India is the largest importer of diammonium phosphate (DAP) in the world. Simple reason: subsidies on urea mean DAP is still a dull boy in the manufacturing circles. In fact, India’s indigenous manufactures of this product have been dependent on imports for even stock ingredients! But to look at the brighter side of affairs, for importers of DAP, these are good times.
Interview by Sairaj Iyer | June 2016 Issue | The Dollar Business
Diammonium phosphate a.k.a. DAP – the three magical alphabets that were instrumental in helping Indian farmers transform the agri-landscape of the country in the 1970s and 1980s (buoyed by thrust on agriculture under the Green Revolution), hold the distinction of being the world’s most widely used phosphorus fertiliser, and India is no exception. However today, apart from being a must-have item in a modern agri-producer’s kitty, the chemical is also used as a fire retardant, yeast nutrient in wine and mead brewing, flux for soldering tin and metals, sugar-purifier, nicotine enhancer in cigarettes, and a key ingredient in safety matches as a preventer of afterglow. In fact, India has consistently been the world’s largest importer of DAP; in 2015, India bagged the distinction of accounting for over 40% of global imports.
The chemical is spoken of at most deliberations involving policymakers, agriculturists, and the trading community. These discussions are as much for the right reasons, as they are for the wrong ones. It was August 1992 when the product reached a milestone, as it was the year when the Nutrient Based Subsidy (NBS) under the recommendations of Abhijit Sen Committee and the freedom for an open and general import license commenced. But, a critical gaffe of not including urea under the same policy created an artificial price-arbitrage. This situation has kept government, manufacturers, economists, associations, leading trade pundits and farmers busy in deliberations. Though DAP remains a debatable policy proposition, it is definitely a lucrative product offering abundant opportunities to its producers and importers in the Indian agricultural sector which contributes heavily to GDP.
The Indian demand for fertilizer is gargantuan in volume terms. India ranks second in the consumption of fertilizers in Asia, even though the Food and Agricultural Organisation of the United Nation’s (FAO) statistics point the per hectare consumption as moderate among developing and agrarian economies. It also points that high-yield varieties (HYV) of crops are primarily responsible for the hike in fertilizer demand.
The Department of Fertilizer (GoI) Working Group’s report on fertilizer industry for the Twelfth Five-Year Plan projects India’s fertilizer demand to reach 692.51 lakh metric tonne (LMT) for FY2017 from 616.30 LMT in FY2013. And when it comes to DAP, the demand for the product is expected to increase to 124.13 LMT for FY2017 from 115.59 LMT in FY2013. When it comes to state-wise consumption, Madhya Pradesh and Uttar Pradesh remain the biggest consumers of DAP in India, followed by Andhra Pradesh, Gujarat, Maharashtra and Chhattisgarh.
India’s demand for the product is being met by a comb
ination of indigenous production and imports. A recent report from the Fertilizers and Chemicals Ministry (GOI) points at just 11 key manufacturers of DAP in the country. J. K. Mohapatra, Secretary at the Ministry of Chemicals and Fertilizers is quoted in the report as having said thus, “The country’s import dependence continues to be quite high (20-25% for urea, 90% for phosphatic fertilizers and 100% for potash). On the demand side, the prevailing relative prices have heavily tilted consumption in favour of urea thereby disturbing the balance in nutrient use.”
Players in the production of indigenous DAP notably include IFFCO, Gujarat State Fertilizer Corporation, Zuari Industries, Paradeep Phosphates, etc. However, indigenous production contributes to roughly 40% of the total annual demand for the product. For the rest, Indian consumers rely on imports.
When one uses the word “smuggle” gold, diamonds, fake notes, and drugs quickly come to mind. These are products which hold great value, but fertilizers? S. S. Nandurdikar, the Former Managing Director at Paradeep Phosphates Ltd and Ex-Chairman of the Fertilizer Association of India, encountered the case of subsidised DAP being smuggled into Nepal. He says, “Bicycling with a 50 kg bag through the India-Nepal border is not a big herculean task. But when our marketing team saw the huge flourishing trade and illegal racket involving hundreds of trucks of DAP, we realised that this was rampant and had become a malaise.” The reason is simple. Until 1992, DAP’s domestic-movement, imports and pricing, were restricted by the government. Subsidies were also offered on its purchase, and manufacturers were also paid subsidies. There were subsidies on input costs and even logistics. August 1992, saw DAP move out of the government’s subsidy charter. However, some concessions remain till date – such as concession on the sale of DAP for agricultural purposes (both on indigenous and imported varieties). But, for the purposes of claiming concession, enlistment with Department of Fertilizers as an importer under the Concession Scheme is a pre-condition. [There is no restriction on import of DAP. However, for trading of DAP as fertilizers in the country, the concerned importer has to obtain licence from the Fertilizer Quality Council (FQC) for states and union territories (UT) where the importer proposes to sell the product.]
The Maker’s ENVY
While trading has become simpler and more profitable, DAP manufacturers continue to face critical challenges at multiple levels. A 2015 report by B&K Securities Ltd., portrays operating profits (EBITDA; earnings before interest, tax, depreciation and amortisation) on DAP for domestic producers at Rs.3,407 per tonne. Ironically, the data points out that an importer or trader can make an operating profit of Rs.5,061 per tonne!
But there is a catch. Interestingly, according to government policy for fertilizers, manufacturers of urea can only sell products under a single brand. However, import restrictions on urea is making DAP manufacturers lose out on this critical branding and distribution advantage. Nandurdikar explains, “Usually fertilizer companies club nitrogen (N), phosphorus (P), potassium (K) and Sulphur (S) products. It is easier for a company selling urea to sell DAP, even if they have to import it. But it is impossible for a company focusing on DAP or P & K products to import urea and offer an umbrella of fertilizer solutions.”
Dr. Uttam Gupta, who has been associated as an economist with the Fertilizer Association of India, points out that the Nutrient Based Subsidy (NBS) Policy allows manufacturers to set prices, but it does not spare freedom of movement and distribution as 20% of fertilizers produced or imported in India are covered under the Essential Commodities Act, and the Department of Fertilizers regulates the movement of these fertilizers to bridge supplies in under-served areas like the North East India. That’s acting against its manufacturers in India.
When it comes to imports of DAP, India imported $3.10 billion worth of DAP in CY2015 and was by far the biggest importer of the product in the world. In fact, India imported almost seven times more than what Vietnam, the second-largest importer of DAP, imported in CY2015 (Vietnam imported $453.18 million worth of DAP in CY2015). And not to say, India relied on China for a substantial portion of its import of the product (almost 58%). Saudi Arab and USA too supplied a significant amount of DAP to India in CY2015.
Ideally, India should have had the advantage of negotiating its own price, but that does not seem to be the case. China being the largest supplier to India and the world, obviously monitors Indian fertilizer imports (with an objective of safeguarding its exports) and accordingly manipulates its prices in the international markets. Interestingly, at the moment, the international price of DAP is trending at in the low range, having dropped from $473 per MT in June 2015 to a low of $353 per MT in February 2016, and then rising only slightly to $358 in April 2016. This is good news for its importers.
Although it is heartening for importers to note that DAP prices have fallen of late, most manufacturers are more worried about the government’s policy than declining prices in the global markets. Gupta and Nandurdikar explain that subsidies on urea are taking away the sheen from DAP production in India.
Gupta, who is an observer of the fertilizer industry for over three decades, and has also authoured a book, Fertilizer Subsidies: The inevitable Monster, says, “Despite de jure decontrol, de facto, these fertilizers (DAP) have been under control for more than two decades now, sans a miniscule period of five weeks, from August 25, 1992 to September 30 1992.” He shares an example of DAP, which has a subsidy of Rs.12,350 per tonne, and an MRP of Rs.22,560 per tonne (2015) based on the cost of delivering DAP to farmers. On the contrary, urea’s MRP is abysmally low at Rs.5,360 per tonne. “DAP is hence unattractive to farmers,” he quips. This is the pain point for manufacturers.
Will Indian DAP manufacturers see some change or will the country continue to import it in large volumes? Will Indian farmers purchase fertilizers on the basis of true nutrient-application, rather than prices? Answers are as yet unavailable, but the industry hopes that changes such as direct benefit transfers to farmers will stabilise market prices, creating a win-win situation for all.
While the thought of cushioning already debt-ridden farmers is encouraging, to increase their income by a five times (the dream that our PM elucidated during his 2015 Independence day speech), will need far more than subsidies. There is a need to educate farmers about soil testing and the usage of fertilizer based on the type of soil and the crop. While the impact of urea on crops is slower, as it is an amide, DAP works better as a ‘starter’. Developed nations have better per acre yield due to smarter utilisation of fertilizers, and that is the need of the day. It is time to remove restrictive policies on production of other fertilizers in the country and bring them at a level-playing field with urea.
But seems unlikely that that will happen anytime soon. And until then, importing DAP will continue to make business sense.
S.S. Nandurdikar, ex-MD, Paradeep Phosphates & Fmr. Chairman, Fertilizer Association of India
TDB: What is the impact of Urea subsidies on DAP’s sales and production?
S. S. Nandurdikar (SN): The Abhijit Sen Committee appointed by Govt. recommended a fixed nutrient based subsidy system with free market driven retail price for all fertilizers. This was a paradigm shift compared to earlier cost plus approach aimed at bringing out balanced nutrient management, control on subsidies and a first step towards loosening govt.controls. Unfortunately for reasons best known to the Govt. the recommendations were applied to only phosphatic and potassic fertilizers keeping Urea totally out. Thus over last 5/6 years subsidy on DAP has been brought down to almost 25% whreas in urea it is now almost 75%. The farmers’ tendencies therefore are towards more use of Urea and decreased use of phosphatic fertilizers. Not only it has affected DAP sale but the concept of balanced use of nutrients so important for productivity and soil health has gone for a toss.
TDB: What is the consumer awareness and their profile been?
SN: Technically fertilizer usage should depend on soil analysis and crop requirements. Many farmers don’t analyze the soil, simply because such things either are not available or take more time and resources or they are ignorant. At PPL, we had started mobile soil analysis facilities in PPP mode with the Orissa Government which offered a soil report within a day.
In the absence of scientific and proper use of fertilizer, further skewed by heavily subsidized urea price (and some more factors), our national average farm productivity is almost half of its potential. Immediate attention has to be on farmer education and soil testing both. The PPP mode in each state is possibly a good and effective option. Short courses specific to a group of farmers from an area should be organized. This also has been effectively tried out in the PPP mode in Orissa.
TDB: A certain section of the industry points that it is better to trade in DAP than even look at manufacture it? There is so much that we are talking about make-in-India, how do you look at it in DAP sector?
SN: As part of the food security policy we have set up good and efficient production facilities for both urea and phosphatic fertilizers across private, public and co-operative sectors. This is also necessary as we are one of the largest consumer in the world having a big impact on world demand-supply balance and prices. Unfortunately because of excessive govt. controls there has been very little increase in capacity addition in last more than fifteen years. Increasing demand therefore is all being met through increasing imports. So much for “Make In India”. Another issue is delays in payment of subsidies. For the last 4/5 years, it has now become a practice for Govt. to roll over every year about Rs.35000 Cr. of subsidy payment that is due to the industry to next financial year putting a huge interest burden on the industry. Phosphatic manufacturers have some more problems to overcome. DAP can be freely imported by anybody from anywhere – traders or even urea manufacturers, and sold in the market. But urea import is canalised thru specific Government agencies. Thus you have a very unfair competition. Additionally even after introduction of NBS Govt. still keeps checking every company’s price of every phosphatic product for “reasonableness” without defining what is the criteria for deciding “reasonableness”. Thus all fertilizer manufacturers have hurdles to cross, DAP manufacturers a lot more.
TDB: You have been associated with the industry for over two decades, what has been your critical observation, and what amendments can be looked forward?
SN: A very laudable objective of doubling farmer’s income in next five years has been incorporated in this year’s budget. Fertiliser plays an important part in farm income. The govt. needs to implement NBS policy in spirit and letter for all fertilizers including urea immediately. Urea imports needs to be de-canalised. Extension services and soil testing activities need to strengthened many-fold may be in PPP mode. Subsidy should be paid in time and eventually there should be direct benefit transfer to farmers. All these are objectives which you would find mention in budget speeches of several years. All you need is to get political will and consensus with the states. Please do remember that agriculture is a concurrent subject and many of current problems have a lot to do with policies of the states.
Dr. Uttam Gupta FORMER Chief Economist, Fertilizer Association of India
TDB: You have been observing the industry for over 25 years now. What is your take on India’s DAP policy?
Dr. Uttam Gupta (UG): The 1980s were productive because subsidies became so monstrous that they had to be decontrolled. Both IMF and World Bank, during Madhu Dandavate’s time as the Union Finance Minister, insisted that the policy of subsidies be changed. And, in 1991, during the Narasimha Rao regime, the World Bank anticipated that urea would be included in the new policy of decontrolling prices, which never happened. The disconnect between urea and other fertilisers kept increasing, which resulted in a diammonium phosphate (DAP) & complex fertilisers versus urea kind of a situation in 1992.
TDB: One of your blogs mentions that despite de-jeure decontrol, de-facto, fertilisers have been always under control. What does this mean?
UG: It’s because subsidies that were launched to control prices of fertilisers, actually resulted in complicating the situation. When the control on DAP was lifted in 1992, its price shot up; the heat had to be released, and the prices had to be subsidised again. But because urea was still heavily subsidised, its consumption also shot up.
TDB: Manufacturing is challenging, but trading DAP is profitable. Why?
UG: With the kind of obtrusive controls, it does not make sense for a manufacturer to commit overheads. We must be importing close to two million tonne and producing one million tonne. The 80s was a period of good orderliness for the industry, but for the last 16 years, things in the industry have been a serious mess.
TDB: What can be done to create a win-win situation?
UG: We have to talk about holistic removal of controls, without cherry picking of favourable policies. Control on producer pricing if removed, hypothetically, should also lead to removal of MRP controlling, and regulation of import of urea. Specifically with respect to DAP and complexes, industry benefits will be driven if a uniform price is set across for manufacturers, and urea restrictions are removed.
Freedom has to be offered to manufacturers in true terms, and the business of giving freights on a unit specific basis for urea also has to be fixed in the true sense. Also, the policy should not bring ad-hoc remedies. For example, on June 26, 2013, a policy gave the freedom, but then brought it back under control. This is a dichotomy.
TDB: So no good things are happening?
UG: There are some good things happening. For instance, our shipping minister Nitin Gadkari, is trying to negotiate a JV with Iran, which will fix the price of gas at $1.5-2 per barrel. With that kind of pricing structure, urea produced in India will be cheaper. It is important to work on the price control of domestic urea, give a flat subsidy and forget about controls.
We must learn to trust manufacturers. If urea and fertilisers are not reaching the North East, then there are a number of public sector organisations such as Hindustan Fertilizer and IFFCO that can do it. The point is not about subsidies, but about an effective policy that is free from back-door and front-door controls.
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