Rising input costs, West Asia war risks weigh on fertiliser sector margins

Rising input costs, supply risks and subsidy pressures amid West Asia tensions could squeeze margins and impact fertiliser output and agricultural demand

The chemical industry, especially the fertiliser sector, has been considerably impacted by the Iran war as it uses crude and natural gas as feedstock. Prices have shot up, and prolonged conflict could lead to a supply squeeze.

 

The Government of India (GoI) has approved higher nutrient-based subsidy (NBS) rates on fertilisers for the first half of 2026-27 (H1FY27), for the Kharif season. There are 10 per cent hikes of subsidies on Nitrogen (N), Phosphate (P) and Sulphur (S) based fertilisers, while Potassium (K) rates remain unchanged. The Budgetary expectation is ₹41,500 crore in 1HFY27, versus ₹37,200 crore in H1FY26.

 

Manufacturers will still face margin pressure unless they undertake price hikes. So far, phosphoric acid prices are high but stable at $1,300 per tonne and are expected to stay in that range, which may help backward-integrated players with healthy margins. However, ammonia, and sulphur have seen sharp price jumps — 30 per cent and 21 per cent, respectively quarter-on-quarter (Q-o-Q). Di-ammonium phosphate (DAP) prices at $780 per tonne will also put pressure on margins for import-dependent players.

 

India imports 75 per cent of its ammonia and 53 per cent of sulphur. Around 20 per cent of urea and one-third of DAP consumption is also directly imported, apart from natural gas imports as feedstock. West Asia is a key fertiliser manufacturing region, and most Indian imports come from there.

 

If the war is prolonged, there may be supply chain disruptions, which will impact production of complex fertilisers and urea, by 10-15 per cent. Apart from profitability, capacity utilisation may drop. Higher prices will also mean higher working capital requirements and may raise the subsidy bill more than estimated.

 

Backward integration could help corporates like Coromandel International and Paradeep Phosphates as they are better placed to ride out the crisis. In contrast, Deepak Fertilisers has no backward integration and faces higher risk. Chambal Fertilisers, which is urea-focused, is exposed to natural gas availability and price volatility.

 

Given the politically sensitive nature of the sector, the government has a track record of fast subsidy disbursal. In India, urea accounts for 45 per cent of fertiliser consumption, while complex fertilisers like DAP, and  nitrogen, phosphorus and potassium (NPK), account for one-third consumption, and single super phosphate (SSP) and muriate of potash (MOP) contribute about 22 per cent.

 

This is a crucial time for Kharif planting. An El Niño effect is expected in calendar year 2026 (CY26), which could lead to monsoon deficit compared to CY2025’s 8 per cent above-normal rainfall. This could mean lower sowing, leading to lower agricultural output and hence softer demand for agrochemicals and fertilisers.

 

The government has tried to offset possible LNG shortages by allocating 70 per cent gas to urea producers. It’s also estimated by Crisil that the industry’s inventory of raw material will last around three months, assuming imports from alternate sources continue.

 

Urea manufacture is energy-intensive and profitability is also dependent on differences between prescribed energy norms and actual energy consumption, while natural gas costs are passed through. Efficient manufacturers consume less energy than prescribed norms, which boosts their profitability. But if capacity utilisation is down, energy efficiency also takes a hit. The industry may require additional subsidy support beyond NBS hikes. The overall FY27 subsidy Budget could increase 12-15 per cent from the Budget estimates of ₹1.71 trillion for FY27.

 

Agrochemical companies, including pesticides, such as Coromandel, Paradeep, PI Industries, UPL, Sharda Cropchem, Bayer CropScience and Rallis, could all be affected as well as pure fertiliser players. There will be a base effect since in Q4FY25 most companies liquidated inventory, leading to a jump in volumes and creating a high base. This could lead to muted growth.

 

For fertiliser usage, Q4 is typically the weakest in terms of volumes and margins. In Q4FY26, volumes may be flat year-on-year (Y-o-Y), but profitability is likely down, given the gas price spikes in March. There are serious concerns for Q1FY27 and beyond. This could in turn lead to sharp food inflation if agricultural production is down. This is a challenging environment for the agrichemical sector and has broader implications too.