MOSL: COROMANDEL INTERNATIONAL (Buy)-Phos acid cost, supply tightness to exert margin pressure

Coromandel International: Phos acid cost, supply tightness to exert margin pressure; Captive capacity expansion of phos acid to work in company’s favor

(CRIN IN, Mkt Cap USD1.7b, CMP INR408, TP INR501, 23% Upside, Buy)

Coromandel International (CRIN) incurs a major raw material (RM) cost in the form of phosphoric acid (38-40% of RM cost, based on our assumption). Consequently, the 30% YoY spike in the price of phosphoric acid in FY19YTD is likely to have exerted pressure on its margins in 1HFY19. Tackling near-term margin headwinds, too, appears to be a tough job. In this report, we, thus, attempt to analyze supply, demand and raw material (rock phosphate and sulphuric acid) cost trends, which primarily dictate the phosphoric acid prices.  

Global market dynamics pointing toward tight phosphoric acid supply

The global supply of phosphoric acid is largely dependent on Morocco, the US and China, which together form ~62% of global exports. Thus, any supply disruption from these countries has a direct impact on the prices of phosphoric acid. Going forward, we expect a tight supply environment, given:

• Strict environment policy impacting Chinese players: China’s environmental policy reform in an attempt to curb pollution has had a severe impact on that country’s fertilizer industry (which uses phosphoric acid as a raw material), resulting in either closing down of capacities or a steep fall in the operating rates of plants. Most recently, the Guizhou government has issued a policy to curb the use of gypsum (phosphogypsum), which is a by-product of the production of phosphoric acid. Any tightness on gypsum production would, in turn, impact phosphoric acid supply. Through this policy, the Guizhou government aims to achieve gypsum demand-supply balance by 2018, more consumption of gypsum than supply by 2019 and gypsum-free phosphoric acid production by 2020. According to industry sources, the target of achieving gypsum-free phosphoric acid production in the stipulated timeframe is very ambitious, and thus, it could impact up to 3.6m mt of phosphoric acid capacity, tightening the global supply to an extent.