The Government's plan to reduce Fertilizer Subsidy comes to an end – No support from the new Urea Investment Policy 2013
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May 14, 2013Urea Policy 2013
The new urea policy being unleashed in 2013 was expected to help the government reduce its fertilizer subsidy. However, the expectation did not hold true. The government of India’s subsidy is unlikely to reduce, despite setting up of new urea plants as governed by the new urea investment policy of 2013. One of the key reasons identified is the prevailing high price in the international market of raw materials like gas, which is one of the major input for the production of Urea. It is important that the price of Gas procured is less than USD 12 per mm BTU, so as to make the production of urea cheap. However going by the current trend seen in the price of gas, it is unlikely that the gas will be available at the rate.
Read on GWI Can Imported Natural Gas replace expensive Crude Oil in India.
More Investment Expected in the Sector
Talking of the new urea investment policy of 2013, it is expected that the industry see some new faces and a new energy might change the mood of the industry. After decade long, the announcements and amendments in the new policy will help to invite fresh investment. The new policy definitely carries the potential of inviting people to invest in the fertilizer market. It is expected that the new policy will drive investment which will drive production in the country. Owing to high production, country’s dependency on imported urea is likely to reduce, which will not only help us reduce our CAD but will also give the industry and the entire value chain a new dimension altogether. The policy clearly stated that the debt servicing ability of the urea projects will be constrained in the initial years and thus new projects will require the debt-servicing support from existing cash flows in the initial years.
Energy Demand-Supply Gap in India
It is undoubtedly true that India is unable to meet its energy demand and there is huge demand supply gap. On the backdrop of this demand-supply gap in natural gas, it is necessary that the country imports re-gassified liquefied natural gas (RLNG). At higher gas costs over USD 12 per mmBtu, there will be a huge rise in the price of urea which will result in increasing subsidy bill for the government. The increasing subsidy will again be a cause of concern for the government. The NIP 2012 clearly proposes the reimbursement on urea as a function of import parity price and gas cost. It is likely that the gas price will hover in the range of USD 12 to USD 20, thus exceeding the average import parity price of urea for the last six years. Thus high IPP and high gas price will result in high subsidy bill. Also the NIP 2013 will result in addition of substantial capacity in domestic production of Urea which will change the global demand supply gap, but again Government’s bill will rise as reimbursement is to be made at high gas cost.
NIP proposes reimbursement to be made within a price band based on the actual IPP for gas prices per mmBtu of between USD 6.5 and USD 14. For all gas used, the reimbursement made at the floor price (for gas of more than USD14 per mmBtu) will be inadequate to cover the operational expense and financial costs in the initial years. This inability will result in constrained debt service ability. It is important that the players in the industry maintain a strong balance sheet, high credit rating and a strong track record so as to manage the project risks. Without these it will be impossible to use the cash flow from operations to help support the debt repayment.