Falling gas prices offer a breather to a subsidy-ridden fertiliser sector

Estimates say a 25.1% fall in natural gas prices, which makes up 50-80% of raw material cost in urea, could lead to a 12% in manufacturing cost; 28 of 31 urea plants in India are gas-based

The liquidity crunch stemming from the non-clearance of subsidy dues could severely impact the working capital cycle of India's fertiliser sector, the backbone of the country’s farm economy.

However, one factor that see has unexpectedly come to its aid is the fall in the prices of natural gas, the main raw material for making urea, the largest consumed fertiliser in the country.

According to some estimates a 25.1 per cent fall in natural gas prices could lead to a 12 per cent drop in the cost of producing urea, as gas accounts for 50-80 per cent of raw material cost of manufacturing urea. Twenty-eight of the 31 urea plants in India are gas-based.

Before we look at how this sudden development impacts the sector, let's examine how the spike in unpaid subsidies is hurting the fertiliser industry.

Rising subsidy woes

According to industry estimates, India’s fertiliser sector started the 2020-21 financial year with an unpaid subsidy backlog of around Rs 48,000 crore.

In the current year, government subsidy is estimated to be about Rs 80,000 crore (urea plus others).

Thus, total subsidy requirement in the current fiscal is estimated to be around Rs 128,000 crore (Rs 48,000 crore plus Rs 80,000 crore).

The 2020-21 Budget provided Rs 71,309 crore towards fertiliser subsidy, a major chunk (around Rs 47,805 crore) of which was towards urea.

The subsidy budget allocated for 2020-21 was already about Rs 8,689 crore (about 11 per cent); lower than the allocation for 2019-20 of Rs 79,998 crore.

As if this were not enough, in 2020-21, the department of fertilisers has been clubbed under the ‘B’category of ministries as per the new expenditure management regime being implemented in the aftermath of Covid-19.

‘B’ category ministries are those that will be entitled to spend just 80 per cent of their allocated budget for 2020-21.

This means, of the already truncated Budget of Rs 71,309 crore, about Rs 57,047 crore will be released in 2020-21.

Of this release, around Rs 10,000 crore has already been spent on repaying bank loans in the first quarter of this fiscal.

Thus, around Rs 47,047 crore will be left for this year’s subsidy, which is not even enough to clear last year’s outstanding subsidy dues.

Sources said assuming that out of this, a minimum of Rs 30,000 crore is carried forward to the next financial year, as has been the practice since the last few years, Rs 50,000 crore will be the estimated subsidy receivables for 2020-21.

Urea is the top fertiliser sold in India, and almost 75 per cent of its cost of sales comes from subsidy receivables from the government. Delay in release of urea subsidy hits the cash flows of companies.

India consumes 30-31 million tonnes of urea a year, of which domestic output is 26-27 million tonnes and the rest is imported.

Higher sales

The low subsidy release hasn’t impacted the demand for the fertiliser, which has risen exponentially the past few months despite the Covid lockdown, as both summer crop and kharif acreage reached record highs.

Fertiliser demand expanded exceptionally during the April-to-August 2020 period over the same months a year ago. 

Urea sales, at 15.52 million million tonnes during the April-to-August 2020 period were 24.7 per cent higher than the same period last year, while the consumption of di-ammonium phosphate (DAP) was pegged at 4.63 million tonnes, or 57.6 per cent more than the same period last year.

Consumption of NPK (nitrogen-phosphorus-potassium) was at 5.10 million tonnes in April-to-August 2020, or 53.7 per cent more than the same period last year.

Sales of muriate of potash, or MOP (for direct application) were estimated at 1.29 million tonnes, while those of single super phosphate (SSP) were estimated at 2.15 million tonnes, which was 42.8 per cent and 13.1 per cent more in April to August 2020 as compared to the same period last year.

Impact of low gas prices

Gas is a very important component of input cost of urea, which is the biggest fertiliser produced in the country.

Gas accounts for 50-80 per cent of the cost of raw material used in making this fertiliser, and 28 of the 31 urea plants in India are gas-based.

A recent study by Icra shows that nearly 41 per cent of the natural gas requirement for the fertiliser sector is met through domestic gas with the remaining 59 per cent being met through a mix of term LNG and spot LNG.

It says that with Brent crude prices, which are a driver of term LNG prices, remaining subdued along with spot LNG prices, the pooled price for the fertiliser sector is expected to remain in the range of $7.5-8/mmbtu in the coming part of the 2020-21 financial year.

At present, the (H2-FY21) the price for gas produced from local fields has been revised to $1.79/mmBtu which is the lowest price ever set as per the New Domestic Gas Policy.

This is expected to lower the subsidy requirement by around Rs 11,000 crore for the urea-based fertiliser companies.

A CARE Ratings report says that a 25.1 per cent fall in natural gas prices could potentially lead to a 12 per cent decrease in the cost of production of urea.

“This will help in decreasing the working capital intensity of fertiliser manufacturers and it will also act as a relief for the fiscal spending of the government while disbursing the urea subsidy, which is already constrained,” the report added.

Clearly, the fall in natural gas prices has come as a big breather for the fertiliser companies particularly urea firms, but how will this last remains to be seen. 

Table: Fertiliser subsidy over the years (in Rs crore)

Subsidy head	2018-19*	2019-20**	2020-21***	% Change#
Urea	46,514	54,755	47,805	-12.7
Nutrient-based	24,090	26,369	23,504	-10.9
Total	70,605	81,124	71,309	-12.1
*Actuals; **Provisional; ***Budget estimate; #Percentage change 2020-21 over 2019-20; Source: CARE Ratings