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Subsidy bill for fertlilizer is likely to come down on account of new domestic gas pricing mechanism that has come into effect from April 1. Fertilzer sector is biggest consumer of natural gas. Domestic gas contributed over 53 per cent of overall gas requirement.
“We estimate $1 decrease in gas prices can benefit fertilizer companies up to ₹1,000 crore,” a senior government official told businesslIne. Following the Cabinet decision, the price of domestic natural gas for April 8-30 has been notified as $7.92 per million British thermal units (mBtu) on a gross calorific basis (GCV). Further, for the gas produced by ONGC/ Oil India (OIL) from their nomination fields, the above mentioned APM price shall be subject to a ceiling of $6.50 per mBtu on GCV basis for the same period. Before the revision, the price was $8.57.
Read also: New gas pricing formula: Short-term pain, long-term gain for ONGC and OIL
According to the Petroleum Planning and Analysis Cell (PPAC), fertilizer sector has largest share among various sectors using natural gas. During April-January 2023, consumption of natural gas was 55.5 BCM (billion cubic metre) out of which fertilizer sector had highest share of 29 per cent. With respect to FY2021-22, sectoral consumption in FY2022-23 in fertilizer sector decreased by 4 percentage points.
34 units
The Fertiliser Ministry data show there are 34 gas-based urea manufacturing units in the country with installed annual capacity of 258.34 LMT approx.
As cost of natural gas is key to fertilizer output price, any reduction in former will bring down the latter, which in turn will have impact on subsidy bill. According to the International Energy Forum, natural gas is used as a feedstock to produce ammonia, a source of nitrogen essential for fertilizer plants. Ammonia is further processed and combined with other plant nutrients like phosphorous and potassium to produce different types of fertilizer. While a majority of global ammonia production uses natural gas, coal gasification is also used.
More read: Revised natural gas pricing norms to benefit consumers, CGD firms
“Because of the prevalent use of natural gas in the production of ammonia-based fertilizers, natural gas prices tend to be correlated with fertilizer prices. Positively correlated (close to 1) when rising natural gas prices push fertilizer prices higher, and negatively correlated (close to -1) when falling natural gas prices cause fertilizer prices to go lower,” it said in an article titled ‘High Natural Gas Prices Contribute to Rising Fertilizer and Food Prices,’ some time back.
Subsidised cost
The government provides urea to farmers at a statutorily notified maximum retail price (MRP) which is ₹ 242 per 45 kg bag of urea (exclusive of charges towards neem coating and taxes as applicable). The difference between the delivered cost of urea at farm gate and net market realisation by the urea units is given as subsidy to the urea manufacturer/importer by the government which ensures farmers getting urea at subsidised cost.
In view of steep increase in the international prices of fertilizers and inputs including gas prices, government decided to absorb the increased prices by increasing subsidy on P&K fertilizers, including DAP. This resulted in revising the subsidy estimate for all types of fertilizer to ₹2.25-lakh crore in FY2022-23 from budget estimate of ₹1.05-lakh crore. For FY24, the budget estimate is ₹1.75-lakh crore.
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