The Hindu Business Line : Pricing urea

THE NEW PRICING policy for urea will do producers a good turn because it will let them recover their investments on modernisation and modification of capacities. Updating and de-bottlenecking of plants have not been put through in recent years, as units were not sure if the additional capital investment would be reimbursed under the extant group pricing system. These investments are imperative now, as producers prepare to move on to the next stage of the group pricing regime. Under this regime, they will eventually be paid a flat subsidy per tonne of urea, based on costs worked out on global energy efficiency and conversion norms.

But the nod for greenfield and expansion projects with assured 12 per cent post-tax returns for five years could have negative implications for the fertiliser subsidy bill. The policy states that this is intended to promote self-sufficiency in urea production. But this may mean closing the option of imports to meet at least a part of the demand-supply gap. The policy states the subsidy for the new capacities will be reviewed after five years. But having encouraged new capacities on grounds of self-sufficiency, it is unrealistic to expect units to shut shop after five years, if they are unable to produce at import parity prices. With global urea prices on a high, imports do not at present appear an economical option. Production costs for the more efficient private producers are well below the import parity prices of around Rs 7,900 per tonne. But the recent surge in global urea prices has been triggered mainly by resurgent demand from the US, and cost-push factors arising from higher gas and oil prices. Whether these price levels will be sustained, is difficult to say given the unpredictable commodity cycles.

Unlike the earlier retention pricing system, the new pricing system does provide an incentive for cost savings by benchmarking the subsidy to international norms for plant efficiency. After the recent efforts at improving efficiencies, private producers can meet these norms. But this may not necessarily enable them to compete with imports, if global prices were to drop back to, say, $120-130 per tonne. With the domestic producers relying significantly on imported feedstock such as Liquified Natural Gas, their cost structure would largely depend on the availability of LNG at economical prices. This is already clear from the intense negotiations on for the pricing of the first shipment of LNG, set to reach India later this month. While the Fertiliser Ministry has said it will not reimburse feedstock costs in excess of $3.5 per million btu, oil majors are asking for no less than $5.2.

Unless the fertiliser majors drive down feedstock prices through some tough bargaining, they will find it difficult to compete with imported urea, when they move on to an import parity regime. Therefore, while the new pricing policy may be right in encouraging de-bottlenecking and modernisation projects to bring down the cost structure of the existing units, there is uncertainty about how the greenfield expansion projects will survive competition from imported urea, sans the props of assured returns.

More Stories on : Editorial | Fertilisers

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Tragedy at Srirangam

Pricing urea

Globalisation revisited

Some risks need to be taken

Facing up to risk of terrorism

Cancun: A start for developing countries

Importance of the FIIs

Borrowing cost

Farm sector

Social security