Mideast conflict threatens India's fertiliser production, says Crisil

The Middle East conflict may disrupt supply chains, cutting India's domestic urea and complex fertiliser production by 10-15%, a Crisil report warns. This could lower profits for makers and raise the government's subsidy bill significantly.

Supply chain disruptions stemming from the ongoing conflict in the Middle East can potentially impact annual domestic production of both complex fertilisers and urea by 10-15 per cent, according to a report by Crisil Ratings. Profitability of manufacturers could decline amid lower capacity utilisation due to supply constraints of key raw materials. The report further noted that the increase in prices of raw materials and imported fertilisers is likely to increase the working capital requirement of players and also raise the subsidy bill of government by Rs 20,000-25,000 crore.

Credit Profiles Supported by Liquidity and Government Aid

Nevertheless, two factors will support credit profiles - firstly, the strong liquidity of large fertiliser companies and secondly, the government's track record of supporting the sector over time with adequate and timely subsidy disbursements, the report stated.

High Import Dependency of Fertiliser Sector

Urea accounts for 45 per cent of fertiliser consumption in India, complex fertilisers (diammonium phosphate, or DAP, and nitrogen, phosphorus and potassium, or NPK) for one-third, and single super phosphate (SSP) and muriate of potash (MOP) for the rest. Fertiliser sector's dependence on imports remains high, with ~20 per cent of urea and one-third of complex fertilisers, primarily DAP, being imported. Furthermore, the key raw materials for urea (natural gas, which comprises ~80 per cent of the raw material cost) and complex fertilisers (ammonia and phosphoric acid) are largely imported due to limited domestic reserves.

Reliance on Middle East for Key Imports

For both urea and DAP imports, the Middle East remains an important region, accounting for ~40 per cent of imports in the first nine months of fiscal 2026 (42 per cent in fiscal 2025 and 28 per cent in fiscal 2024). For domestic fertiliser production, the dependence on the Middle East is even higher, with ~60-65 per cent of liquefied natural gas (LNG) and 75-80 per cent of ammonia imports coming from the region.

Impact on Kharif Season and Mitigating Factors

Anand Kulkarni, Director, Crisil Ratings, says, "The ongoing issues in the Middle East could disrupt the fertiliser supply chain at a crucial time for the kharif season. Disruption in LNG and ammonia supplies continuing for about three months could cut domestic urea and complex fertiliser production by 10-15%. The impact on production will be cushioned to some extent by the recent government directive for the allocation of 70% gas to urea manufacturers. Additionally, the fertiliser inventory of around three months, along with expected imports from alternative sources, will mitigate the risk of immediate supply shortages."

Profitability Under Pressure Amidst Supply Constraints

The reduced capacity utilisation is likely to dent profitability, with urea manufacturers likely to see a larger impact as suboptimal capacity utilisation will reduce energy efficiency.

Urea Manufacturers Face Energy Efficiency Challenge

Profitability of urea players primarily hinges on the difference between prescribed energy norms and actual energy consumption, as natural gas costs are completely passed through. Energy consumption of efficient players is ~5 per cent lower than the prescribed norms, which directly boosts their profitability. However, with a decline in capacity utilisation, energy efficiency will take a hit, leading to an impact on operating profits. Nonetheless, players with multiple plants may optimise gas usage between plants to lower the impact.

Complex Fertiliser Profits Hinge on Subsidy Hikes

Similarly, the profitability of complex fertilisers may get impacted due to the interplay of variables such as rising input costs, transmission of costs to the Nutrient Based Subsidy (NBS) rates set by the government, and retail prices. The shortage of raw materials and increased supply chain costs have already increased prices of ammonia by ~24 per cent since the start of the conflict. With limited ability to pass on these costs, the extent of impact on profitability will depend on commensurate hikes in NBS rates.

The industry will require additional subsidy support from the government to mitigate the impact. Given the strategic importance of the sector, the government has supported it in the past through increased NBS rates and additional subsidy for DAP players. The ability of fertiliser makers to source key raw materials and fertilisers from alternative sources and government intervention in this regard will bear watching in case the Middle East conflict prolongs, the report concluded. (ANI)

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