The Hindu Business Line : Fertiliser companies may retain super profits

The Government is planning a new policy initiative to encourage fertiliser production in the country. It is contemplating a move to exempt fertiliser manufacturers producing beyond their stated capacities from sharing their extra gain with the Government.

This would be subject to two criteria; the production cost of this fertiliser is below the import parity price (IPP) and that the product is used for agricultural purposes.

According to the proposed New Pricing Scheme for urea to be taken up by the Committee of Secretaries shortly, the Government would not intervene if the urea manufacturers produce beyond 100 per cent capacity utilisation and would pay full subsidy.

As of now, the Government claims 65 per cent of the net gain made by a urea unit from the extra output. However, the Government share is not taken in the form of cash but is accounted for by reducing the subsidy payout to the unit.

For any extra production sold to non-agricultural users, the companies are free to decide on the price, as there is no subsidy involved.

Multiple benefits

According to the Government's understanding, the move not to take a share of the extra gain could generate multiple benefits. "Since subsidy element would not be reduced under this proposal, it would help canalise more of the excess urea into agriculture, increasing fertiliser availability. Since the cost of production of Indian gas-based urea plants is lower than the international price, companies can set ambitious targets and higher domestic output would reduce imports," an official pointed out.

This would also encourage speedy conversion of naphtha-based units to switch over to lower cost gas-based production since the naphtha price is higher than that of gas.

As of now 65 per cent of the urea is produced by gas-based units and 35 per cent by using naphtha as feedstock. There is a 5-10 per cent overlap due to multiple feedstock capacities.

Lower subsidy bill

According to industry estimates, if all naphtha-based units are converted into gas-based units and gas availability is ensured, the overall subsidy bill could come down by around Rs 8,000 crore since 65 per cent of the subsidy payout goes to the naphtha-based plants, sources said.

While the fertiliser industry is said to be broadly in agreement with the Government's new proposal, it has raised some issues. Earlier this week, the Fertiliser Association of India (FAI) wrote to the Government that the weighted average cost of energy for production of up to 100 per cent of the capacity was continuously going up due to the dwindling supply of natural gas under the administered price mechanism.

High production cost

According to FAI, the shortfall is being made up with either naphtha or regassified liquefied natural gas (R-LNG) bought in the spot market. The prices of the regular supplies of R-LNG would also go up from 2009. While the industry feels it would be able to make arrangements for the long-term supply of NG/LNG for up to 100 per cent of the capacities, for production in excess of that, it would have to buy gas either on short-term basis or from the spot market, leading to higher cost of production of any incremental quantity of urea, thus taking it beyond the import parity price. "However, the overall cost (weighted average) of the total output of a unit would still be lower than the IPP,'' FAI has said.