specific energy use. We discussed structural and policy changes in the sector. The economic analysis showed that productivity was increasing over time. The increase took place during the era of total control when the retention price system and distribution control was in effect. The retention price system was coupled with relatively high norms on capacity utilization which supported productivity increase. With liberalization of the fertilizer sector and reduction of subsidies productivity declined substantially since the early 1990s, despite an increase in capacity utilization.I further pointed out options for reducing energy consumption in the fertilizer industry. In comparing current energy consumption to best achievable energy consumption energy savings of up to 17% could be achieved. However, the implementation of initiatives towards energy efficiency is being hampered by barriers both of general and process specific nature occurring at the macro and micro level of the economy. Energy policies in general and price-based policies in particular can help overcome these barriers in giving proper incentives and correcting distorted prices. Appropriate provisions should be made in the retention pricing scheme to further encourage investment in energy conservation projects. Originally, normative consumption of various inputs was taken into account under the retention price system which encouraged the implementation of energy efficiency measures. These and other fiscal incentives need to be reinstated under the current scheme. Through the removal of subsidies energy prices would come to reflect their true costs. In a deregulated market, firms would adjust their behaviour in order to minimize costs of production. Therefore, in the short term, energy price increases would push less productive and inefficient mostly smaller units out of the market or force these units to take immediate initiatives to improve productivity and efficiency. On a long term basis, substantial further investments in energy efficiency technologies for existing and new plants have to be made. Therefore, sectoral policies should be devoted to the promotion of such investments. A stable foreseeable policy environment would substantially help firms to reduce the risk of taking large investments. Our economic results pointed out that technological change has been biased3 towards the use of energy inputs. This implies that price-based policies albeit effective in reducing energy use could have a negative long run effect on productivity, and thus welfare. An optimal policy strategy would therefore consist of a mix of regulatory and price based incentives within a set political and economic framework.

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