Fertiliser firms to benefit from Indian urea policy change

After potash and phosphatic fertilisers, whose prices were partially decontrolled in 2010, the Indian government will now go for a series of policy changes in pricing urea, the most commonly used fertiliser.

These policy revisions will benefit the industry with the government approval for a hike in their urea production costs. The government will foot the bill for the extra subsidy arising from the higher cost.

The cabinet committee on economic affairs (CCEA) is likely to consider these changes in a couple of weeks. Subsequently, however, the retail prices of urea could be hiked by 10% in a separate move.

Modifications to the pricing system to recognise higher fixed costs would provide relief to the 29 producers in the country by roughly R350 a tonne.

This is a change to the basic framework of urea pricing (called the new pricing scheme — stage three) without any revision in the retail price. India produces about 22 million tonnes of urea and consumes more than 30 million tonnes. The country has budgeted about R67,000 crore of fertiliser subsidy for this fiscal, more than half of which would be on urea.

Subsequently, the CCEA will consider two other proposals to raise the retail price of urea by about 10% and to recognise the entire cost of natural gas imported by greenfield projects as eligible for subsidy payment. These two proposals are being given the final shape. Urea price was last revised up by 10% in 2010 to R5,310 a tonne.

"MRP revision could be taken up independent of the modifications to the pricing policy,” said Tarun Surana, Equity Research Analyst at Sunidhi Securities & Finance.

"Granting higher fixed cost would be a relief to producers and would lead to better profitability without affecting the consumer, although it would increase the subsidy burden,” said Surana.

The fertiliser ministry wants the entire cost of imported liquefied natural gas (LNG) to be treated as eligible for subsidy payment. The finance ministry, however, believes that its recent budget announcement of allowing a lower withholding tax of 5% on the interest paid by fertiliser units on foreign loans would lower the cost of setting up new fertiliser units and therefore, the maximum cost of LNG to be recognised for subsidy calculation could be capped at about $14.

Surana said tax sops may not be of much help in offsetting the cost of building a new urea plant, which has already gone up due to the weaker rupee.

The fertiliser ministry wants to encourage new investments in the sector as domestic consumption of urea is expected to go up by about 13% to 34 million tonne in five years. The previous policy to encourage investments helped in adding only 2 million tonne of capacity as there was no certainty of getting natural gas at a steady price over the long term. Policy makers are hoping to address this hurdle by giving pass through status to gas price. Compared to the domestic price of $4.2 per million metric British thermal unit (mmBtu), imported LNG is available at about $15-18 a unit. While the domestic gas production is declining, the fertiliser sector's requirement will go up by 65 million metric standard cubic metres a day by 2014-15.