New investment policy for urea to check spurt in gas prices

Our Bureau Updated - January 07, 2013 at 09:44 PM.

As per the policy, the floor prices of urea increase are in line with the gas price of $14 (about Rs 770) million British thermal units. If the gas price crosses $14/mBtu, urea producers are to be reimbursed the entire gas cost.

The new investment policy announced by the Union Government may result in substantial urea capacity addition in the next three to four years.

The policy benchmarks realisation of urea for new projects to import parity prices, subject to floating floor and ceiling prices, which are in turn linked to gas prices.

As per the policy, the floor prices of urea increase are in line with the gas price of $14 (about Rs 770) million British thermal units (mBtu). If the gas price crosses $14/mBtu, urea producers are to be reimbursed the entire gas cost. This ensures new projects are protected from a sharp spike in gas prices.

The new policy is in line with the demand of the industry to do away with the gas price ceiling of $14 mBtu in the earlier proposed policy.

Further, it provides a downside risk protection through a cost-plus mechanism and upside benefit through import parity price (IPP)-linked pricing mechanism for new projects.

Assuming a 2:1 debt-equity mix, rating agency ICRA expects the post-tax project internal rate of return to remain in the band of 12.8 per cent to 15.6 per cent (for gas prices of $7-20 mBtu) for brownfield projects.

FRESH CAPACITY

Given the clarity on gas price pass-through, the rating agency expects at least 5-6 projects to materialise in the near future. The policy may help creation of incremental capacities to the extent of 8-10 million tonnes a year over five years, although it may not eliminate urea imports altogether.

India currently consumes 29 million tonnes of urea, while the domestic production stands at 22 million tonnes leading to import of about seven million tonnes.

K. Ravichandran, Senior Vice-President, Corporate Ratings, ICRA, said the policy should be favourable for various stakeholders. While the industry would benefit through implicit pass-through of gas prices, the Union Government would benefit through reduction of subsidy outflows, as reliance on imports would reduce and international prices may also correct due to lower demand from India.

“Further, lower subsidy receivables should also lead to an improvement in the working capital cycle of the urea players, which should lead to a decline in the interest costs of these companies,” he said. The Government has paid a subsidy of Rs 17,400 crore for imported urea last fiscal.

suresh.iyengar@thehindu.co.in

Published on January 7, 2013 16:02