New Urea Policy alters energy math, encourages production: CRISIL
Govt has estimated subsidy savings of Rs 2,600 cr in 4 yrs by resetting energy consumption norms
The New Urea Policy 2015 announced by the Union Cabinet earlier this
week may not be uniformly beneficial for the industry. The policy
tightens energy consumption norms and aims to increase production by two
million tonne. This, according to a CRISIL report, would have a mixed
impact that would vary between manufacturers. While the new norms on
energy savings would be a credit negative since they reduce the profit
on production up to a specified cut-off capacity, profit can be higher
for production beyond that threshold.
The negative impact will depend on what energy norms are applicable for
each unit and scope for further efficiencies. The positive impact will
depend on capacity utilization, specifically, the extent of production
possible and any fixed-subsidy allocated per tonne in order to
incentivize production So far, urea manufacturers have benefited
because their energy consumption has been less than the norms set by the
government. And subsidy was given based on these norms for production
up to the cut-off.
The new policy is yet to be notified but the government estimates
subsidy savings of Rs.2,600 crore in four years by resetting energy
consumption norms. Besides, there will be indirect saving of Rs 2,211
crore (total savings will be Rs 4,829 crore) on account of revised
specific energy consumption norms and import substitution respectively
during the next four years.
According to CRISIL, this will be directly mopped up from the
bottomlines of urea manufacturers because stricter norms will translate
into lower gains from energy savings unlike before. However, the policy
will push manufacturers to further enhance their energy efficiencies.
For production beyond cut-off, the prevailing subsidy was linked to
import-parity prices of urea. But in the last fiscal, import-parity
price fell, domestic natural-gas prices rose, and consumption of
imported re-gasified liquefied natural gas (RLNG) also increased because
of which profit from production beyond cut-off capacity had almost
dried up for most manufacturers.
Depending on the domestic-imported gas mix, and in the absence of any
change in policy, production beyond cut-off had also become unviable for
some manufacturers.
CRISIL said the New Urea Policy aims to increase domestic output by
encouraging production beyond cut-off. But the extent of increase in
profits can be ascertained only once the fixed subsidy, if any, payable
for production beyond cut-off is known.
The increase in profit will largely offset the impact of tightening of
energy norms for production up to cut-off. And fixed subsidy for
production beyond cut-off capacity will add to stability in cash flows.
For urea manufacturers that haven’t revamped their plants and do not
produce beyond 100 per cent capacity, the policy will largely be
negative.
Urea production can be divided into two parts: production up to cut-off
capacity (nearly 90 per cent of domestic capacities) and production
beyond cut-off capacity (nearly 10 per cent of domestic capacities)
Among the companies that are likely to be impacted are Chambal
Fertilisers and Chemicals Limited, Indian Farmers Fertilisers
Co-operative Limited, KRIBHCO Shyam Fertilizers Limited, Krishak Bharati
Cooperative Limited, Mangalore Chemicals and Fertilizers Limited,
National Fertilizers Limited, Rashtriya Chemicals and Fertilizers and
Tata Chemicals Limited.
The Union Cabinet on Monday approved a comprehensive New Urea Policy
for the next four financial years. The policy is aimed at maximizing
indigenous urea production and promoting energy efficiency in urea units
to reduce the subsidy burden on the Government. "It will enable the
domestic urea sector having 30 urea producing units, to become more
energy efficient, would rationalize the subsidy burden and incentivize
urea units to maximize their production at the same time," said a
government statement.
It is expected to result in additional production of around 20 lakh/MT
annually. Presently, India is importing about 80 lakh metric tonnes of
urea out of total demand of 310 lakh metric tonnes.
Earlier the Government had approved gas pooling policy under which all
urea units would get gas at a uniform price. The government had also
decided in January to allow urea producers to produce neem coated urea
upto 100 per cent of production and making it mandatory to produce a
minimum of 75 per cent of domestic urea as neem coated, so that farmers
are benefitted. Neem coated urea is required less in quantity with same
plot size and gives higher crop yields. Underground water contamination
due to leaching of urea also gets reduced with neem coating since
nitrogen in the neem coated urea gets released to plants very slowly.
Neem coated urea is not fit for industrial use, so chances of its
illegal diversion to industries will also be lesser.
The MRP of urea for the farmers has been kept the same at Rs. 268/- per
bag of 50 kgs. excluding local taxes. Farmers have to pay an additional
price of only Rs.14/- per bag of neem coated urea.
The Government also decided to continue the existing subsidy rates for
Phosphatic and Potassic (P&K) fertilizers (22 grades including DAP,
Single Super Phosphate (SSP), Muriate of Potash (MOP), etc.) under the
Nutrient Based Subsidy (NBS) policy for the current year. Subsidy rate
for DAP remains same at Rs 12350/- per metric tonne while it is Rs
9300/- for MOP. Separate subsidy for boron and zinc coated fertilizers
has also been continued.
There are 19 units producing phosphatic fertilizers and 103 units
making SSP. The entire requirement (approximately 30 lakh Metric Tonnes)
of MOP is met from imports, since there is no resource of potash in
India. About 90 percent of the phosphates are imported.
http://www.business-standard.com/article/economy-policy/new-urea-policy-alters-energy-math-encourages-production-crisil-115051500564_1.html
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