BackDAP: trading lucrative vs manufacturing
Importing of diammonium phosphate, a water soluble fertilizer, is more remunerative than making it in India
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Importing of diammonium phosphate (DAP), a water soluble fertilizer, is more remunerative than making it in India. Roughly one-third of the complex fertilizers sold in India is DAP. Last fiscal year 7.6 million tonnes (mt) of DAP was sold, of which 47% was made in India.
Tracking the fall in raw material prices and subdued demand, DAP prices in international markets have fallen by one-fourth from a year ago. Prices reached a level where importers of DAP are clocking better margins than local manufacturers, data compiled by B&K Securities India Pvt. Ltd shows. Domestically produced DAP will yield an operating profit, or Ebitda (earnings before interest, taxes, depreciation and amortization) of ₹ 3,407 per tonne. A trader or importer is estimated to make an operating profit of ₹ 5,061 per tonne, 48.5% more than the locally produced DAP.
As the chart shows, it is the product cost that is giving traders the edge. Their procurement cost is lower. So even if they get a similar selling price and subsidy amount, traders stand to make more money. “Globally, during the last three-four years, we have seen forward integration of phosphoric acid players into production of DAP as they realized that the cream of business lies in selling the end DAP rather than producing its intermediate (phosphoric acid) and selling it to formulators. Hence, global DAP supply has gone up. Consequently, importers have been at an advantage over manufacturers," B&K Securities said in a note.
Not surprisingly, imports are surging. DAP imports last month rose 32.8%. So far this fiscal year, they have increased 48%. In contrast, domestic manufacturing has taken a back seat. Till February end, locally made DAP volumes dropped 5.5%.
This scenario is driving up inventories. If one includes the forthcoming production and imports, DAP inventories are estimated to reach 3.8 mt by the kharif season, which according to an estimate by an industry stakeholder is sufficient to meet the demand for the season.
But if rains play truant again, it will be a double whammy for DAP manufacturers in India. On the one hand, competition from traders will be intense, leading to cuts in farm gate prices. On the other, poor demand or low offtake can curtail production. Hence the acute need for a normal monsoon.
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