FocusIndia 'softening up' sell side before DAP negotiations

20 February 2012 16:23  [Source: ICIS news]

LONDON (ICIS)--India has made an early strike in the run-up to imminent biannual negotiations for diammonium phosphate (DAP) fertilizer contracts, sources said on Monday.

Sensing a market shift to the buy side in a weakened phosphates market that is vulnerable to further downward corrections, the government is proposing to cut the national nutrient-based subsidy (NBS) for DAP by almost one-third from 1 April.

The current subsidy of Indian rupees (Rs) 19,763/tonne (€304/tonne, $401/tonne) was set last March to ensure importers recoup the costs of buying at high prices and reduce the risk of incurred expenses being passed down the distribution chain and increasing retail prices.

The contract price for DAP was also set last spring during talks between US phosphate fertilizer producer PhosChem and Indian Farmers Fertiliser Co-operative Ltd (IFFCO) buyers to reflect the NBS.

These key players later agreed to increase the contract price in September to $677/tonne CFR (cost and freight), which nets back to the benchmark US Gulf export price at around $625/tonne FOB (free on board) Tampa, as the spot market firmed.

As India imported around 7m tonnes of DAP last year  almost 50% of globally traded DAP leverage is applied during the negotiations to achieve discounts against higher spot prices. Suppliers use the country’s high demand as a countermeasure.

However, a simultaneous rapid devaluation of the Indian rupee and a sharp $80100/tonne decline in export prices from major producers in the US and North Africa at the end of last year has shifted the supply-and-demand balance to the buy side.

Market sources caution that the upcoming DAP contract negotiations, which will be led by PhosChem and IFFCO, have taken on a different hue to previous years.

The Indian government has already launched an opening salvo, viewed by some as a “softening up" the sell side, before the talks begin in earnest.

Ministry officials issued a decree prohibiting the distribution of spot cargoes recently purchased at around $600/tonne CFR – $77/tonne below the current contract price – arriving from 1 February from the ports into the distribution chain.

These shipments, around 140,000 tonnes of DAP, will then be subject to the new and potentially lower NBS, which will be implemented in the next fiscal year beginning on 1 April.

Producers and traders have voiced concerns that these measures will place further downward pressure on prices, as they scramble to sell into alternative markets with low demand.

“If there is no trading with India then producers can make an adjustment to output for booked tonnes,” said one source. “Traders and buyers will find these measures more difficult.”

In addition, the government has cut this year’s subsidy by Rs950/tonne with immediate effect to prevent importers from increasing financial returns from the NBS when recouping higher import costs against falling international prices.

Offtake of DAP during the last season was also lower than previous years and although estimates of carryover range from 500,000–3m tonnes, demand for fresh imports could be dampened.

“India is making a case,” said one producer.

“In addition to the devaluing rupee and the higher levels of inventory, the real market has dropped. There is a fear to sell because the netback to Tampa at $540–550/tonne CFR is very low.”

Coupled with the Rs950 cut, government proposals to reduce the current NBS by a further Rs4,763 would result in a 29% drop to the subsidy for the next fiscal year. If the proposal is approved, suppliers will be pressed to make similar reductions to the contract price of DAP.

“Buyers want a contract price at $550–560/tonne CFR and sellers [want] $580–590/tonne CFR,” said one trader.

“But the inventory is not 2m. Closing inventory was 576,000 tonnes, which was up 370,000 tonnes on 2010–2011. Overall, the demand for DAP last season was up.”

Demand will be a strong negotiating tool for the supply side. Indian farmers like using DAP and although they turned to cheaper nitrogen-phosphate-potassium (NPK) blends last year, this was due more to the lack of availability of DAP rather than financial concerns.

Data released by the Fertilizer Association of India for April 2011 to January 2012 underlines that domestic production, which totalled 3.2m tonnes, will not meet farmer demand.

Regardless of the carryover, imports will be needed and, as the summer kharif planting season is due to get underway in July, shipments will need to arrive early in the second quarter for timely distribution.

The weather will also be a contributing factor. The timing and volume of the monsoon rains expected in June will have a critical impact on demand.

Recognising the weakness in the market, the Indian government and buyers have moved swiftly to position themselves in the weeks leading up to the DAP contract negotiations.

Bolstered by declining prices and settling first-quarter contracts for raw material phosphoric acid at $120/tonne below fourth-quarter prices, the buy side has a strong hand to play.

End-user demand and the climate will feature prominently on the supply side, which is unlikely to yield to calls for similar discounts for the finished DAP product.

($1 = €0.76. $1 = Rs49.31, €1 = Rs65.01)

For more information on phosphates and other fertilizers, please visit icis pricing fertilizers

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By: Karen Thomas
+44 208 652 3214

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