Summary:
Falling ammonia prices could ease input-cost pressure for Indian fertiliser companies, but high sulphur and phosphoric acid prices remain key margin risks.
Fertiliser firms in India can now take some respite from their price woes due to an easing of ammonia prices following a huge price rise during the June quarter. Prices of Tampa ammonia contracts have fallen by $110 per tonne from the previous month, while those for August were reduced by another $30 per tonne. Ammonia prices on a Northwest Europe basis have come down to about $680 per tonne, which represents about 25% of its peak level.
This price fall has occurred in the wake of a price spike on account of disruption caused by the West Asia conflict. Falling prices have been witnessed on both sides of the Suez Canal as demand for Fertilisers has started declining while that for industries has remained sluggish with good inventory levels being maintained by distributors.
Why Lower Ammonia Prices Matter for Fertiliser Companies
Ammonia forms a critical input for non-urea Fertilisers, especially the complex NPK Fertilisers that include nitrogen, phosphorus, and potassium. Thus, reduced ammonia prices will help ease input pressure for companies like Coromandel International, Paradeep Phosphates, GSFC, Deepak Fertilisers and GNFC.
But the effect is unlikely to be the same. Ammonia prices have remained some 20% higher than their pre-West Asia crisis level despite the current correction. Furthermore, ammonia constitutes less than 20% of input costs for complex Fertiliser companies, thereby restricting its influence on profits.
Phosphoric acid is another input whose price has risen by roughly 25% in the December quarter.
Sulphur Prices Remain the Bigger Concern
However, it is the sulphur that has become the chief cost concern for producers of phosphatic Fertilisers. Disruptions in the supply of sulphur, ammonia, and phosphoric acid in West Asia have kept prices high.
The risk is real, considering that roughly 70% to 75% of the world’s sulphur and ammonia trade goes through the Strait of Hormuz. A fresh round of disruptions will soon undo the progress made on ammonia prices.
Thus, despite cheaper ammonia, the EBITDA per tonne of the Fertiliser companies might not recover from its first quarter level.
Green Ammonia Could Reduce India’s Import Dependence
The country is also working on the long-term solution as well. Through the National Green Hydrogen Mission program, SECI has provided green ammonia supply capacity to 13 Fertiliser plants at a capacity of 7, 24, 000 tons per annum with discovered price being ₹49. 75 to ₹64. 74 per kg. Presently, the country produces about 165-170 lakh tons of phosphatic and potassic Fertilisers. A substantial portion of this production is dependent on imported ammonia.
Coromandel has signed for 85,000 tons per year at ₹50. 75 per kg for Kakinada and another 50,000 tons at ₹51. 89 per kg for Visakhapatnam. Paradeep Phosphates has made arrangements of 75,000 tons per year at ₹55. 75 per kg, 25,000 tons per year at ₹62. 84 per kg, and another 15,000 tons per year at ₹57.
Why Fertiliser Stocks Are in Focus After Ammonia Prices Fell
Low ammonia prices have helped improve sentiment since this removes one of the key raw material-related challenges that companies face in the June quarter. Coromandel and Paradeep Phosphates were both down around 9% year to date, whereas Deepak Fertilisers was up by over 19%, and GNFC by almost 9%. RCF was down by around 13%.
Valuations vary widely. While Deepak Fertilisers had a valuation multiple of about 77.69x compared to its historical average of 50.20x, Coromandel had a multiple of approximately 32.5x.
While low ammonia prices help improve margins, a rerating of Fertiliser companies would be contingent on many other factors like sulphur and phosphoric acid prices, government subsidies, monsoons, and West Asia supply chain stability.
