Softening gas prices credit positive for urea sector: Report

Natural gas is a key raw material for the manufacturing of urea and comprises nearly 70 per cent of the total cost of producing urea.

Published: 02nd July 2019 06:22 PM  |   Last Updated: 02nd July 2019 06:22 PM   |  A+A-

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For representational purposes (File Photo | AFP)


MUMBAI: With global natural gas prices declining significantly in the recent months, urea players are expected to witness a fall in their production cost following lower working capital funding requirements, according to a report.

The Asian spot LNG prices have declined precipitously from USD 9-10 per million metric British thermal units (mmbtu) in December 2018 to about USD 4 per mmbtu now, owing to a supply glut and milder winter demand," rating agency Icra said in a report.

The global natural gas price also witnessed correction in the recent months and the outlook for the same remaining benign, urea players will see their cost of production fall, it said.

While gas costs are a pass-through to the government, the same will result in lower working capital funding requirements for the urea manufacturers, it added.

Natural gas is a key raw material for the manufacturing of urea and comprises nearly 70 per cent of the total cost of producing urea.

As per our estimates, the cost of production of urea falls by around Rs 1,600-1,700 per tonne for each USD 1 per mmbtu fall in the gas price.

Thus the subsidy outgo for the government is also expected to reduce in the current fiscal, which will reduce the backlog for the industry if the fertiliser subsidy is kept unchanged in the coming Union Budget 2019-20, Icra senior vice-president K Ravichandran said.

He said, as for the industry, while the decline in pooled gas prices will reduce the energy savings for the efficient players, it will improve their contribution on production above the cut-off quantity, for which they receive realisation linked to the import parity price of urea.

The government had completed the implementation of the direct benefit of transfer (DBT) for the fertiliser sector in March 2018, though the subsidy is still being routed through the industry, the report said.

In recent months there have been reports of the government is planning to introduce DBT to farmers for the fertiliser sector as well on a pilot basis.

The scheme will result in the fertiliser subsidy getting directly transferred to the farmers bank account since they would be paying the full price for the fertilizers, it added.

There have also been discussions held around the implementation of the Nutrient Based Subsidy (NBS) scheme for urea similar to the scheme currently operational for Phosphatic & Potassic (P&K) fertilizers, Icra said.

The NBS will aim at having a uniform subsidy for urea players and the retail price will become free for the players to set, though within a range.

The aim is to reduce the subsidy outgo for the fertiliser industry and also reduce the under-recoveries on account of the non-revision in various cost components.

While the scheme will a positive, the government will need to ensure that the disruption in payout of subsidy at the farmers level is minimized, he pointed out.

With fertiliser prices rising, there could also be some impact on the fertiliser sales volumes as was witnessed post the implementation of the NBS scheme for P&K fertilisers in the country, it said.

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