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Fertiliser makers are going slow on expansion plans following the petroleum ministry’s approval to double natural gas prices. Their mega capital expenditure (capex) plan, of Rs 50,000 crore, is under implementation. The grievances are the pricing of gas, lack of offtake commitment and concerns over gas availability through long-term tie-ups. Companies have, however, started contemplating a price rise to pass the burden.
Makers had chalked the capex plan immediately after the government implemented its new urea policy in 2013 to reap the benefit of supply deficit. While the largest private urea maker Chambal Fertilisers announced to double its capacity with a new 1.3-million-tonne facility and an investment of Rs 10,000 crore in the next few years, Nagarjuna Fertilizers and Chemicals proposed to set up a 1.3-million-tonne facility, with a capex of Rs 5,000 crore. Others, including public sector makers, also announced similar plans.
“But, fresh investments in new projects have been stalled due to uncertainty over subsidy for the revised gas price. Makers are waiting and watching over the government on pricing and its long-term supply assurance,” said Salil Garg, an analyst with India Ratings.
“The increase will impact the sector. We will gradually pass most of the additional cost,” said Somnath Patil, president and chief financial officer, Deepak Fertilisers and Petrochemicals Corporation. Other companies did not respond.
The petroleum ministry approved the increase to $8/ mmbtu effective April 1 from $4.2/mmbtu. This is likely to affect urea makers more than other fertiliser makers, with natural gas accounting for 80 per cent of the inputs.
With an estimated demand of 32 million tonnes against 23-million production, India meets 28 per cent of urea through imports. Also, 50 per cent of non-urea fertiliser demand is also imported.
However, the demand-supply dynamics remain strong. This favourable mismatch, with the strategic importance of the sector to maintain the national food security value chain, has proved supportive for fertiliser makers.Makers had chalked the capex plan immediately after the government implemented its new urea policy in 2013 to reap the benefit of supply deficit. While the largest private urea maker Chambal Fertilisers announced to double its capacity with a new 1.3-million-tonne facility and an investment of Rs 10,000 crore in the next few years, Nagarjuna Fertilizers and Chemicals proposed to set up a 1.3-million-tonne facility, with a capex of Rs 5,000 crore. Others, including public sector makers, also announced similar plans.
“But, fresh investments in new projects have been stalled due to uncertainty over subsidy for the revised gas price. Makers are waiting and watching over the government on pricing and its long-term supply assurance,” said Salil Garg, an analyst with India Ratings.
“The increase will impact the sector. We will gradually pass most of the additional cost,” said Somnath Patil, president and chief financial officer, Deepak Fertilisers and Petrochemicals Corporation. Other companies did not respond.
The petroleum ministry approved the increase to $8/ mmbtu effective April 1 from $4.2/mmbtu. This is likely to affect urea makers more than other fertiliser makers, with natural gas accounting for 80 per cent of the inputs.
With an estimated demand of 32 million tonnes against 23-million production, India meets 28 per cent of urea through imports. Also, 50 per cent of non-urea fertiliser demand is also imported.
According to an India Ratings report, the increase will result in a huge increase in the government's subsidy, which was Rs 72,600 crore for FY14.
Inadequate subsidy budgets and delays in disbursal have led to increased working capital requirements of companies. Makers fund this subsidy shortage through short-term debt. Consequently, interest costs rise as borrowing costs are not included in the subsidy reimbursement mechanism.
This strains cash flow from operations, impacting their credit profiles.
“The decision to double prices will create serious problems. Since natural gas is used to make fertilisers for farmers, and generate power for industrial and public use, the decision will raise costs for common people, and alienate large sections of the electorate,” said a sectoral official.
The subsidy burden on the sector will rise Rs 11,000 crore. The sector, however, is pursuing the government to reduce the lag time of currently six months for clearing subsidy, which was Rs 33,500 crore as on March 31.
