The Hindu Business Line : Fertiliser cos gain as feedstock prices fall

Falling costs
Delivered price of naphtha to urea units is hovering now at Rs 16,000-17,000 a tonne, down from a fiscal average of Rs 40,000
The feedstock requirement of domestic urea units is around 42 million standard cubic meters per day

Harish Damodaran

New Delhi, Jan. 1 Fertiliser companies are experiencing a substantial reduction in their production costs, courtesy falling feedstock prices.

The delivered price of naphtha to urea units is hovering now at Rs 16,000-17,000 a tonne, having averaged over Rs 40,000 a tonne for most of this fiscal and crossing Rs 55,000 in July (when global crude prices peaked).

Fertiliser units consume 0.5 to 0.6 tonnes of naphtha to produce a tonne of urea. At current naphtha prices, the feedstock cost for each tonne of urea comes to roughly Rs 8,000 to Rs 10,000, whereas they were Rs 20,000-25,000 when naphtha ruled at Rs 40,000-plus levels.

Feedstock accounts for bulk of the production cost of urea, with conversion charges (utilities, consumables, salaries and overheads) at Rs 1,200-1,500 a tonne and capital-related charges (interest, depreciation, etc) between Rs 500 and Rs 2,000 depending upon plant vintage.

The feedstock requirement of domestic urea units is around 42 million standard cubic metres per day (scmd). Of this, 28 million scmd is sourced as gas at a weighted average cost of $4.5/million British thermal units (mbtu). This includes some 20 million scmd of indigenous gas at around $3.2 per mbtu and the rest eight million scmd of imported liquefied natural gas (LNG) at $6.5-7/mbtu against long-term contracts.

The problem of volatility in feedstock cost (linked to world crude prices) is mainly for the 14 million scmd balance requirement, which is met entirely from the spot market.

When feedstock prices went through the roof, urea manufacturers were shelling out between $25 and $30 per mbtu for spot purchases of LNG or naphtha (one tonne of naphtha produces 41 mbtu of energy, while 1,000 cubic metres of gas generates the equivalent of 33 mbtu; 24 mbtu of gas is used to produce one tonne of urea).

But at prevailing naphtha prices of Rs 16,000-17,000 a tonne and at Rs 48.5-to-a-dollar, the delivered cost comes to only $8-8.5 per mbtu. So sharp has been the decline that those units earlier contracting spot cargoes through LNG terminals at Hazira and Dahej have now fully switched over to naphtha.

Further, fertiliser companies hope to do away with dependence on spot purchases altogether (of both naphtha and LNG) once gas from Reliance Industries’ Krishna-Godavari basin starts flowing in.

The fertiliser industry has been allocated 14 million scmd out of the expected production of 55 million scmd from these fields by July 2009. This gas is to be made available at $4.2 per mbtu.

All this would significantly reduce manufacturing costs. However, the Director-General of Fertiliser Association of India (FAI), Mr Satish Chander, claimed that the industry does not stand to gain as much as the Government.

“When our costs come down, it gets reflected in a lower retention price payable to us as subsidy reimbursement,” he said. Fertiliser companies are mandated to sell urea to farmers at Rs 4,830 a tonne, as against an average retention price (covering all costs) of Rs 12,000 a tonne. The gap is footed as fertiliser subsidy from the exchequer.

“We had originally projected the subsidy outgo for 2008-09 at Rs 120,000 crore, but now it may be only Rs 1,00,000 crore. It would have been lower had the rupee not weakened against the dollar,” Mr Chander said, adding that if present trends continue, the subsidy bill will within Rs 80,000 crore next fiscal.

Related Stories:
Fall in chemical prices may help trim Govt’s fertiliser subsidy bill
Fertiliser, power firms drive up naphtha usage as prices fall
Gujarat industry substituting LNG with naphtha

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