The near 8 per cent cut in domestic natural gas price will help bring down urea subsidy bill by Rs 930 crore, India Ratings & Research (Ind-Ra) has said.
The downward revision in natural gas prices from USD 5.05 per million British thermal unit to USD 4.66 is applicable from April 1 to September 30 and is due to the decline in gas prices at the benchmark indices of Henry Hub of US, National Balancing Point of UK, Canada's Alberta Hub and Russia's energy hub over the reference period January-December 2014.
"Natural gas, which forms a majority of the raw material cost for urea production in India, is a pass through for gas based urea producers up to their respective reassessed capacities. Around 80 per cent of indigenous urea is produced using domestic gas," it said.
India-Ratings said it believes that "the indigenous urea subsidy bill will be arrested marginally by Rs 930 crore in FY 2016 pursuant."
Urea retail prices are controlled by the government and any change in gas prices is absorbed by the government of India through subsidies.
Ind-Ra said the subsidy burden for indigenous urea had increased due to the upward revision of gas prices in November 2014 from USD 4.2 to USD 5.05 per mmBtu.
"However, factoring in the November 2014 increase in gas prices, the recent downward revision will partly offset, albeit marginally, the subsidy burden by 2.4 per cent. Nevertheless, urea subsidy requirements will continue to remain high despite the proposed reduction, as gas prices remain higher than the FY14 level of USD 4.2," it said.
The upward revision in gas prices during November 2014 had significantly altered the urea production feasibility at post-cut off production levels. However, reduction in gas prices could support post cut-off production for some of the plants, it said.
Ind-Ra said the reduced gas prices could support post cut-off urea production in the short term, however, a paradigm shift in the fertiliser policy with urea price decontrol could be the only sustainable solution to support the domestic urea industry.
Government has increased the subsidy allocation for indigenous urea to Rs 36,000 crore in in FY15 from Rs 26,500 crore in FY14 and revised it to Rs 38,200 crore for FY16.
"Increased subsidy requirements are partially due to the increase in domestic gas prices from FY 2014 levels as well as a marginal increase in the use of costly imported liquefied natural gas (LNG)," it said.
