The long-awaited policy on investment in new urea plants, cleared by the Cabinet Committee on Economic Affairs on Friday, has several welcome facets. But there are a few grey areas as well, which make it hard to assess its overall impact. Based broadly on the recommendations of the Abhijit Sen committee, the new policy gives a go-by to the cost-plus concept, which has been in vogue for determining urea prices and subsidies. It opts, instead, for benchmarking prices with the cost of imported urea for all additional production from revamped or expanded units and from new plants. The key element of the policy is that the urea produced from capacity additions in the next four years can carry a price tag that is equivalent to 85 per cent of the international parity price (IPP). The IPP will, however, be subject to a floor and ceiling of $250 and $425 per tonne. Meanwhile, the financially-troubled public sector fertiliser units have been allowed to charge up to 95 per cent of the parity price, in the hope that this will facilitate their survival as going concerns.
In an interesting departure, the government has chosen, through the new policy, to encourage the use of coal by envisaging that coal-based urea projects will be treated on a par with brownfield or greenfield projects based on other feed-stocks, notably gas. This comes at a time when the use of coal is being frowned upon, on account of concerns about global warming, though the new coal-based technology may not be environment-unfriendly. However, the suitability as well as the economics of the use of indigenously available coal is yet to be ascertained.
It would be fair to say that the new policy has opened up avenues for fresh investment in urea production, and this is welcome because there has been no investment in new urea capacity for the past decade. In fact, investment in this sector began to dwindle after the misfired bid to de-control fertilisers way back in 1992. Though the government feels that the new policy will result in substantial expansion of urea manufacturing capacity, 10-12 million tonnes by 2012, industry circles are less optimistic. However, there could easily be the addition of some 3 million tonnes production capacity in the near future, even if largely through the revamping and de-bottlenecking route. But the unpalatable fact is that the capacity expansion will depend almost wholly on the availability of gas to the industry at reasonable prices, and this is uncertain despite the anticipated supplies from the Krishna-Godavari basin. It is also not clear whether the new policy will apply to units going in for a change of feedstock, say from naphtha to natural gas, which also usually involves de-bottlenecking and requires heavy investment.
There is a difference of opinion among analysts even about the propriety of the proposed price band of $250 to $450 per tonne, especially considering that current urea prices hover around $800 a tonne. This matters all the more because incremental urea production will become available, if at all, only after two or three years and there is no way that prospective investors can foresee what global prices would be at that time. In short, it is difficult at this point to visualise how much fresh investment or capacity expansion the new fertiliser policy will spur, especially because many of the other dampers, including a perpetual liquidity crunch on account of belated subsidy payments, remain unaddressed.