Fertiliser fears come to fore due to war

IN PERSPECTIVE

The crisis in Ukraine following the invasion by Russia has exposed the chinks in the Indian fertiliser industry.

Despite predictions by successive governments during the last four decades that India would become self-reliant on the fertiliser front and putting in place policies aimed at achieving the goal, the country remains preponderantly dependent on imports for meeting the requirements of its farmers.

The three most popular fertilisers used by farmers are urea, di-ammonium phosphate (DAP) and muriate of potash (MOP), which are the major sources of nitrogen, phosphate and potash respectively. Natural gas is the raw material/feedstock/fuel used for the manufacture of urea whereas phosphoric acid and ammonia are the prime raw materials (RMs) needed for making DAP.

In the case of DAP, nearly 50% of India’s requirement is sourced from other countries whereas all of the MOP needed by farmers is imported. Similarly, all phosphoric acid and the bulk of ammonia are imported. Coming to urea, one-third of the requirement is imported. Even for the balance of two-thirds produced domestically, India depends on the import of natural gas (it comes as liquefied natural gas or LNG). This is when fertiliser gets priority in the allocation of domestic gas (supplied at a low administered/subsidised price) next only to household consumption and use in transportation. If this priority goes, the dependence on LNG import will go up.

Of the total potash imports, India draws close to 50% from Russia and Belarus, Russia’s collaborator in its operations against Ukraine. Russia, Belarus and Ukraine together account for 20% of our phosphoric acid import. Additionally, India gets around 15% of its ammonia imports from Russia. In the case of natural gas, Russia supplies 10% of our import needs. Nearly 60% of Indian DAP imports come from China and Saudi Arabia. For urea, over one-third of Indian imports come from China.

Due to the ongoing war, there will be disruption in supplies from the region and in turn, price hike due to: (i) sanctions by European countries and USA, (ii) physical incapacitation in the supply chain from mining to production to logistics and movement; (iii) clogging of sea transportation routes. This is likely to continue till 2022 end and much longer if Nato countries also get directly entangled.

MOP will bear the brunt wherein we draw 50% of the requirement from Russia and Belarus, followed by phosphoric acid and ammonia. Already, the landed cost of MOP has increased from $280 per tonne before the conflict to $500 after. The cost of phosphoric acid has gone up from $1,330 per tonne to $1,530 while ammonia is up from $900 to $1,050.

Even in the case of natural gas, urea and DAP, where our dependence on this region is less, India will end up paying a high price as the former’s contribution to world supplies is substantial and any disruption impacts price by creating a global shortage.

Russia is the world’s second-largest producer of natural gas with a share of 10%. In the export of gas, its share is 25%. The conflict has affected its supplies leading to a shortage. As a result, the spot price of LNG has already shot up to $50 per million Btu (British thermal unit) from $25 per mBtu late last year and a low of $9 per mBtu in April 2020. The worst is yet to come.

The European Union (EU), which draws 40% of its natural gas supplies from Russia, has decided to cut purchase by two-thirds and substitute it with LNG supplies from other sources by this year-end. This works out to about 70 million tonnes of LNG, or 18% of the global LNG trade. For this, the EU will compete with Asian countries including India for supplies from the Middle East, leading to a further hike in price.

In the case of urea, Russia alone makes up for 14% of world supplies whereas in DAP, its contribution is around 10%. The war-induced disruption in supplies has caused a hike in prices from the already high reached in 2021-22. For instance, the landed cost of DAP has gone up from $900 per tonne before the war to $1,100.

At present, the Union government gives farmers a shield by undertaking to bear the excess cost of supply over the low selling price as a subsidy. During 2021-22, it has given Rs 60,000 crore over and above the budget allocation of Rs 80,000 crore to pay for the increase in cost. During 2022-23 also, it is likely to give an additional Rs 45,000 crore over the budget allocation of Rs 1,05,000 crore. But this is a fiscally imprudent, unsustainable arrangement.

Prime Minister Narendra Modi should look for long-term solutions: (i) exploring indigenous sources of fertiliser raw materials; (ii) long-term tie-ups with major global suppliers; (iii) maintaining reserve as a percentage of annual requirement; (iv) and preventing leakage and enhancing use efficiency.

(The writer is a policy analyst)