UREA PRICING POLICY - STEP IN THE RIGHT DIRECTION

A nice article By SP Tulsian



To enable the companies to increase the indigenous production of Urea, the Government on Friday announced new Import Parity Price (IPP) linked subsidy policy for production of additional urea by the domestic manufacturers, over and above their current rated capacities.



In the past, existing fertilizer companies were not allowed to exceed its rated capacity, and if they would have done it, would not have got any subsidy reimbursement from the government. Due to this policy, in last four year, production of Urea and DAP grew by just 0.56% to 24.07 million tonnes in 07 – 08. India, the world’s second largest consumer of fertilizer has seen an import of 10 million tonnes, a quarter of the total demand in 07 – 08. This gap between Demand and Supply is likely to cross to 19 million tonnes by end of 11th Five Year Plan (2007 – 12).



The new policy, approved by the Cabinet Committee on Economic Affairs (CCEA) has set floor and ceiling prices for urea, linked with the IPP and subsidy payable to the producers will be calculated based on these two prices. Floor price has been fixed at $ 250/tonne and the ceiling is fixed at $ 425/tonne. This means, if production cost of a company is less than $ 250 a tonne, their compensation would still be calculated on the basis of the floor price and would stand to gain. Conversely, if the cost of production is more than $ 425 a tonne, compensation would exclude cost above this ceiling. If production cost remains within this range, the subsidy would be calculated based on the actual cost.



For additional Urea produced through revamp of existing units, the subsidy would be 85 per cent of the IPP.



Urea produced through brownfield expansions at existing locations would attract a higher subsidy rate of 90% of IPP.



Closed units on getting revived will attract 95% subsidy. This would help 8 units of Hindustan Fertiliser Corporation Ltd. and Fertiliser Corporation of India Ltd. All these recommendations are based on the recommendations of Dr. Abhijet Sen Committee.



Let us examine how far it will benefit the existing units engaged into making of Urea with feedstock being gas or naptha. It may get noted that all the existing gas based urea plants are capable to operate at 120% to 125% of rated capacity, as all of them are technically efficient and competent plants, if gas is available to them.



Presently, Urea IPP is about Rs.25,000 per MT which is equivalent to $ 600 per MT. In such a scenario, if an existing company is producing additional Urea, it will be entitled to have a price of $ 425 per MT or Rs.18,000 only. However, in case of a fertilizer plant, fixed costs constitutes about 20% of the total cost of production, and the present cost of production of a company, with gas being provided to them at administered price, works out at Rs.18,000 per MT. This translates into a cost of $ 425 per MT.



However, under the new policy, only non-APM gas will be considered for the new investment in Urea sector. Further, gas transportation charges will be paid to units undertaking expansion and revival on the basis of actuals (upto 5.2 Gcal per tonne of Urea) as decided by the Gas regulator, subject to a maximum ceiling of $ 25 per tonne of Urea.



The new investment policy is a departure from the existing policies, which are based on cost plus approach with a 12 per cent, post tax return to the manufacturers. This pricing policy, based on market parameters will encourage investments in the sector and also substantial improvement in efficiencies.



There are about 22 gas based Urea plants in the country and it has been recently decided by Empowered Group of Ministers to supply gas to all these plants to enable them to achieve full capacity utilization. Some of the prominent gas based Urea plants are Chambal Fertilisers, Indo Gulf Fertilisers (now a unit of Aditya Birla Nuvo) RCF (Thal Plant) National Fertiliser (two plants) Tata Chemicals etc.



Presently, the import price of $ 600 per MT, for Urea is in view of huge demand of India, which is likely to fall once the domestic production increases but is not likely to fall to $ 425 per MT. This means, the existing companies going in for expansion has to remain contended with a ceiling price of $ 425 per MT.



Since the cost of production would be higher for this, as gas would be available at non-APM rate, which is almost at double the rate, the companies have to work on its efficiency to keep the cost of production low.



The capital expenditure would be least for revamping including de-bottlenecking while it would be higher for brownfield expansions while time required to implement the same may range within 6 to 24 months.



This implies that companies going for revamping would be entitled for a price of $ 361 per MT (85% of $ 425 MT) while it would be at $ 382 per MT (90% of $ 425) for brownfield expansions, it would definitely be inadequate and may not be economically and commercially viable for the companies.



As stated earlier, even if we consider an element of 25% fixed costs, and the present cost which is now at $ 425 per MT and expected to rise to $ 500 per MT, in view of differential and higher rate for non-APM gas, the direct cost for the additional production would be at around $ 375 per MT (75% of $ 500 per MT) and under revamp, the companies would only be getting $ 361, thus having a loss of about $ 14 per MT. Even under brownfield expansions, realization would be at $ 382 per MT, while investment on capex would be much higher than revamping.



Hence, it is concluded that ceiling price of $ 425 per MT should have been fixed anywhere between $ 475 to $ 500 per MT to incentivise the existing companies to go for higher production to tide over shortages and to cut on imports.