Government’s fertiliser bill to increase

The government’s decision to do away with the current differential gas pricing in the Indian market by doubling the price of gas under the Administered Price Mechanism (APM) may add an estimated Rs 2400 crore to the Centre’s subsidy bill. 

APM gas is currently supplied at a concessional rate to the fertiliser sector on priority. “This will only be pass-through for gas-based urea manufacturing companies.“ Sudip Sural, Head, Corporate Rating, CRISIL, said. 

Since urea is the only controlled fertiliser at present, the additional spend in differential between its actual manufacturing cost and the retail price is borne by the government and not by the industry. 

But the move has raised apprehensions in the fertiliser sector, especially since APM gas meets 45% of the total gas needs of the sector. 

This year, infact, additional availability of APM compared to earlier has even meant that some fertcos had to pay penalty to Reliance Gas for taking contracted, but more expensive, supplies. “We preferred to use all the APM gas available because it was much cheaper,” one company official said. 

While the industry fears bigger problems on timely recovery of subsidy from the Centre in the short term, it perceives high and market-linked gas price pushing up urea production costs inordinately in a deregulated environment two years or more later. 

Industry sees pricing APM gas same as Reliance gas as signalling the new benchmark price for all gas, irrespective of source. This would boost input prices for urea manufacture and increase industry problems in reclaiming the subsidy or concession. 

“At any given time, several months worth of subsidy payments due to industry are stuck in the government’s pipeline. The Centre has been unable to clear all the dues to industry in the running fiscal for the last three years and has carried over huge amounts into the next year’s subsidy bill,” an industry expert said. 

The long term worry for the industry is the impact of the gas price hike in a de-regulated environment. An official from a cooperative fertiliser company who did not want to be quoted said “The hike in gas price remains pass-through only as long as ours is a regulated sector. There is no saying how much longer it will remain so. Once it becomes fully de-regulated two or so years down the line, benchmark market-linked gas price will account for a big part of urea production costs and sharply heighten competition among fertiliser companies.” 

Natural gas is used as a feedstock in urea manufacturing. Of the total urea production costs, gas price (APM and other sources) accounts for an estimated 70%. Urea manufacturing cost for for pre-92 gas based plants, at prevailing APM gas price, is estimated at Rs 5600/tonne. 

For mixed feedstock plants, costs are an estimated Rs 7000/tonne. However, urea is currently retailed at a controlled rate of Rs 4830/tonne, with the Centre picking up the difference.

Source: Economic Times

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