Uniform gas price may boost urea capacity, improve profits

MUMBAI: The government's recent decision to supply natural gas at uniform price to all domestic urea manufacturing units through a price pooling mechanism may be considered neutral for this subsidy-driven industry .

But, for a handful of players, this can prove a profit booster, thanks to the government's 2008 policy that allowed market driven pricing to urea for expanding capacities. Fertiliser companies that added capacities since 2008, but ran units on costly imported LNG, the price pooling can cut costs and expand margins.

Such profits can represent up to 40% of an individual company's annual profits, say experts.
Since 2008, a total of nine fertiliser makers added 2.9 million tonne capacity, or approximate 10% of the industry's current production, as the government allowed selling the incremental urea quantity at import parity non-subsidised price. Only those who could source a large chunk of their gas requirement domestically -as production using costly imported feedstock wasn't always profitable -could benefit fully .

This is going to change.

"RCF is presently running on full capacity with nearly four lakh tonne above the cut-off limit at Thal, as we use mostly domestic gas," said RG Rajan, chairman &MD, RCF. "However, this is not the case with players dependent on imported LNG, as international urea prices came down last year.With the pooling mechanism such plants can produce at their full capacity," he added.

"Getting gas at a pooled price and ability to sell part of the urea quantity at import-parity price will benefit companies that had de-bottlenecked their capacities under the government's earlier investment scheme," said K Ravichandran, senior VP & co-head, corporate ratings, ICRA."Companies who are largely using domestic gas for producing urea above the cut-off quantity , such as KRIBHCO, KRIBHCO Shyam and RCF, could, however, find their profits squeezed as the pooled gas price will likely be higher than the domestic gas price," he added.

Under the circumstances, Tata Chemicals, Indo Gulf Fertilisers (now part of AB Nuvo) and Chambal Fertilisers are among those likely to benefit the most from gas pooling.

The change in gas cost will also change the working capital requirement for companies. "We believe companies with gas cost higher than industry average will benefit on account of lower working capital requirement and players with gas cost lower than industry average will suffer on account of higher working capital requirement," said a report from Edelweiss, pointing out that this could well be a step in decontrolling urea.

Industry experts, while wishing for a uniform and sustainable urea pricing policy, believe that the uniformity in natural gas prices should induce capacity additions. According to RCF's Rajan, new plants that the government announced can become viable with uniform gas price. ICRA's Ravichandran said gas pooling will incentivise more LNG imports by the fertiliser industry, which will improve gas availability at relatively lower prices and allow 4-5 new plants to come up.