The new urea policy announced by the Cabinet on Monday might not be uniformly beneficial for industry. The policy tightens energy consumption norms and aims to increase production by two million tonnes. This, said a CRISIL report, would have a mixed impact.
While the new norms on energy savings would be a credit negative, as these reduce the profit on production up to a specified cut-off capacity, profit can be higher for production beyond that threshold. The policy was announced for the next four financial years. It is aimed at maximising indigenous urea production and promoting energy efficiency in 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 rationalise the subsidy burden and incentivise urea units to maximise their production at the same time,” said a government statement.
It is expected to result in additional production of around 2 million metric tonnes annually. Presently, India is importing about 8 million metric tonnes of urea out of total demand of 31 million metric tonnes.
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. There will also be indirect savings 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.
The negative impact of the policy will depend on what norms are applicable for each unit and the scope for further efficiencies. The positive impact will depend on capacity utilisation, specifically, the extent of production possible and fixed-subsidy allocated per tonne in order to incentivise production So far, urea manufacturers have benefitted because their energy consumption has been less than the norms set by the government.
According to CRISIL, this will be directly mopped up from the bottomlines of urea manufacturers as stricter norms will translate into lower gains from energy savings unlike before. However, the policy will push manufacturers to further enhance their energy efficiencies.
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)
For production beyond cut-off, the prevailing subsidy was linked to import-parity prices of urea. But in the last financial year, import-parity price fell, domestic natural-gas prices rose, and consumption of imported re-gasified liquefied natural gas (RLNG) increased because of which the production beyond cut-off capacity profit had dried up for most manufacturers. Depending on the domestic-imported gas mix, and the absence of any change in policy, production beyond cut-off had 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 when the fixed subsidy for it, if any, 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.
Among the companies that are likely to be impacted by the policy 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.
Earlier the government had approved gas pooling policy under which gas was provided to all urea units at a uniform price. It had decided in January to allow urea producers to produce neem coated urea up to 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 gives higher crop yields and is not required in high quanitites while using the same plot size as other urea variants. Underground water contamination due to leaching of urea also gets reduced since nitrogen in the neem coated urea gets gradually released to plants. This variant of urea is not fit for industrial use, so chances of its illegal diversion to industries will also be lesser.
The market retail price (MRP) of urea for the farmers has been kept the same at Rs 268 for a 50kg bag. excluding local taxes. Farmers have to pay an additional price of only Rs 14 a bag of neem coated urea.
The government decided to continue the existing subsidy rates for phosphatic and potassic (PK) fertilisers (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 a metric tonne while it is Rs 9300 for MOP. Separate subsidy for boron and zinc coated fertilisers has also been continued.
There are 19 units producing phosphatic fertilisers 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 per cent of the phosphates are imported.