Global prices fall, long-term import deals struck

A sharp drop in global prices is likely to bring down the fertiliser subsidy in FY24 to lower than the budget estimate of Rs 1.79 trillion, after touching the record level of Rs 2.52 trillion in the last fiscal year. The government is also exploring options for entering into long-term agreements with several countries to source fertilisers, a move that would reduce the cost of imports of soil nutrients.

A decline in the import cost of liquefied natural gas (LNG), a key ingredient in the manufacturing of urea in recent months, is also expected to reduce the fertiliser subsidy.

The subsidy on soil nutrients is likely to decline by more than 30% on year to around Rs 1.8 trillion in FY24 as per preliminary projections.

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Imports account for a third of domestic soil nutrients consumption of around 60 million tonne (MT) annually.

Because higher global prices prevailed last year, the fertiliser subsidy rose by 56% to Rs 2.52 trillion in FY23 against Rs 1.62 trillion in 2021-22.

Industry sources told FE global prices are expected to soften further, which could bring down the subsidies outgo in the current fiscal. “The government’s thrust on promoting nano fertiliser such as urea and diammonium phosphate (DAP) would pull down imports of soil nutrients,” an official said.

Officials said that natural gas prices, which constitute 85% of the domestic cost of production of urea, have moderated to $14.5 million metric BTU (mmbtu) from around $25 mmbtu in October 2022.

Of the total annual demand of 35 MT of urea, close to 29 MT is domestically produced and the rest is imported.

Trade sources said that imported urea prices, which rose to $925/tonne in April 2022, had declined by 64% to $ 313/tonne in March, 2023.

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Global prices of DAP have dropped by 57% to $606/tonne in March, 2022 from $954/tonne in April 2022. The country imports about half of its annual requirement of 10 MT of DAP.

Around 15% of NPK fertiliser requirements are met through imports. The domestic Muriate of Potash (MoP) of 1.5 MT is met solely through imports (from Belarus, Canada and Jordan, etc).

“We are increasing domestic production and making long-term arrangements for imports with exporter countries. It will give us an opportunity to get fertiliser at our price,” fertiliser minister Mansukh Mandaviya recently stated.

Indian companies have signed a series of long-term deals with Morocco, Saudi Arabia, Canada, Russia, Oman, Israel and Jordan for importing crop nutrients. These agreements for long term sourcing of soil nutrients constitute about 30% of the total requirement.

In case of urea, farmers pay a fixed price of Rs 242 per bag (45 kg) against the cost of production of around Rs 2,650 per bag. The balance is provided by the government as a subsidy to fertiliser units.

The retail prices of phosphatic and potassic (P&K) fertiliser, including DAP were ‘decontrolled’ in 2020 with the introduction of a ‘fixed-subsidy’ regime as part of Nutrient Based Subsidy mechanism announced by the government twice in a year.