The Centre’s decision last week to charge urea manufacturers a uniform average price for natural gas by pooling domestic and imported variants will neither cut the government’s subsidy burden nor spur urea production, unless the fertiliser is brought under the Nutrient Based Scheme (NBS), says the fertiliser industry.
“The move is in the right direction since natural gas, the feedstock, accounts for 70-75 per cent of production costs. Everyone now gets the same price. But pooling is just one part, unless urea pricing policy is revisited, production is unlikely to rise, while government outgo on subsidy will remain the same,” said Satish Chander, Director General, Fertiliser Association of India.
Under the NBS policy, in place since April 2010 for NP/NPK (phosphoric and potassic) fertilisers, retail prices have been decontrolled. The price of urea, however, is administered by the government and at ₹ 5,360/tonne is considerably cheaper than fertilisers, such as di-ammonium phosphate (DAP) and muriate of potash (MOP), which has resulted in its imbalanced usage adversely affecting soil health.
Domestic urea manufacturing units consume about 42 million metric standard cubic metres a day (mmscmd) of gas, of which 26 mmscmd is supplied internally, while around 16 mmscmd is imported regasified liquefied natural gas (R-LNG), which costs nearly twice as much as domestically produced natural gas at $5.18/mmBtu.
“The cost of production used to vary between urea makers and the Centre felt this could be reduced by pooling. While individual contracts for importing R-LNG are likely to continue, the subsidy will now be on the basis of the weighted average price,” said an industry source.
Piecemeal measure
Prior to the move, the price of delivered gas to fertiliser units varied between plants on the basis of the combination of domestic gas and R-LNG, which meant non-uniform input prices. With conversion efficiencies differing between units, the production cost will be skewed, impacting the subsidy quotient paid out by the government as the difference between the administered price of urea and its production cost.
“Based on our interactions with industry players, we believe the urea industry’s average cost of gas will be at $11-12/mmBtu. Hence, the cost as well as subsidy of players who are incurring gas cost higher than the industry average will dip, and vice versa after the gas pooling mechanism,” said an Edelweiss Securities note published last week.
The delay in subsidy payments had left manufacturers, particularly those relying on imported gas, stressed financially. Uniform pricing, the Fertiliser Ministry believes, is likely to improve capacities through lower production costs.
“It is an easing of the subsidy mechanism and will make little sense unless urea is shifted under the NBS scheme. At the micro level, it will make a difference to those importing R-LNG but overall, it isn’t likely to generate much savings for the government,” the source added, hopeful that gas supply to NP/NPK units would be steady in order to promote “balanced fertilisation”.
India produces about 23 million tonnes (mt) of urea with demand at about 30 mt. The demand is estimated at around 34 mt by 2017-18. Of 30 urea plants in the country, 27 now use natural gas as the feedstock.
The government increased the subsidy allocation for indigenous urea to ₹ 36,000 crore in fiscal 2015 from ₹ 26,500 crore in fiscal 2014 and revised it to ₹ 38,200 crore for fiscal 2016.