Ammonia Price Drop Boosts Fertilizer Stocks Amid Sulfur Woes
By Business Desk
Falling ammonia prices since late June offer partial relief to fertilizer companies, but high sulfur costs continue to impact profitability. Market shifts to surplus.
Ammonia prices have significantly retreated since late June, offering some relief to fertilizer companies even as elevated sulphur prices persist as a major concern. Analysts anticipate further reductions in ammonia prices through the December quarter.
Ammonia Market Shifts to Surplus
This correction signifies a genuine market shift from scarcity to surplus, as noted by Harmish Desai from Systematix Institutional Research. The benchmark Tampa ammonia contract, a key global indicator, has experienced a steep decline.
- Suppressed demand following the spring season.
- Weak industrial demand.
- Ample distributor inventories.
While current ammonia prices remain approximately 20% higher than pre-West Asia crisis levels, their easing provides some respite. Varun Gogia, Vice President and Sector Head at Icra, confirmed this benefit for non-urea fertilizer companies.
Sulphur Costs Offset Gains
Despite the ammonia relief, persistently high sulphur prices continue to be a significant concern for the industry, partially negating the benefits. Elevated costs of sulphur and phosphoric acid impact profitability across the sector.
- Indian phosphatic fertilizer manufacturers: Coromandel International Ltd, Paradeep Phosphates Ltd, Gujarat State Fertilizers & Chemicals Ltd (GSFC).
- Nitro-chemical companies: Deepak Fertilizers and Petrochemicals Corp. Ltd, Gujarat Narmada Valley Fertilizers & Chemicals Ltd (GNFC).
Prashant Biyani, Vice President at Elara Capital, highlighted that ammonia costs contribute less than 20% to complex fertilizer companies. This suggests the relief from falling ammonia prices is only marginal for overall profitability.
Geopolitical Supply Chain Risks
The ongoing conflict in West Asia has disrupted raw material supplies, leading to production cuts by major manufacturers and increased prices for essential inputs. This vulnerability extends to sulphur, acid, and ammonia.
- 70% to 75% of global sulphur and ammonia trade traverses the Strait of Hormuz.
Given that the sector’s second-quarter earnings outlook is closely tied to raw material prices and government subsidies, analysts recommend considering staggered investments in fertilizer stocks. Coromandel International and Paradeep Phosphates are expected to benefit and are viewed as good long-term investments, while Deepak Fertilizers currently trades at a high earnings multiple.