2012 Jan Fertilisers

7/31/2019 2012 Jan Fertilisers

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Industry Comment Fertilisers

www.imacs.in 1

ICRA Management Consulting Services LimitedIMaCSResearch&

Ana

lytics

January 2012


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Contacts:

Swati Jain Senior Research OfficerE-mail:[email protected]

Vineet Nigam Programme Leader (Research & Analytics)

E-mail:[email protected]

Telephone: +91 120 4515800

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by it to be accurate and reliable. Although reasonable care has been taken to ensure that the

information herein is true, such information is provided as is without any warranty of any kind,

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accuracy, timeliness or completeness of any such information. All information contained herein

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and should not be construed as any indication of credit rating or grading of ICRA for any

instruments that have been issued or are to be issued by any entity.
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TABLE OF CONTENTS

ENVIRONMENT ANALYSISPORTERS MODEL ................................................................................. 7

EXECUTIVE SUMMARY ....................................................................................................................... 8

INDUSTRY OVERVIEW ........................................................................................................................ 9

NITROGENOUS FERTILISERS ............................................................................................................... 12

PHOSPHATE FERTILISERS ................................................................................................................... 14POTASH FERTILISERS ........................................................................................................................ 22

FERTILISER SUBSIDIES AND GOVERNMENT POLICIES ......................................................................23

UREA SUBSIDY POLICY UP TO MARCH 2003RPS ............................................................................... 23

UREA POLICY FOR THE PERIOD STARTING APRIL 1,2003 ....................................................................... 28SUBSIDIES ON OTHER FERTILISERS ...................................................................................................... 33POLICY FOR MODERNISATION AND EXPANSION .................................................................................... 40

POLICY FOR UNIFORM FREIGHT SUBSIDY ............................................................................................. 42CENTRAL EXCISE AND CUSTOMS DUTY ON FERTILISERS .......................................................................... 42GUIDELINES FOR CUSTOMISED FERTILISERS,2008 ................................................................................ 42

NBS FOR P AND K AND SSP,2010 AND 2011 ..................................................................................... 42

RAW MATERIALS/FEEDSTOCK .........................................................................................................44

NATURAL GAS ................................................................................................................................ 44LIQUID HYDROCARBONSNAPHTHA,FUEL OIL/LSHS .......................................................................... 48ENERGY CONSUMPTION AND EFFICIENCY............................................................................................. 50

PHOSPHATE FERTILISER RAW MATERIALS ............................................................................................ 53

DEMAND CHARACTERISTICS ............................................................................................................56

OVERVIEW ..................................................................................................................................... 56FERTILISER USE BY CROPS ................................................................................................................. 65NPKRATIO AND TRENDS.................................................................................................................. 67

OUTPUT PRICES .............................................................................................................................. 69FERTILISER PRICES ........................................................................................................................... 70HIGH YIELDING VARIETIES ................................................................................................................. 71

IRRIGATION .................................................................................................................................... 73

CREDIT .......................................................................................................................................... 75AVERAGE FARM SIZE........................................................................................................................ 77

DOMESTIC DEMANDFUTURE ESTIMATES .....................................................................................78

PLANNED CAPACITY .........................................................................................................................80

INDUSTRY FINANCIAL PERFORMANCE ............................................................................................81

PROFITS AND MARGINS .................................................................................................................... 81

RETURNS ....................................................................................................................................... 82DEBT-EQUITY AND INTEREST COVERAGE ............................................................................................. 83

CONCLUSION ...................................................................................................................................86

ANNEXURE .......................................................................................................................................87


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LIST OF TABLES

Table 1: Indias Installed Capacity and Production of Fertilisers ................................................... 9

Table 2: Consumption of Urea and DAP........................................................................................ 10

Table 3: Nitrogenous Fertiliser Production and Capacity Utilisation ........................................... 13

Table 4: Feedstock-wise Share in N Capacity ................................................................................ 13

Table 5: Regional Distribution of N Fertiliser Capacity, Production, Consumption and Gap ...... 14Table 6: Phosphate Fertiliser Production and Capacity Utilisation .............................................. 15

Table 7: Regional Distribution of P205 Fertiliser Capacity, Production, Consumption and Gap 15

Table 8: Feedstock-wise Share in Phosphate Fertilisers Capacity ................................................ 18

Table 9: Import of Phosphate Fertilisers DAP, MAP and TSP .................................................... 21

Table 10: Farm-gate Price of Urea ................................................................................................. 25

Table 11: Subsidy on Urea ............................................................................................................. 26

Table 12: Urea Imports by Country of Origin ................................................................................ 26

Table 13: World Urea Production.................................................................................................. 28

Table 14: Classification of Units in Groups under New Pricing Scheme ...................................... 29

Table 15: Classification of Units in Groups under N P S................................................................ 31

Table 16: MRP of Major Fertilisers ................................................................................................ 37Table 17: Final Rates of Concession for Decontrolled Fertilisers ................................................. 38

Table 18: Final Rate of Concession for Decontrolled P and K Fertilisers...................................... 39

Table 19: Impact of NBS on Non-Urea and Phosphate Fertilisers ................................................ 42

Table 20: Estimated Delivered Price of NG and RLNG for Fertiliser Companies by Location ...... 46

Table 21: Consumption of NG, Naphtha, FO/LSHS by Fertiliser Industry .................................... 49

Table 22: Indias Ammonia Production and Imports for Fertiliser............................................... 51

Table 23: Energy Consumption in Ammonia Production.............................................................. 52

Table 24: World Rock Phosphate Production and Reserves......................................................... 54

Table 25: Effect of Market Factors on Fertiliser Demand ............................................................. 57

Table 26: State-wise Fertiliser Consumption and Growth............................................................ 60

Table 27: Season-wise Consumption of Fertiliser Nutrients ........................................................ 61

Table 28: Use of Fertilisers and HYV Seeds ................................................................................... 62

Table 29: Nutrient Consumption of Fertilisers and Share ............................................................ 63

Table 30: State-wise Fertiliser Consumption per Hectare ............................................................ 64

Table 31: Fertiliser Use by Crops in India 2003-04 ..................................................................... 66

Table 32: State-wise Fertiliser Use Ratio....................................................................................... 68

Table 33: Crop Requirement per kg of Nutrient ........................................................................... 70

Table 34: Growth of WPI and Consumption ................................................................................. 71

Table 35: Percentage of Area Under a Crop Group using HYV Seeds, Fertilisers and Manure ... 72

Table 36: State-wise Percentage of Area under a Crop Group: Using HYV Seeds, Fertilisers and

Manure.................................................................................................................................... 73

Table 37: Flow of Institutional Credit to Agriculture .................................................................... 77

Table 38: Farm Size and Fertiliser Consumption in India.............................................................. 78Table 39: Tenth Five-Year Plan Projected versus Actual Consumption .................................... 78

Table 40: Projected Fertiliser Consumption by Nutrient and Product ......................................... 79

Table 41: Planned Capacity Expansion .......................................................................................... 80

Table 42: Industry Financial Performance Share of Operating Costs ........................................ 81

Table 43: Year-wise Industry Margins ........................................................................................... 82

Table 44: Key Industry Ratios ........................................................................................................ 84

Table 45: Financial Performance ................................................................................................... 85


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Table 46: Production and Consumption........................................................................................ 87

Table 47: Capacity Straight and Complex Fertilisers, Nutrients ................................................ 87

Table 48: Production Straight and Complex Fertilisers, Nutrients ............................................ 88

Table 49: Demand-Supply Gap (N, P2O5, K20) ............................................................................. 88

Table 50: Imports and Exports (N, P2O5, K20).............................................................................. 89

Table 51: Indias N and P Installed Capacity, Production and Capacity Utilisation..................... 89

Table 52: Urea, DAP, SSP Installed Capacity, Production and Capacity Utilisation .................. 89

Table 53: Production, Consumption and Import of Urea ............................................................. 90

Table 54: Production, Consumption and Import of DAP .............................................................. 90

Table 55: Production, Consumption and Import of MOP ............................................................. 91

Table 56: Production, Consumption and Import of SSP ............................................................... 91

Table 57: Domestic Production of Fertilisers by Nutrient ............................................................ 92

Table 58: State-wise Consumption of Fertilisers by Nutrient ...................................................... 93

Table 59: State-wise Consumption of Fertilisers by Land Area .................................................... 95

Table 60: N:P:K Consumption Ratio .............................................................................................. 96

Table 61: Regional Distribution of N:P:K Consumption Ratio ...................................................... 96

LIST OF FIGURES

Figure 1: Fertiliser Nutrients Used in India ..................................................................................... 9

Figure 2: Share of Fertilisers in Installed Capacity of N and P2O5 ............................................... 10

Figure 3: Consumption of Fertiliser Products................................................................................ 11

Figure 4: Nutrient Content of Indias Fertiliser Consumption...................................................... 11

Figure 5: Share of N Fertilisers in Total N Nutrients Consumption .............................................. 12

Figure 6: Share of P-Fertiliser in Total P Nutrients Consumption................................................. 16

Figure 7: Production and Imports of Ammonia ............................................................................ 16

Figure 8: Phosphoric Acid for Fertiliser Industry........................................................................... 17

Figure 9: Region-wise DAP Production and Consumption............................................................ 19Figure 10: SSP Capacity, Production and Capacity Utilisation...................................................... 19

Figure 11: Region-wise SSP Production and Consumption........................................................... 20

Figure 12: Sulphur Deficiency in Soil ............................................................................................. 20

Figure 13: Production, Imports and Total Supply of Rock Phosphates ........................................ 22

Figure 14: Imports and Consumption of MOP and SOP................................................................ 23

Figure 15: Farm-gate Prices of Urea and Delivered Cost .............................................................. 25

Figure 16: Average CFR (India) Prices of Urea, DAP and MOP ..................................................... 27

Figure 17: Quarterly Trends in World Urea Prices ........................................................................ 28

Figure 18: Weighted Average Rates for Concession for Different Feedstock Groups of Urea

Units ........................................................................................................................................ 30

Figure 19: Quarterly Trends in World DAP Prices ......................................................................... 40

Figure 20: Production of NG and off-take by Fertiliser Industry .................................................. 45

Figure 21: Quarterly Trends in World Rock Phosphate Prices...................................................... 55

Figure 22: Sulphuric Acid Production in India ............................................................................... 55

Figure 23: Quarterly Trends in World Phosphoric Acid Prices...................................................... 56

Figure 24: Indias Fertiliser Consumption FY1960-1995............................................................. 58

Figure 25: Yields of Major Food-grains.......................................................................................... 58

Figure 26: Indias Fertiliser Consumption FY1998 to FY2011..................................................... 59

Figure 27: Growth in Fertiliser Consumption per Hectare............................................................ 63


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Figure 28: Country-wise Fertiliser Consumption........................................................................... 64

Figure 29: Indias N P K Ratio ......................................................................................................... 67

Figure 30: Growth in Area under Irrigation and Fertiliser Consumption ..................................... 74

Figure 31: Institutional Credit Flow to Agriculture ....................................................................... 76

Figure 32: ROCE and RONW........................................................................................................... 83

Figure 33: Debt-Equity and Interest Coverage .............................................................................. 84

Figure 34: Trends in Quarterly OI and Operating Margins ........................................................... 85


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Threat of Substitutes Low

Bio fertilisers and organic fertilisers

are produced, but they continue to

account for a very small share.

Inter Firm Rivalry Moderate

The Government provides assured

returns to companies through

concession schemes. Some competition

exists in terms of sale volumes. In urea,

the sales are also regulated, although, toa smaller extent than before.

Bargaining Power of Buyers

High

Although the farmers are

fragmented, they are politically

important for the Government;

prices are controlled.

Barriers to Entry High

High capital costs, delays in subsidy

payments, high working capital

requirements, and Government approval

for setting up a urea plant.

Bargaining Power of Suppliers

Medium/High

Feedstock is a major cost for fertiliser

companies. However, Governments

subsidy mechanism largely insulates

companies from input cost volatility.


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To feed an estimated population of 1.4 billion by 2025 Indias food grain production needs to

increase from 218.2 mt in FY2010 to around 325 mt by 2025. There will also be a need to

increase production of non-food grains such as oilseeds, sugarcane, cotton, tea and cotton.

According to estimates by the United Nations Food and Agriculture Organisation (FAO), India

would require about 45 mt of nutrients from various sources of plant nutrients, i.e., fertilisers,organic manures and bio-fertilisers. Because of the limited scope for increase in acreage, most of

the increase in agricultural production would have to come from a substantial increase in yields.

Yields for a majority of crops have been stagnant over time and there remains great potential for

increasing yields through greater use of inputs such as fertilisers. Thus, fertilisers are likely to

remain vital for future development of agriculture.

To achieve self-sufficiency in fertilisers, the Government of India has protected the domestic

industry through price and supply controls. The Indian fertiliser industry has emerged as the

third-largest in the world. However, because of feedstock and raw material constraints the

industry, as a whole, has so far been less cost-efficient than international counterparts.

World over, the agriculture sector enjoys substantial subsidies. In India, agricultural subsidies are

disbursed primarily through output-price support and input subsidies. Input-fertiliser subsidies

have been successful in increasing fertiliser consumption, improving agricultural yields and

increasing indigenous food grains production. The subsidy is provided to the fertiliser

manufacturer for distributing and selling its products to the farmers at a price cheaper than the

cost of production of fertilisers. However, agricultural subsidies in India are among the lowest in

the world. Further, input subsidies form less than 10% of the value of agricultural production and

fall within the World Trade Organisation (WTO) provisions.

Agricultural soils require frequent fertilising because of nutrient depletion over time. Fertilisers

can be organic or manufactured chemicals. They typically provide, in varying proportions, three

major plant nutrients nitrogen or N, phosphorus or P, and potassium or K. Other secondary

plant nutrients include calcium, sulphur, magnesium and sometimes, trace elements or

micronutrients such as boron, chlorine, manganese, iron, zinc, copper and molybdenum. N, P,

and K are the three most important nutrients for crop growth.


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Figure 1: Fertiliser Nutrients Used in India

Source: IMaCS Research

The Indian fertiliser industry provides for the three primary nutrients: nitrogen-N, phosphate-

P2O5 and potash-K2O. Besides these, the industry also manufactures complex fertilisers (N:P:K),

which are a combination of the three nutrients. Urea (46% N), ammonium sulphate or AS (20.6%

N), calcium ammonium nitrate or CAN (25% N), ammonium chloride or ACl (25% N) are the

straight nitrogenous N-fertilisers manufactured. The complex fertilisers comprise a combination

of two or three nutrients and are referred to as NP or NPK fertilisers. These include 16:20:20,

20:20:0, 14:28:14, 14:35:14, 17:17:17, 19:19:19, 16:20:0, 15:15:15, 20.8:20.8:0, 23:23:0,

10:26:26, 12:32:16 and 20:0:10.

Table 1: Indias Installed Capacity and Production of FertilisersThousand tonnes of nutrients

FY 1991 1998 2005 2006 2007 2008 2009 2010 2011

Capacity 11,047 13,694 17,689 17,747 18,026 18,165 18,182 19,157 19,168

N 8,282 10,559 12,208 12,288 12,290 12,290 12,290 12,945 12,947

Straight N 7,252 9,350 9,956 10,066 10,066 10,066 10,604 10,523 -

Through NP/NPKs 1,030 1,209 2,252 2,222 2,224 2,224 1,686 2,422 -

P 2,765 3,135 5,481 5,459 5,736 5,875 5,892 6,212 6,221

Straight P2O5 817 1,038 982 1,068 1,190 1,208 1,225 1,280 1,287

Through NP/NPKs 1,948 2,097 4,499 4,391 4,546 4,667 4,667 4,932 4,934

Production 9,044 13,159 15,344 15,535 15,966 14,617 14,318 16,298 16,544

N 6,993 10,083 11,305 11,333 11,525 10,903 10,901 11,924 12,173

Straight N 6,148 8,806 9,504 9,430 9,510 9,259 9,314 9,869 10,217

Through NP/NPKs 845 1,277 1,801 1,903 2,015 1,644 1,587 2,055 1,956

P 2,051 3,076 4,039 4,202 4,441 3,714 3,417 4,374 4,371

Straight P2O5 584 613 394 447 476 359 405 495 594

Primary nutrients: N, P, K

Secondary nutrients: Ca, S,Mg

Micronutrients : B, Mn, Cl,Zn, Fe, Cu, M

Organic

nutirents N: Urea, AS, CAN, ACl

P2O5:SSP, TSP, Pelofos

K2O: MOP, SOP

Complex: N:P/N:P:K, DAP,

APS, Nitro-phosphate

Manufactured

fertiliser


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FY 1991 1998 2005 2006 2007 2008 2009 2010 2011

Through NP/NPKs 1,467 2,463 3,645 3,755 3,965 3,355 3,012 3,879 3,777

During the period, 2005-2011, the installed capacity of N fertilisers has increased at a six-year

compound average growth rate (CAGR) of 1% to about 13 million tonnes (mt) per annum or mtpa

in terms of nutrients.

Figure 2: Share of Fertilisers in Installed Capacity of N and P2O5

Sources: FAI, IMaCS Research

Urea is the main fertiliser produced in the country, accounting for 78.9% of N-fertiliser capacity.Among the phosphate fertilisers, single super phosphate or SSP (16% P), with an installed

capacity of 8.0 mtpa is a major straight phosphate fertiliser comprising 20.7% of total P2O5

capacity. At an installed capacity of 6.9 mtpa, di-ammonium phosphate or DAP is the other key

fertiliser manufactured constituting 51.7% of the P2O5 capacity in 2010-2011. Potash fertilisers

are primarily imported.

Table 2: Consumption of Urea and DAP

Thousand tonnes

FY 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011CAGR

(%)

Urea 19,186 19,917 18,493 19,767 20,665 22,298 24,338 25,963 26,649 26,673 28,113 3.7%DAP 5,885 6,181 5,473 5,625 6,256 6,764 7,381 7,497 9,231 10,492 10,870 5.1%

79%

4%2%

10%3%2%

18.0%

3.4%

51.7%

6.2%

20.7%Urea

NP/NPK

Nitro-phosphate

DAP

APS

SSP

AS, CAN, ACl

P2O5 Fertilisers

N-Fertilisers


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Figure 3: Consumption of Fertiliser ProductsThousand tonnes

*Does not include Urea and DAP


In FY2011, the contributions of N, P and K to the total nutrient consumption of 28.1 million

tonnes (mt) in the country were 58.9%, 28.6% and 12.5%, respectively. The share of N, P and K

averaged 61.3%, 26.9%, 11.8% during FY2005-11, as compared with 65.5%, 25.3% and 9.2%

during FY1999-2003.

The high share of N fertiliser consumption reflects on high nitrogen deficiency in Indian soils. In

the Indo-Gangetic plains, medium-high yields can be obtained only with the application of N-

fertilisers. Phosphorus deficiencies are also high with P fertility being low or medium in nearly

95% of districts. K deficiencies have also grown because of depletion, especially, in the Indo-

Gangetic plains with increase in rice-wheat system productivity. Sulphur deficiency is also

prevalent in many states.

Figure 4: Nutrient Content of Indias Fertiliser ConsumptionFY, Thousand tonnes

733

3,825

87

3,932

1998

47

2,888

1,145641

532

427

-

-3,576

100173-

9,862

AS, ACl, CAN

SSP

TSP

MOP

SOPMAP

Rock

10-26-26

12-32-16

14-35-14

15-15-15

16-20-0

17-17-17

19-19-19

20-20-0

23-23-0

28-28-0

14-28-14

NP/NPK2010-11

1999-2000

5,661

9,823 11,310 10,474 11,07711,714 12,723

13,773 14,419 15,09115,580 16,558

2,005

2,898

4,3824,019 4,124

4,6245,204

5,543 5,5156,506

7,2748,050

808

1,156

1,6671,601 1,598

2,0612,413

2,335 2,636

3,3133,632

3,514

0

5,000

10,000

15,000

20,000

25,000

30,000

1986 1996 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011P

K2O P2O5 N


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The main straight-N fertilisers produced in the country are urea, CAN, AS and ACl. The

intermediate input required is ammonia. Nitrogen is obtained from the atmosphere; the sources

of hydrogen for ammonia production are naphtha, natural gas (NG), fuel/furnace oil (FO), low

sulphur heavy stock (LSHS), coal and coke oven gas (COG).

The total installed capacity for production of N fertilisers in India was 12.9 mtpa as of November

2011. Capacity increased sharply from 5.2 mtpa in 1983-84 to 11.99 mt in 2000-01, but remained

almost stagnant 2001-09. Urea dominates N fertiliser production and consumption in India. It

accounts for 97% of straight N fertiliser production capacity and 78% of the total N fertiliser

production capacity. It is produced commercially from synthetic ammonia and carbon dioxide.

Figure 5: Share of N Fertilisers in Total N Nutrients ConsumptionFY

Urea has the highest nitrogen content of all solid nitrogenous fertilisers in common use. It

therefore has the lowest transportation costs per unit of nitrogen nutrient. Urea consumption is

high because of the low selling price and the high nitrogen content (46.4%) and lower selling

price, which makes it attractive as compared with other fertilisers.

On the supply side, urea and other N fertiliser market is characterised by the presence of big

players. The top six producersIFFCO, NFL, RCF, CFCL, KRIBHCO and NFCLaccount for about

two-thirds of the total N fertilisers capacity in the country and 64% of production. IFFCO is the

largest producer of urea, accounting for around 20% of Indias urea production.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20102011P

AS,CAN, ACl DAP and others Urea


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Table 3: Nitrogenous Fertiliser Production and Capacity Utilisation

Production

(thousand tonnes)

Capacity Utilisation

(%)

FY 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

Public 3,006 2,898 2,937 3,132 3,181 83.7 93.9 95.1 89.2 90.6

Private 5,464 4,974 4,830 5,388 5,536 99.4 89.9 87.3 89.6 92.1

Cooperative 3,055 3,031 3,133 3,404 3,456 96.4 95.6 98.9 99.4 100.9

Total 11,525 10,903 10,900 11,924 12,173 93.8 95.2 95.2 92.1 94.0

Anhydrous ammonia is the source of nearly all the synthetic nitrogen fertilisers produced in the

world. Ammonia is produced by combining nitrogen with hydrogen. The nitrogen is obtained

from the atmosphere, while the hydrogen is obtained from primarily natural gas it is also derived

to some extent from naphtha, coke-oven gas, refinery gases and fuel oil. Of the total production

capacity of 22.2 mtpa of urea, around 81% is based on NG, 9% on naphtha and 10% on FO/LSHS.

Table 4: Feedstock-wise Share in N CapacityThousand tonnes

NG Naphtha FO CokeAmmonia

(External)

Capro-

lactumTotal

October 2002 4,729 3,105 1,117 59 1,521 - 12,000

Share 39.4% 25.9% 9.3% 0.5% 12.7% 100.0%

October 2003 4,993 3,271 1,050 59 1,688 - 12,198

Share 40.9% 26.9% 8.6% 0.5% 13.8% 100.0%

November 2006 7,374 1,998 1,047 61 1,694 - 12,260

Share 60.1% 16.3% 8.5% 0.5% 13.8% 100.0%

November 2007 7,548 1,823 1,047 61 1,694 - 12,260

Share 61.6% 14.9% 8.5% 0.5% 13.8% 100.0%

November 2008 7,548 1,823 1,047 61 1,717 - 12,284

Share 61.5% 14.8% 8.5% 0.5% 14.0 100.0%

November 2009 8,085 1,853 1,047 61 1,912 87 13,045Share 62.0% 14.2% 8.0% 0.5% 14.7% 0.7% 100.0%

November 2010 8,069 1,190 1,047 40 1,908 87 12,341

Share 65.4% 9.6% 8.5% 0.3% 15.4% 0.7% 100%

November 2011 8,071 1,190 1,047 40 1,911 87 12,346

Share 65.4% 9.6% 8.5% 0.3% 15.5% 0.7% 100%

The largest consumption of N fertilisers is in the Northern region (accounting for nearly 33.5% of

the total N consumption). Western region has the largest share of 45.5% in production (on

account of high feedstock availability) and faces high freight costs in marketing urea to other

locations. Eastern India with limited production of NG (except in North East) has low share in

urea production and imports its requirement mainly from the western region.


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Table 5: Regional Distribution of N Fertiliser Capacity, Production, Consumption and Gap

Volume

(Thousand tonnes)

FY 2004 2005 2006 2007 2008 2009 2010 2011

3 year

CAGR

Growth

Capacity 12,166 12,208 12,288 12,290 12,290 12,290 12,945 12,947 1.7%

East 863 863 953 953 953 953 953 953 0.0%

North 3,742 3,742 3,742 3,742 3,742 3,742 4,050 4,050 2.6%

South 2,191 2,254 2,254 2,199 2,206 2,206 2,539 2,539 4.7%

West 5,418 5,418 5,340 5,390 5,390 5,390 5,403 5,405 0.1%

Production 10,557 11,305 11,333 11,525 10,903 10,901 11,924 12,173 3.7%

East 420 466 485 634 630 583 729 732 5.1%

North 3,320 3,470 3,480 3,514 3,578 3,682 3,924 3,929 3.1%

South 1,807 2,016 2,040 2,039 1,510 1,538 1,784 1,971 9.2%

West 5,010 5,352 5,329 5,338 5,184 5,097 5,487 5,541 2.2%

Consumption 11,077 11,714 12,723 13,773 14,419 15,091 15,580 16,558 4.7%

East 1,608 1,658 1,750 1,969 2,106 2,161 2,163 2,156 0.8%

North 4,494 4,548 4,722 5,074 5,211 5,376 5,442 5,546 2.1%

South 2,118 2,407 2,941 2,921 3,008 3,360 3,411 3,763 7.7%

West 2,857 3,101 3,311 3,808 4,094 4,194 4,564 5,094 7.5%

Gap -520 -409 -1,390 -2,248 -3,516 -4,190 -3,656 -4,385 -

East -1,188 -1,192 -1,265 -1,335 -1,476 -1,578 -1,434 -1,424 -

North -1,174 -1,078 -1,242 -1,560 -1,633 -1,694 -1,518 -1,617 -

South -311 -391 -901 -882 -1,498 -1,822 -1,627 -1,792 -

West 2,153 2,251 2,018 1,530 1,090 903 923 447 -

All P fertilisers are made from naturally occurring phosphorus-containing minerals. Such minerals

are broadly called rock phosphates. The major intermediate for P fertilisers is phosphoric acid,

which is derived from rock phosphate. The basic principle of phosphoric acid manufacture is

through decomposition of rock phosphate by an acidsulphuric acid, nitric acid or hydrochloric

acid.

The sector-wise production of P fertilisers in the country and their shares in the total production

are presented in the following table. Among individual manufacturers, while IFFCO is in the

cooperative sector and has a highest share of27% in production, others are in the private sector

and smaller in size. They include Gujarat State Fertilisers and Chemicals Limited (GSFC), Paradeep

Phosphates Limited (PPL), Godavari Fertilisers and Chemicals Limited (GFCL), SPIC, TCL, MCFL, ZIL,

and Hindalco Industries Limited (HIL).


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Table 6: Phosphate Fertiliser Production and Capacity Utilisation

Production

(Thousand tonnes)

Capacity Utilisation

(%)

FY 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

Public 234 162 192 228 227 60.4 41.9 49.6 59.0 58.7

Private 3,077 2,584 2,309 2,953 2,856 85.4 71.0 61.7 71.8 69.4

Cooperative 1,129 969 916 1,194 1,288 65.9 56.6 53.5 69.7 74.9

Total 4,441 3,714 3,417 4,374 4,371 77.4 64.7 58.5 70.4 70.3

The western region accounts for about 45.4% of the total production and 36.9% of the total

consumption. While the northern region accounts for 24.2% of total P fertiliser consumption, it

produces only about 1%. The eastern and southern regions, together, account for about 53.6%

and 38.9% of production and consumption, respectively. While there was a decline in the overall

annual production of P fertilisers by 0.1% in 2010-2011, the growth in consumption was 10.7%.

While capacity addition and production increased at 1.9% and 5.5% over the three-year period of

2008-2011, consumption increased by 13.3%, resulting in a demand-supply gap.

Table 7: Regional Distribution of P205 Fertiliser Capacity, Production, Consumption and Gap

Volume

(Thousand tonnes)

FY 2004 2005 2006 2007 2008 2009 2010 2011

3 year

CAGR

Growth

Capacity 5,402 5,481 5,459 5,736 5,875 5,892 6,212 6,221 1.9%

East 1,539 1,544 1,545 1,544 1,565 1,565 1,567 1,572 0.1%

North 114 83 93 96 96 100 92 98 0.7%

South 1,276 1,302 1,313 1,435 1,475 1,475 1,711 1,694 4.7%

West 2,594 2,570 2,509 2,662 2,738 2,752 2,843 2,857 1.4%

Production 3,617 4,039 4,202 4,441 3,714 3,417 4,374 4,371 5.5%

East 778 936 878 1,099 1,106 966 1,099 1,247 4.0%

North 44 38 41 44 31 35 40 44 12.3%

South 998 1,091 1,202 1,200 880 849 1,124 1,097 7.5%

West 1,799 1,963 2,082 2,097 1,697 1,569 2,112 1,984 5.3%

Consumption 4,124 4,624 5,204 5,543 5,515 6,506 7,274 8,050 13.3%

East 519 590 685 762 803 918 974 1,047 9.2%

North 1,398 1,349 1,505 1,505 1,474 1,662 1,871 1,948 9.6%

South 922 1,166 1,437 1,451 1,362 1,727 1,833 2,082 15.0%

West 1,286 1,518 1,577 1,825 1,876 2,199 2,596 2,973 16.4%

Gap -507 -585 -1,002 -1,102 -1,801 -3,089 -2,900 -3,679

East 259 346 193 337 303 48 125 200

North -1,354 -1,311 -1,464 -1,461 -1,443 -1,627 -1,831 -1,904

South 76 -75 -235 -251 -482 -878 -709 -985

West 513 445 505 272 -179 -630 -484 -989

N, P and K are also applied to soil through a number of complex fertilisers, the most important

being DAP or 18:46:0. It contains 18% by weight of nitrogen and 46% by weight of phosphate.

After urea, DAP is the second most widely used fertiliser in India and accounts for around 62% of

Indias P fertiliser consumption, followed by complex NP/NPK fertilisers (30%), and SSP (8%).


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Figure 6: Share of P-Fertiliser in Total P Nutrients ConsumptionFY

The two important inputs of DAP production are ammonia and phosphoric acid. While somemanufacturers do produce either or both internally, the majority of manufacturers import both

the raw materials. The total supply of ammonia increased from 9.2 million tonnes in 1991 to 15.3

million tonnes in FY2011. Imports increased from 6.5% to 11.1% during this period.

Figure 7: Production and Imports of AmmoniaFY, Million Tonnes

The fertiliser industry consumed 3.7 million tonnes of phosphoric acid in 2010-2011, up from 1.4

million tonnes in 1990-91. Imports accounted for 58.1% of the total supply in 2010-2011. While

production increased by 33.2% in FY2011, imports declined by 21.2% on a year on year basis. In

2010-2011, India imported phosphoric acid from Morocco, Senegal, South Africa, Tunisia, USA,

0

1

1

2

2

3

0

2

4

6

8

10

12

14

16

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011P

Production (LHS) Imports (RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Others SSP DAP


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Israel, Jordan, Lebanon and Philippines. The major domestic manufacturers of phosphoric acid

are IFFCO (Paradeep), Paradeep Phosphates, Sterlite Industries, Hindalco Industries, FACT and

Coromandel International. Installed capacity of IFFCO (Paradeep) was 874.5 thousand tonnes as

on November 1, 2010. The private sector accounts for 1,035 thousand tonnes of the total

installed capacity of about 2,087 thousand tonnes.

Figure 8: Phosphoric Acid for Fertiliser IndustryFY, Thousand tonnes


Phosphate and complex fertiliser plants can either be based on imported phosphoric acid or in-

house phosphoric acid manufactured from rock phosphate. For deriving phosphoric acid fromrock phosphate, companies use either sulphuric acid (for DAP and SSP) or nitric acid (for NP and

NPKs). The sulphuric acid itself may be bought or manufactured in-house from sulphur either in

the elemental or pyrite forms. Sulphuric acid is also manufactured by capturing the sulphur

dioxide rich smelter gases in copper smelters. Around 45.3% of the P capacity is based on

imported phosphoric acid, while the rest is manufactured in-house from imported rock

phosphate. Since around 58% of phosphoric acid requirement is met through imports, trends in

international prices play a significant role in domestic production costs.

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011P

Production Imports Total supply


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Table 8: Feedstock-wise Share in Phosphate Fertilisers CapacityThousand tonnes

SulphurSmelter

Gases

Sulphuric

Acid

(External)

Nitric

Acid

Phosphoric

Acid

(External)

Total

October 2002 2,689 184 57 153 2,053 5,137

SSP 989 - 57 - - 1,047NP/NPK 1,701 184 - 153 2,053 4,090

October 2003 2,650 184 58 153 2,491 5,536

SSP 949 - 58 - - 1,007

NP/NPK 1,701 184 - 153 2,491 4,529

November 2006 2,804 184 58 152 2,473 5,671

SSP 1,011 0 58 0 0 1,068

NP/NPK 1,794 184 0 152 2,473 4,603

November 2007 2,835 184 58 152 2,473 5,702

SSP 1,041 - 58 - - 1,099

NP/NPK 1,794 184 - 152 2,473 4,603

November 2008 2,858 184 139 152 2,531 5,865

SSP 1,065 0 139 0 0 1,204

NP/NPK 1,794 184 0 152 2,531 4,661November 2009 2,879 184 139 152 2,830 6,185

SSP 1,086 - 139 - - 1,225

NP/NPK 1,794 184 - 152 2,830 4,960

November 2010 2,876 184 182 152 2,819 6,213

SSP 1,099 - 182 - - 1,281

NP/NPK 1,777 184 - 152 2,819 4,931

November 2011 2,883 184 182 154 2,819 6,221

SSP 1,105 - 182 - - 1,287

NP/NPK 1,777 184 - 154 2,819 4,934

The following figure presents the region-wise production shares of DAP. As the figure shows, DAP

production is concentrated in the eastern region (primarily Orissa with production of 1.5 mt in

FY2011) and western region (primarily Gujarat with production of 0.9 mt in FY2011).

Since the northern region does not have sea ports, there is no DAP manufacturing unit in the

region. However, the demand is highest in the northern and western regions. The eastern and

western regions have overcapacity and market their product in the northern region.

The only straight P fertiliser produced in the country is SSP or 0:16:0. The main raw materials

required are rock phosphate and sulphuric acid (H2SO4). SSP contains 16% water soluble P2O5,

12% sulphur, 21% calcium, and some other essential micronutrients in small proportions. SSP is a

cheaper fertiliser used to treat sulphur deficiency in soils, as well as a nutrient for enhancement

of yields.


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Figure 9: Region-wise DAP Production and ConsumptionFY2011, Thousand tonnes

SSP is produced by 82 manufacturing plants in the country with an annual installed capacity of

8,043.7 thousand tonnes (P2O5 equivalent of 1,287 thousand tonnes). In 2010-2011, the

production was 3,712.8 thousand tonnes, resulting in a capacity utilisation of 46%, up from 30%

in 2008.

Figure 10: SSP Capacity, Production and Capacity UtilisationFY, Million tonnes

Sources: FAI, IMACS Research

Of the total SSP production of around 3.7 mt in FY2011, around 69.3% was produced in the

western region, which is also the largest consumer accounting for 68.2% of total SSP

consumption. The surplus SSP is primarily despatched to the eastern region.

5.1 5.0 5.1 5.25.8 5.9

6.6 6.5 6.6 6.7

7.8

6.36.0 6.1 6.1

6.7

7.4 7.5 7.98.0

8.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

1

2

3

4

5

6

7

8

9

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Capacity Production Capacity Utilisation (%)

1,765

643

1,1331,276

3,385

2,156

4,052

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

East North South West

Production Consumption


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Figure 11: Region-wise SSP Production and ConsumptionFY2011, Thousand tonnes

According to the proceedings of a symposium-cum-workshop on Sulphur in Balanced

Fertilisation, organised by TSI (Washington DC), FAI (New Delhi) and IFA (Paris), a study of

49,194 soil samples from across the country indicates that Punjab, Orissa, Gujarat and West

Bengal have a larger percentage of samples with high sulphur deficiency.

Figure 12: Sulphur Deficiency in SoilPercentage of sample with high, medium or low deficiency


Imports of DAP increased at a CAGR of 25% between FY2006 and FY2011. China, USA, Lithuania,

Russia and Jordan were the key suppliers of DAP in FY2011. In FY2011, the total consumption of

0 10 20 30 40 50 60 70 80 90

Uttar Pradesh

UttarakhandHaryana

Punjab

Himachal Pradesh

Madhya Pradesh

Chhattisgarh

Gujarat

Maharashtra

Rajasthan

Bihar

Orissa

Jharkhand

West Bengal

Andhra Pradesh

Karnataka

Tamil Nadu

Kerala

All India

High Medium Low

436275

428

2,574

583396 429

2,417

0

500

1,000

1,500

2,000

2,500

3,000

East North South West

Production Consumption


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mono-ammonium phosphate (MAP) was 98 thousand tonnes. At present, most of the MAP

requirement is imported. Use of MAP and triple-super phosphate (TSP) is fairly recent

phenomenon. Most of it is imported as of now. Imports of MAP grew at a CAGR of 33% during

FY2006-2011.

Table 9: Import of Phosphate Fertilisers DAP, MAP and TSPThousand tonnes

2005-06 2006-07 2007-08 2008-09 2009-2010P 2010-11P

DAP (18-46-0) 2,438 2,875 2,724 6,192 5,889 7,411

Australia 115 70 5 323 63 84

China - - 271 400 460 2,525

Russia and Lithuania 399 471 88 1,238 1,362 950

Jordan 188 374 466 675 535 606

Korea - - 45 122 - 51

Mexico - - - 228 10 196

Germany - - - 37 - -

Saudi Arabia - - - 14 - -

Turkey - - 23 101 27 25

Greece - - - 115 - -Thailand - - - 16 - -

Tunisia - - - 123 143 132

Ukraine - - - 185 - 53

Vietnam - - - 113 - 11

USA 1,736 1,960 1,822 2,502 3,020 2,430

Others - - 4 - 31 3

MAP (11-52-0) 45 97 266 267 193 188

China - 97 265 48 - 34

Dubai - - 0.4 - - -

Iran - - - - - 1

Israel - - 1 - - -

Estonia and Ukraine 45 - - 154 193 153

South Africa - - - 14 - -Thailand - - - 51 - -

TSP (0-46-0) - - - 173 87 98

China - - - 10 87 72

Israel - - - 163 - 26

As assessed in 2005, India has 305.3 million tonnes of rock phosphate reserves, of which 21.1 mt

can be used for chemicals and fertilisers and 90.7 million tonnes, which are beneficial. These

reserves are primarily located in Jharkhand, Rajasthan, Madhya Pradesh, Uttar Pradesh and

Uttarakhand. In 2010-11, domestic production was 1.6 million tonnes and imports around 6.4 mt

in (2010). Jordan is the largest supplier of rock phosphate with a share of 46%, followed by Egypt

(16%), Morocco (14%), Togo (9%). The rest 15% is from Vietnam, Algeria, Nauru, Syria and Peru.

Production of rock phosphates increased at a CAGR of 4.2% between FY2004 and FY2010 from

1.2 million tonnes to 1.6 million tonnes. During this period, imports increased at a CAGR of 4.7%,

from 4.8 million tonnes to 6.4 million tonnes. Although imports accounted for about 80% of the

total supply in 2010, the share of imports has declined from over 86% in FY2001. The overall

supply of rock phosphates increased at a CAGR of 5% from 6.1 million tonnes to 8 million tonnes.


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Figure 13: Production, Imports and Total Supply of Rock PhosphatesFY, Million tonnes

Potash or K fertilisers account for about 12.5% of Indias fertiliser consumption. Potash fertilisers

are obtained by mining and purification of natural deposits containing potassium salts, which

occur in various countries, notably France, Germany, Canada, US, Russia, and Israel. The major

potash fertiliser consumed in the country is potassium chloride, also called muriate of potash

(MOP) or 0:0:60. The principal source for manufacturing MOP is sylvinite a mixture of sylvite(KCl) and halite (NaCl) in different proportions. In the absence of potash deposits of commercial

significance in India, K fertilisers are not produced in the country and the entire requirement is

met through imports.

5.75.9

4.8

6.1 6.2

6.9 6.8 6.86.8

8.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010P

Production Imports Total Supply


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Figure 14: Imports and Consumption of MOP and SOPFY, Thousand tonnes

Since Independence in 1947, the Governments objective has been to achieve self-sufficiency in

food grains production. Fertiliser is the key input that has made this goal achievable. Towards

keeping the prices of inputs at affordable levels, the prices of fertilisers have been kept below the

cost of production and importation. The prices of fertilisers in India, particularly of urea, are

lower than in developed and neighbouring developing countries. The objective behind the lowprices is to maintain a favourable input-to-output ratio. The aim has been to ensure that the

farmer receives a price that makes fertiliser use acceptable and remunerative. The Government

provides a fertiliser subsidy to fill the gap between the cost of production/import cost plus

distribution of fertilisers, and their retail prices. The ultimate aim of the subsidy is to provide food

grains at affordable prices; insulate farmers from variations in production costs; and ensure

reasonable returns.

World over, agriculture sector enjoys substantial subsidies in the form of producer support,

general services support and consumer support. However, measures linked to production or

input use still dominate producer support and subsidies in most countries. Agricultural subsidies

in India are among the lowest, globally. Further, the input subsidies (of which fertiliser subsidiesare a part) form less than 10% of the value of agricultural production. Consequently, Indian

fertiliser subsidies are within the provisions of the WTO.

The retention pricing scheme (RPS) was instituted in 1977 following the recommendations of the

Marathe Committee. The RPS guaranteed the urea producer an assured post-tax return on net

0

10

20

30

40

50

60

70

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011P

MOP Imports MOP Consumption SOP Imports SOP Consumption


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worth (RONW) of 12%. The Government sets the farm gate price, which is the price at which the

fertiliser is sold to the farmer. Previously, the Government set the unit specific retention price,

i.e., the realisation that the manufacturer was entitled to. The difference between the two

constituted the subsidy.

The retention price varied from one producer to another and, for the same producer fromplant to plant.

For older units, typically the plant was fully depreciated and all loans outstanding had beenrepaid. Thus, the capital charges component of the retention price was lower.

However, the retention price was also a factor of the variable cost, specifically, the cost ofthe feedstock.

The RPS was implemented by the Fertiliser Industry Coordination Committee (FICC). The FICCundertook the necessary costing and technical evaluations and, maintained accounts and

made payments to fertiliser companies.

The fixed costs reimbursed under the RPS belonged to two categories: capital related charges(CRC) and conversion costs.

While CRCs included depreciation, interest and RONW, conversion costs included, amongothers, wages and salaries, repairs and maintenance, chemicals and consumables, overheadsand selling expenses.

The variable costs were the hydrocarbons and other utilities (power, water, etc.). The retention prices were fixed for a period of three years. Specifically, the CRCs and conversion costs were computed with reference to the financial

year prior to the one immediately preceding the beginning of the new pricing period and

remained unchanged during the pricing period.

For variable costs, while the consumption norms of raw materials and utilities remainedconstant during the pricing period, changes in actual price of the hydrocarbons and other

utilities (power, water, etc.) were reflected in quarterly escalations or de-escalations.

In addition to the RPS, urea manufacturers were also reimbursed for the freight expenses

incurred on transport of the product from the factory to markets. The Government controlled the

distribution of urea. The entire production of domestic urea units was covered by allocations

under the Essential Commodities Act, 1955 (ECA, 1955). Based on the demand estimates drawn

up by the Ministry of Agriculture, the allocations were made to different States through different

units. These allocations were then used by the Department of Fertiliser (DoF) to issue orders

under the Fertiliser Movement Control Act, 1973. The Government had a policy to provide for

multiple sources of supply to any State to take care of unexpected problems.

When the RPS was introduced, it was envisaged as a self-sustaining scheme with producers who

had RPS below the farm gate price refunding the balance to a Fertiliser Price Fund Account, set

up under the FICC. Units with retention price greater than the farm gate price were to receive the

difference from the fund. The expectation was that initially there would be a surplus, which

would be eroded as a larger share of the production came from new and higher cost plants. This

surplus could be invested in bank deposits or loaned to fertiliser companies. However, this

surplus got eroded soon because of the high cost of new plants and the stickiness of selling

prices. Thus, budgetary support became a routine feature. The farm-gate prices of urea have


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been revised upwards in April 2010 to Rs. 5,310 per tonne. The trend in the farm gate prices of

urea is presented in the following table.

Table 10: Farm-gate Price of Urea

FY Rs./tonne

1982 2,350 (w.e.f. 11.7.81)

1983 2,350

1984 2,150 (w.e.f. 29.6.83)

1985 2,150

1986 2,350 (w.e.f. 31.1.86)

1987 to 1991 2,350

1992 3,300 (w.e.f. 25.7.91), 3,060 (w.e.f 14.8.91)

1993 2,760 (w.e.f. 25.8.92)

1994 2,760

1995 3,320 (w.e.f. 10.6.94)

1996 3,320

1997 3,660 (w.e.f. 21.2.97)

1998 3,660

1999 4,000 (w.e.f. 29.1.99)

2000 4,600(w.e.f 29.2.2000)

2001 4,600

2002 4,830 (w.e.f 28.2.2002)

2003 5,070 (w.e.f 1.3.2003), 4,830 (w.e.f 12.3.2003)

2010 5,310 (w.e.f. 1.4.2010)

The above table shows that the farm gate prices increased at a very slow rate over the past

decade, and have changed in April 2010. By comparison, retention prices increased sharply.

Further, lower growth in domestic urea production, consistent growth in consumption,

substantial increase in imports, and higher international prices, have translated into a burgeoning

subsidy burden since 2003-04. The increase in subsidy burden has been on account of both

increase in raw material prices (which resulted in rise in subsidy for indigenous fertilisers) andincrease in finished goods prices (which resulted in rise in subsidy for imported fertilisers).

Figure 15: Farm-gate Prices of Urea and Delivered CostFY, Rs. per tonne

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Farmgate Price Delivered Cost-Indigenous

Delivered Cost-Imported


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Rise in consumption has also resulted in higher level of subsidies. The large increase in subsidies

and inadequate budgetary provision has resulted in the Government delaying subsidy payments

to various producers.

Table 11: Subsidy on Urea

Rs. MillionFY Imported Indigenous Total

1993 9,961 48,000 57,961

1994 5,990 38,000 43,990

1995 11,660 40,750 52,410

1996 19,350 43,000 62,350

1997 11,631 47,430 59,061

1998 7,220 66,000 73,220

1999 1,242 74,730 75,972

2000 741 86,700 87,441

2001 10 94,800 94,810

2002 473 82,570 83,043

2003 0 77,900 77,900

2004 0 85,210 85,2102005 4,940 102,430 107,370

2006 12,110 106,530 118,640

2007 32,740 126,500 159,240

2008 66,060 164,500 230,560

2009 100,790 209,690 310,480

2010P 46,030 175,800 221,830

2011 RE 63,960 150,800 214,760

2012 BE 69,830 133,080 202,910

Because of lower increase in urea prices (compared with P and K fertilisers), excess usage of N

fertilisers, stagnation in domestic production, and higher growth in urea consumption; Indias

urea imports increased from nil in FY1991 to 3.78 mt in FY1996. They subsequently declined to nil

in FY2001 as production growth outpaced growth in consumption. Imports again increased to

2.06 mt in FY2006. Urea imports increased 129% in FY2007 to 4.72 mt, and 47% in FY2008 to 6.93

mt. The significant increase was mainly because of only a 0.9% growth in domestic production

during FY2007, and a decline of 2.1% in FY2008. During FY2011, urea imports were estimated at

6.6 mt. Imports were primarily from China, Oman, CIS and Iran.

Table 12: Urea Imports by Country of Origin

Thousand tonnes

FY 2004 2005 2006 2007 2008 2009 2010 20113-year

CAGR

China 25 - - 154 2,635 496 534 2,505 -1.7%

Bangladesh - 49 - 118 219 105 26 - -CIS - 390 519 1,439 736 1,407 991 292 -26.3%

Qatar 35 - - 342 467 420 299 - -

Oman - - 1,325 1,837 1,891 1,906 2,338 2,366 7.7%

Others 83 202 213 829 980 1,333 1,022 1,447 13.7%

Total 143 641 2,057 4,719 6,928 5,667 5,210 6,610 -1.5%


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Along with an increase in urea imports, urea prices have also increased with average price of urea

imports from non-OMIFCO sources increasing from US$237.9/t in FY2005 to US$258.6/t in

FY2006. Although average prices declined to US$248.9/t in FY2007, they increased sharply to

US$528/t in FY2009. CFR prices peaked in 2009. In FY2011 prices were US$327/t.

Figure 16: Average CFR (India) Prices of Urea, DAP and MOPUS$ per tonne

Urea prices have increased significantly from the latter half of 2006 because of strong demand in

India, Pakistan, and Iran. Prices increased sharply in 2007 because of delays in new capacity

coming on-stream, and higher growth in consumption (because of high commodity prices and

higher food grains production). Prices also remained high as Indias urea import requirements

increased caused by a decline in production. However, market conditions deteriorated swiftly

and significantly through the second half of 2008. By late-2008, the fertiliser industry faced a

slowdown of sales, amid rising inventories, as farmers delayed purchases in expectation of

further price reductions, volatile commodity prices and tightening financial conditions. After

reaching a peak of US$770/t in August 2008, urea prices have declined 70% to US$229/t in

December 2008. Although prices for most agricultural commodities and inputs have dropped

significantly and swiftly in recent months, average urea prices increased 59.3% in 2008 to

US$493/t, compared with increases of 39% in 2007, and 2% in 2006. For Indian imports, urea

prices came down to about US$230-240/t by end-2008. By early-January 2009, Yuzhnyy and

Baltic urea were trading around US$215/t FOB, compared with US$210/t in late-2008. After price

declines, Indias landed cost of import of fertilisers has also declined in recent months because of

a sharp decline in shipping freight rates since May 2008. In the start of the year 2011, the average

price increased from US$340/t to US$466/t by the July-August 2011.

0

100200

300

400

500

600

700

800

900

1,000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

20

Urea DAP MOP


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Figure 17: Quarterly Trends in World Urea PricesUS$/t, f.o.b., FSU (Maximum range)

With effect from 11th January 2011, indigenous manufacturers of urea have been allowed to

produce neem coated urea, which has been incorporated in Schedule I of the Fertiliser Control

Order, 1985, up to a maximum of 35% of their total production of respective subsidised

fertilisers.

As per data available from the International Fertilizer Industry Association, the four year growth

in production of Urea (N) between 2006 and 2011 was 2.5% and in production of Urea (P) was

2.7%.

Table 13: World Urea Production

mt

2006 2007 2008 2009 20104 year

CAGR

Urea N

Production 61.9 64.0 65.2 67.8 68.2 2.5%

Exports/Imports 14.6 16.7 15.3 16.6 18.4 6.0%

Urea P

Production 134.7 139.1 141.8 147.4 149.6 2.7%

Exports/Imports 31.7 36.4 33.3 36.1 40.0 6.0%

Based on the recommendations of Group of Ministers (GoM) under the chairmanship of Mr. K C

Pant, the GoI notified the new pricing scheme (NPS) policy for the urea manufacturing units with

effect from April 1, 2003. The NPS replaced the earlier RPS, and has been implemented in three

stages:

Stage I from April 1, 2003 to March 31, 2004. Stage II from April 1, 2004 to March 31, 2006 (extended till September 30, 2006) Stage III from April 1, 2006 onwards (delayed to October 1, 2006 onwards).

0

100

200

300

400

500

600

700

800

900

Q403 Q204 Q404 Q205 Q405 Q206 Q406 Q207 Q407 Q208 Q408 Q209 Q409 Q210 Q410 Q211 Q411 Q212


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Stage I

In the first stage, which was from April 1, 2003 to March 31, 2004, urea units were divided into

six groups based on their technological vintage and feedstock. These groups are the following:

pre-1992 gas-based post-1992 gas-based pre-1992 naphtha-based post-1992 naphtha-based FO/low sulphur heavy stock (LSHS)-based mixed feedstock-based units.

Classification of units among different groups so determined remained unchanged during Stage I

and Stage II.

Units in each group were provided concessions (i.e., reimbursement over and above farm-gate price), based on weighted average of retention prices of units in the group (retention

prices calculated as per the previous policy). While the units having retention prices lower

than the group average were provided the individual retention price, units having retention

prices higher by 20% than the group average concession rate got the average of the group

weighted average (excluding the outliers) and their respective retention price. Units withretention prices higher than the group average got concession at the group average rate.

Units in each group were provided escalation or de-escalation in the variable costs onaccount of variations in the prices of feedstock and fuel, linked to the level of energy

consumption in the respective group. Variations in the non-energy component of the group

pricing were indexed to 50% of changes in the wholesale price index (WPI).

During the first stage, urea distribution was partially decontrolled with 75% and 50% ofproduction of each unit supplied through the ECA, 1955 allocation mechanism during Kharif

2003 and Rabi 2003-041 respectively, and the remaining permitted for sale to farmers at

notified maximum retail prices (MRPs) outside the allocation mechanism. Although, the GoI

had proposed to completely decontrol urea distribution, decontrol was deferred initially for a

period of 6 months from April 1, 2006, and subsequently deferred upto March 31, 2006.

Therefore, the allocations of urea under ECA continued to be restricted upto 50% of theinstalled capacity (as reassessed) of each unit and the remaining quantities could be sold by

the manufacturer anywhere at the MRP.

Table 14: Classification of Units in Groups under New Pricing Scheme

Name of the Group Name of the Units

Pre-1992 Gas based units BVFC- Namrup-III;, IFFCO-Aonla- I; Indo-Gulf Jagdishpur; KRIBHCO-Hazira; NFL-

Vijaipur- I; RCF-Trombay-V

Post-1992 Gas based units NFCL-Kakinada- I; CFCL-Gadepan- I; TCL- Babrala; OCFL-Shahjahanpur; NFCL-

Kakinada- II; IFFCO-Aonla- II; NFL-Vijaipur- II

Pre-1992 Naphtha based units FACT-Cochin, Duncans, Kanpur, IFFCO- Phulpur- I, MCFL- Mangalore, MFL- Manali

(Chennai), SFC- Kota; SPIC-Tuticorin; ZIL- Goa

Post-1992 Naphtha based units IFFCO- Phulpur- II; CFCL-Gadepan- IIFO/LSHS based units GNVFC- Bharuch, NFL- Nangal; NFL- Bhatinda; NFL- Panipat

Mixed energy based units GSFC-Vadodara; IFFCO- Kalol; RCF- Thal

1Kharif season includes both early Kharif (i.e. autumn) and late Kharif (i.e. winter). Similarly, the Rabi season includes

both Rabi and Zaid Rabi (i.e. summer). Generally, the harvesting months of the early Kharif and the late Kharif seasons

extend over August to October and November to January, respectively. The crops of the Rabi and Zaid Rabi seasons are

harvested during February to April and May to June, respectively.


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Stage I I

During the second stage, which commenced from April 1, 2004, group concessions were

modulated on account of reduction in capital-related charges (for gas based and post-1992

naphtha based groups) as well as tightening of group energy norms for the respective groups.

The special treatment for outliers was to be eliminated in Stage II but the GoI made an exception

for Madras Fertilizers Ltd., which continued to enjoy the outlier benefit. The units having lowerconcession rate than the group average continued to get the concession as per their individual

concession rate. The principles for escalation or de-escalation in the variable cost component on

account of changes in the prices of feedstock and fuel mooted for the first stage, were continued

for Stage II also. The weighted average rates for concession for different feedstock groups of urea

units are as shown below:

Figure 18: Weighted Average Rates for Concession for Different Feedstock Groups of Urea Units

Rs. per tonne

Stage I I I

Regarding Stage III for period commencing from April 1, 2006, the GoI had set up a Working

Group under the Chairmanship of Dr. Y K Alagh in December 2004 to study the relevant issues

and suggest suitable recommendations. The Working Group (WG) had submitted its report in

December 2005. The WG had recommended that instead of a significant increase in prices,

fertiliser prices could be increased by the upper limit of the increase in the Index of Prices of

Output Received by the agriculture sector of the economy as estimated by the Commission on

Agriculture Costs and Prices (CACP). As regards the supply price of fertiliser, the best option

would be to shift to the Long Range Marginal Cost (LRMC) or the Long Range Average Cost (LRAC)

Price. Simultaneously, there could be a package of incentives for non-gas based units to shift to

NG-based production. However, this may result in gains for efficient units under the new scheme.

As a result, the WG had suggested a Second Best Strategy wherein there would be two groups a

gas based group and a FO/LSHS based group. There would be one-time incentives for efficiency

within each group and so-called unintended gains would be much less. One-time incentives

would be given to units switching over from Naphtha/FO/LSHS; and to units which had done this

modernisation in the last five years and still had substantial debt servicing and interest payment

obligations on account of investments. For FO/LSHS units, the uncertainty in arranging for gas

supplies is considerable particularly in the existing shortage situation. Thus, a subsidy could be

5,500

7,455

16,617

12,48911,430

9,272 9,700

4,000

8,000

12,000

16,000

20,000

Pre-1992 Gas

based units

Post-1992 Gas Pre-1992

Naphtha

Post-1992

Naphtha

FO/LSHS Mixed energy Overall


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arranged for the differential energy cost until adequate gas supply is arranged. Energy prices

would be a by-pass subject to upper limits set by the Government.

In March 2007, the GoI announced NPS Stage III, which spells out the GoIs urea policy for the

period October 1, 2006 to March 31, 2010 (NPS Stage-II was extended from March 31, 2006 to

September 30, 2006). The salient features of NPS-III are as follows: The policy for incentivising additional production of urea during NPS Stage-III will be

applicable from the date of notification and till then the additional production of urea byunits beyond 100% of their capacity will be governed by the existing policy of sharing of the

net gain between the Government and the unit in the ratio of 65:35.

The classification of units shall be as follows:

Table 15: Classification of Units in Groups under N P S

Name of the Group Name of the Units

Pre-1992 Gas based units BVFC- Namrup-III;, IFFCO-Aonla- I; Indo-Gulf Jagdishpur; KRIBHCO-Hazira; NFL-

Vijaipur- I; RCF-Trombay-V

Post-1992 Gas based units NFCL-Kakinada- I; CFCL-Gadepan- I; TCL- Babrala; OCFL-Shahjahanpur; NFCL-Kakinada- II; IFFCO-Aonla- II; NFL-Vijaipur- II

Pre-1992 Naphtha based units FACT-Cochin, Duncans, Kanpur, IFFCO- Phulpur- I, MCFL- Mangalore, MFL- Manali

(Chennai), SFC- Kota; SPIC-Tuticorin; ZIL- Goa

Post-1992 Naphtha based units IFFCO- Phulpur- II; CFCL-Gadepan- II

FO/LSHS based units GNVFC- Bharuch, NFL- Nangal; NFL- Bhatinda; NFL- Panipat

Mixed energy based units GSFC-Vadodara; IFFCO- Kalol; RCF- Thal

Group averaging will be done after updation of all costs up to March 31, 2003. Capacity utilisation levels of 93% for pre-92 Naphtha and FO/LSHS based plants, and 98% for

pre-92 gas, post-92 gas, post-92 Naphtha and mixed energy based plants will be considered

for calculating the base concession rates of urea units as on March 31, 2003.

Transportation cost of gas will be computed and paid separately. The updated notional concession rates of all urea units as on 1.4.2003 so determined on the

pattern followed during Stage-I of NPS will form the basis to calculate the concession rate

payable to each urea unit during Stage-III of NPS commencing from October 1, 2006. No

outlier benefit will be admissible to any unit in Stage-III of NPS.

On the base concession rate so determined for each unit, only escalation and de-escalationon components of variable cost on actual basis subject to pre-set energy norms given in

StageIII.

A deduction of Rs. 50/t from the concession rates of pre-92 Naphtha and FO/LSHS based andRs. 75/tonne from the other units for the reduced CRC will be made.

The respective pre-set energy consumption norm of each urea unit during Stage-II of NPS orthe actual energy consumption achieved during the year 2002-03, whichever is lower, will be

recognised as the norm for Stage-III of NPS.

Saving on energy over the pre-set norms will be paid as per the basic rate of the weightedaverage of feed/fuel used during Stage-III of NPS.

All functional naphtha and FO/LSHS based units should get converted within a period of 3years. On the expiry of the aforementioned period, the Government will not subsidise the

high cost urea produced by the non-gas based urea units and rate of concession of such units

will be restricted to the lower of the prevalent import parity price (IPP) or their own rate.

Units not able to tie up gas will have to explore alternative feedstock like Coal Bed Methane(CBM) and coal gas. In order to provide incentives for conversion to gas, there will be no


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mopping up of energy efficiency for a fixed period of 5 years for Naphtha based as well as for

FO/LSHS based units. Capital subsidy will be considered for FO/LSHS based units for which

DOF will notify a separate scheme. For conversion of the non-gas based urea Plants toNG/liquefied natural gas (LNG), a Committee headed by Petroleum Secretary, comprising of

Secretaries of Planning Commission, Department of Fertilisers (DOF) and Department of

Expenditure has been constituted for facilitating the connectivity and supply of gas to non-

gas based units converting to gas and to develop appropriate mechanism for fixing the priceof gas in a transparent manner.

To encourage urea production in the country, no permission will be required from theGovernment for production beyond 100% of re-assessed urea capacity of the unit. Allproduction between 100% and 110% of the existing reassessed capacity, if so required by the

government as per the approved production plan will be incentivised on the existing net gain

sharing formula between the Government and the unit in the ratio of 65:35 respectively withthe proviso that the total amount paid to the units, after including the component of variable

cost will be capped at the units own concession rate. Units increasing production beyond

110% may be compensated at their concession rate, subject to the overall cap of IPP. While

procuring additional urea beyond 100% of the reassessed capacity of urea units, a meritorder system of procurement will be followed. In other words, the units which supply urea at

the least cost would be given preference in procurement. Government will not subsidise theadditional production, if not required by it for consumption.

In order to disincentivise high cost production of eight Naphtha and FO/LSHS based unitswhose cost of production is higher than the prevalent IPP, to facilitate their early conversion

to gas, these units are allowed to produce 100% of capacity should they adhere to an agreed

timetable for conversion to gas and tie up of gas/LNG/CBM/Coal gas. If they do not, they willbe given only 75% of the difference between the rate of concession and variable cost

component (i.e., 75% of the balance fixed costs beyond 93% of capacity utilisation) in the 1st

year (April 1, 2007) and 50% of the fixed cost beyond 93% capacity utilisation from 2nd year(April 1, 2008) onwards.

While the broad contours of the previous policy have been retained in this one, there are quite a

few departures as well. From the industry's perspective, tightening of energy consumption and

capacity utilisation norms, update of fixed costs and reduction in capital related charges (CRC) are

some of the negative features. Some of the positive features are higher reimbursement for

energy savings, update of freight costs, and reimbursement of actual taxes on inputs. While the

subsidy sought to be reduced is insignificant in relation to the current outlay, the actual gains

could be much higher if the Governments plans of encouraging the conversion of

naphtha/FO/LSHS-based units to NG succeed. In fact, the thrust of the policy seems to be on

ensuring conversion to NG as the preferred feedstock. Importantly, however, the policy gives

freedom to individual units to decide on debottlenecking projects. Thus, operationally efficient

gas based urea producers can expect to be significantly benefited by the new policy, if they can

source gas at competitive rates for the incremental production. Overall, NPS Stage III sets thetone for the eventual de-regulation of the urea sector over the medium to long term. In such a

scenario, the existing gas based players should remain competitive against imports, subject to

their gas prices remaining competitive (delivered price of NG at upto US$5/mbtu2 or million

british thermal units). The delivered price of gas beyond this price may make new investments in

this sector uncompetitive. However, the price of gas beyond which import becomes cheaper will

2mbtu is also expressed as mmbtu, which is intended to represent a thousand BTUs.


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depend upon prices of urea prevailing in the international market at any given point of time. The

credit profile of liquid hydrocarbon based units converting to gas would however be determined

largely by the energy savings post-conversion, the project cost, and the cost of gas.

P and K fertilisers (along with complexes) were decontrolled with respect to pricing, distributionand movement with effect from August 25, 1992 following the recommendations of the Joint

Parliamentary Committee (JPC) set up by the Government. However, decontrol resulted in a

sudden and unprecedented rise in prices. DAP prices rose from Rs. 4,680/t, pre-decontrol to

around Rs. 8,000/t, post-decontrol. The prices of complex fertilisers rose on an average by 80-

100%. To contain prices, the Government, in September 1992, announced an ad-hoc concession

of Rs. 1,000/t of DAP and MOP as well as concessions ranging from Rs. 500-1,000/t of complex

fertilisers. These payments were to be routed through the State Governments. The States were

given an indicative retail price of Rs. 6,500/t for DAP and Rs. 4,200/t for MOP with allowances to

be made based on the distance from the port to the factory. The price of SSP on which there

were no concessions increased from Rs. 1,200/t to Rs. 3,000/t. Once the farm gate prices came

down in response to the concessions, domestic production and sales picked up. However, theprices of decontrolled products remained higher than before, resulting in a decline in

consumption of P and K during FY1993-97. The fact that the RPS was continued for nitrogenous

fertilisers meant that their relative price was cheaper and consequently consumption of N

increased 4.7% in FY1993, compared with declines for P and K. The problems of the decontrolled

sector were compounded by competition from imports, which increased from 1.58 mt in FY1994

to 2.11 mt in FY1996. The decanalisation of imports meant that DAP could be imported in any

quantity at zero duty. At the time of decontrol, there was excess capacity in the global DAP

market, which resulted in very low prices prevailing for imported DAP.

In July 1996, the Government took a policy decision to make DAP available to farmers at

affordable rates. To achieve this end, the retail price of DAP was reduced by Rs. 2,000/t and an

equivalent increase in concession was granted. The concession was increased to Rs. 3,000/t for

indigenous DAP and to Rs. 1,500/t for MOP in FY1996 (effective Kharif season). The concession

on imported DAP was resumed and fixed at Rs. 1,500/t.

In March 1997, the Government constituted the Empowered Committee under the chairmanship

of the Secretary, Department of Agriculture. The Committee fixed the selling price of Rs. 8,300/t

for DAP, and Rs. 3,700/t for MOP (both changes effective from Kharif 1997-98). The selling prices

were also notified for complex fertilisers other than DAP. The selling price of SSP was left to the

State Governments as the cost of production varied significantly across units and SSP primarily

met local demand. As the international price of DAP had increased, these selling prices were

possible only with higher concessions. Accordingly, the concession on indigenous DAP was

increased by Rs. 750 for both indigenous (to Rs. 3,750/t) and imported (Rs. 2,250/t) varieties. The

concession on MOP was increased to Rs. 2,000/t. The concession on complex fertilisers was

derived from their P and K content. The Empowered Committee also introduced administrative

improvements in the conduct of the scheme. The implementation of these measures led to the

recovery of the P and K sector with increase in both domestic production and consumption.


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The ad-hoc concession scheme formed an important departure from the RPS in that the

concession level was the same for all producers and was not set unit wise. The focus on arriving

at an average industry price means that high cost producers have to produce more efficiently to

compete with the low cost ones. However, a recurring issue in the scheme was the basis of fixing

the concession. To settle the issue of ad-hocism in fixation of concessions, the Government

entrusted the Bureau of Industrial Costs and Prices (BICP) to arrive at a normated cost ofproduction for Indian producers and the appropriate level of concession on DAP during 1998. The

cost of production was set at Rs. 12,420/t for indigenous DAP. Given the selling price of Rs.

8,300/t, the subsidy translated to Rs. 4,120/t. As a result, the realisation to DAP manufacturers in

FY1999 was fixed at Rs. 12,420/t. The normative cost of production was revised to Rs. 11,483/t

and a formula was been devised whereby the concession was linked to the cost of imported raw

materials.

Earlier, the subsidy calculation for complex fertilisers was ad-hoc and subsidised only the P

component. A modified form of concession scheme was introduced wherein, both the N and P

components were subsidised. The subsidy on DAP was ascribed to both the N and P content.

During 2001, the GoI directed the TC to suggest a method for computing concessions for complexfertilisers.

Based on the recommendations of the TC, the Government announced a new policy for

concession on complex fertilisers. The policy was announced in January 2003, but was effective

from April 1, 2002. Concessions were now based on weighted average cost of production, rather

than the earlier basis of concession on domestic DAP. For this, the units were divided into two

groups: Group I comprised units based on imported ammonia or indigenous ammonia from gas.

Group II comprised units based on indigenous ammonia made from indigenous naphtha/FO. The

rationale for the new grouping was to protect those units that were based on high cost feedstock

such as naphtha or FO. Separation of units in two groups was based on captive production of N

versus external sourcing as there was wide variation in the cost of nutrient N between the two

groups. For the other nutrients (P and K), costs and other costs (OC), weighted average cost

was worked out for all the units taken together and applied uniformly. Thus, the normative cost

of production of 11 grades of complex fertilisers manufactured by 10 different units for FY2001

was worked out by adopting various parameters such as 90% assessed capacity utilisation,

normative consumption levels, latest rates of input materials (both imported and indigenous),

12% post-tax RONW, etc. For working out normative price, efficiency norms were applied to

production capacity, raw material and utilities consumption at the unit level. The normative

production level for each u

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