The Hindu Business Line : Urea policy to open up new opportunities

The new investment policy for urea announced last week has the potential to sharply improve realisations and open up new growth opportunities for domestic manufacturers of the fertiliser.

There is a substantial supply deficit for urea in the domestic market, which is currently being bridged by imports.

However, only producers who have the resources to put up new facilities and feedstock linkages to ensure gas, coal or LNG supplies, may be able to capitalise on this opportunity.

Producers such as Tata Chemicals and Aditya Birla Nuvo who are already in the midst of capacity expansion and those like Chambal Fertilisers, who have a reasonable level of profitability, may be best placed to benefit from this proposal within the listed space.

The new policy proposes compensation to producers at import parity prices of urea, instead of on a cost-plus basis as prevalent now.

However, import parity based pricing will be applicable only to additional urea produced (over and above rated capacity) through expansion or de-bottlenecking projects.

Further, the import parity prices for this purpose would be capped at $250 a tonne as the floor and $425 a tonne as the ceiling.

While urea produced through revamp of an existing plant would attract 85 per cent of the import parity price, that produced through brownfield expansion would attract 90 per cent of the import parity price.

With global urea prices currently hovering at $700-800 a tonne, producers who manage to put up capacities now, may stand to receive subsidy based on the ceiling price of $425 per tonne.

Realisations at this level could substantially expand the profit margins of producers who are able to produce above rated capacity.

However, not all listed producers of urea may be in a position to put up capacities at this juncture. For one, only those with healthy cash flows and a reasonable margin picture may be able to find the resources to fund expansion.

Second, the availability of feedstock such as natural gas or LNG has been a key constraint to urea producers actually ramping up output to meet rising demand.

Therefore, producers who manage to secure feedstock for their expanded capacities may be the ones to make the best of this policy proposal.

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