Need for expediting planned growth of urea plants with natural gas!

Need for expediting planned growth of urea plants with natural gas!

As the fertiliser subsidy is reaching Himalayan heights at Rs67,970 crore, the  New Investment Policy should expedite planned growth of Urea plants and availability of natural gas

It is too early even for India Meteorological Department (IMD), to predict the type of monsoon that we may have this year. What is certain is the continued and increasing usage of fertilizers to grow more foodgrains, not only to meet our own needs, but also have enough for export, as we have now a number of established markets for these.

 Over the past 13 years, there have been no developments in this industry; no expansion plans as manufacturers have been saddled with lower or inadequate supplies of fuel, resulting in the short fall of about 8 million tonnes, against our annual requirement of 29-30 million tonnes, with the domestic production almost static at 22 million tonnes. These 8 million tonnes have been imported so far.

 The international price of urea has been ruling around $350-$360 a tonne and has now dipped down to a $300 level; other nutrient prices have also come down. Our first move, therefore, should be to ensure that serious and immediate steps are taken to negotiate better prices with our established suppliers to plan shipments in time so that we are ready before the monsoon arrives.

 The New Investment Policy was notified in January 2013 to boost urea production in country, whose manufacturers have not expanded their production capacities in the last 13 years. A Group of Ministers, who studied the issue of the industry, have recommended increasing the fixed production cost of Urea plants that are 30 years old or more by Rs150 per tonne and for all others by Rs350 per tonne. Consequently, the fixed cost would be uniformly at Rs2,300 per tonne.

 For easy reference, it may be mentioned that "fixed cost" refers to the salary and wages paid, contract labour cost, repair and maintenance and selling expenses. The new policy also eliminates the expression of "guaranteed

buy-back" of the urea produced, as, in the true sense of the term, theGovernment does not buy back the production .

 In so far as the increase in gas price, effective from 1st April is concerned, the policy has already a prescribed formula of a flexible floor and ceiling price of gas based on $6.5 to $14 per mmbtu. The floor price has been determined at a return on equity of 12% and the ceiling price at a ROE of 20%.

 Beyond delivered gas price of $14 per mmbtu only the floor price will be increased.

By 2017, the demand for Urea is expected to reach 34 million tonnes, as against the current requirement of 30 million tonnes (indigenous production is now 22 mt), and instead of continuing to import, the new investment policy has brought keen interest for development of brownfield projects by existing makers like Indian Farmers Fertiliser Cooperative Ltd (IFFCO), Rashtriya Chemicals and Fertilizers Ltd (RCF), Chambal Fertilisers and Tata Chemicals, with two new players to start greenfield projects of 1.3 million tonnes each. If all these projects go through without hiccups, the total output is envisaged at 41.5 million tonnes, more than what we might need. As much as Rs25,000 crore may thus be invested in these expansions and new projects in the next few years. One of the most important conditions that the government wants to make is to provide a bank guarantee that they will complete the projects on schedule.

 To support this, the government plans to give subsidy at a certain percentage for a period of eight years, for those projects that comes up after the amended policy comes into force. It may be noted that the fertiliser subsidy has grown to a staggering Rs67,971 crore (revised) for 2013-14 from Rs18,460 crore in 2005-06 and the budget estimate for 2014-15 remains practically unchanged at Rs67,970 crore.

 The only one thing that the Government can consider seriously is if and when increased gas production is available from Reliance Industries Ltd and ONGC can they allocate some for the Urea plants? One option is to decontrol urea prices to assess the impact that it may have?

 (AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)