Thursday, August 21, 2008

Fertiliser Companies: Good Time Ahead

The centre has agreed to release Rs.22,000 crores, in cash, to the fertilizer companies against subsidies due to them, by availing loan from SBI and interest on such loan would be paid by the Centre. Another subsidy of Rs.31,000 crores shall be paid within the next three months. Fertiliser Ministry is estimating a total subsidy of Rs.1,15,000 crores for 2008-09, against Rs.30,986 crores, provided for it, in the budget.

In view of sharp rise in crude prices in the year 2008, the prices of feedstock of fertilizer being Furnace Oil and Naptha as well as Natural Gas, have also increased. The cost of production has thus increased with domestic cost of Urea at around Rs.13,000 per MT while imported cost at Rs.31,000 per MT.

The first tranche of subsidy of Rs.30,986 crores, provided in the budget, already got exhausted in first four months. An eyebrow by the industry experts were raised at the time of budget provision of Rs.30,986 crores, considering the fact that it was inclusive of a backlog of about Rs.8,000 crores and against a subsidy of Rs.45,000 crores of year 2007-08.

In view of administered selling price of fertilizers, presently subsidy component is almost 80% of the cost of production, and for the first time, the subsidy payment was made by the government last year by issuing Fertiliser Bonds, for the first time, of Rs.7,500 crores last year. Obviously, issuing bonds helps the government to curtail its deficit as these items are appearing below the line.

Finance Minister, while presenting his Budget for 2008-09, has given a separate para for “Revisiting the Roadmap for Fiscal Adjustment, which reads as under :--

“I acknowledge that significant Liabilities of the Government on account of oil, food and fertiliser bonds are currently below the line. This accounting arrangement is consistent with past practice. Nevertheless, our fiscal and revenue deficit are understated to that extent. There is a need to bring these Liabilities into our fiscal accounting. As a first step I have shown these liabilities clearly in “Budget at a Glance”. I intend to request the Thirteenth Finance Commission to revisit the roadmap for fiscal adjustment and suggest a suitably revised roadmap.”

Inspite of having realized the flaws of understating the fiscal deficit by issuing bonds, finance ministry, this time, were also keen to issue bonds only. All the bonds received by fertiliser company were discounted by them and the present discount rate on such bonds are as high as 15 per cent. Since these bonds are not having SLR status, even banks are not too keen to buy them.

Sometime back, the government had cleared the Urea pricing policy. Out of the estimated demand of 40 million MT of fertilisers in the country, Urea demand constitutes about 27 million tonnes while domestic production is close to 20.5 million tonnes only. The gap of over 6 million tonnes is purely met by the imports, on which, subsidy burden alone comes to over Rs.15,000 crores. In 06 – 07 the total demand of Urea was at 25 million tonnes against production of 20.3 million tonnes while that of DAP at 8 million tonnes against production of 4.86 million tonnes.

With Urea pricing now in place for incremental production by the domestic companies, which is linked to Import Parity Price within a band of 85% to 95% with a floor and cap of $ 250 per MT to $ 425 per MT, would encourage the companies to expand. The present cost of production of Urea by a domestic company is at $ 300 per MT while imported Urea cost about $ 710 per MT. Considering new investments on capacity expansions or de-bottle necking, the companies would be able to realize about $ 360 per MT (85% of cap price of Urea of $ 425 per MT). But these companies were wary of receiving subsidy reimbursement by way of bonds as it was putting about 10% loss to them on redeeming these bonds.

In India, prominent Urea manufacturers are Chambal Fertilisers, RCF, (Thal Plant) National Fertilisers, (2 Plants) Indo Gulf Ferilisers, GSFC, Nagarjuna Fertilisers and Tata Chemicals all are gas based, while GNFC, National Fertilisers (3 Plants), Zuari are either FO or Naptha based urea plants. Some of the DAP makers are Coromandal Fertilisers, RCF, and Deepak Fertilisers.

With dust having settled on payment of subsidy by the government in cash as also on Urea pricing, fertiliser companies would be encouraged to go for expansion, which should result in higher production after 12 months. But let’s hope that government does not revert back, to issue of fertiliser bonds, as this time, it has not happened due to PM’s intervention in the matter.

If we have assured supply on Natural Gas and payment of subsidy by the government in cash, fertiliser companies have good time ahead.


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