Gas price pooling leads to breakthrough in urea production

India's urea production, which has been stagnating at 22 mt, is to rise to 24 mt in 2015-16

It is reassuring to know from fertiliser secretary Anuj Bishnoi that India’s urea production, which has been stagnating at 22 million tonnes (mt) for some years, is to rise to 24 mt in 2015-16.

The breakthrough in urea production, which will reduce our import dependence to some extent, is mainly due to the pooling of gas prices and promotion of energy efficiency, which in turn would reduce the government’s subsidy burden.

India is short of gas and supply of indigenous gas to fertiliser plants is unfailingly much lower than the requirement of 42.4 million standard cubic metres a day (mscmd).

Because of restricted supply from local sources, the government has put a cap of 31.5 mscmd on supply of domestic gas to fertiliser plants. Urea units have for long been subject to cuts in supply of administered pricing mechanism (APM) gas affecting their working. As a result, the fertiliser sector’s dependence on imported liquefied natural gas (LNG) has ballooned to 36 per cent.

The spurt in urea production in the current year shows the new urea policy is yielding results. India’s annual consumption of urea is 31 mt and the big shortfall in domestic supply is met by imports. Last year, domestic urea production of 22.85 mt led to imports of 8.74 mt. No one will contest the efficacy of the urea policy. What, however, defies logic is the government sticking to canalisation of urea imports, ignoring the experience of last rabi season when failure to bring foreign-origin urea in time caused much distress to farmers.

A shortage situation at the peak of a growing season forces farmers to pay hefty premium for urea in the grey market. Private groups known for their nimbleness in entering the market when world prices favour buying, are engaged in importing di-ammonium phosphate and muriate of potash. Keeping them out from urea imports is costing the exchequer dearly as it is a disservice to farmers.

The government has, however, seen the merit of coating all urea - both domestic and foreign-origin - with neem (azadirachta indica) against only 6 mt now. Neem-coated urea is a little more expensive than the plain variety, but it will more than compensate for that by reducing nitrogen (N) loss by 10 per cent and improving the fertility of land. Much to the concern of experts, Indian growers have remained prone to using larger and larger quantities of urea ignoring arable land’s need for phosphatic (P) and potassic (K) nutrients.

The department of fertilisers says the ratio of NPK application has worsened from 4:2:1 in 2009-10 to 8.2:3.2:1 more recently. The arrest in productivity growth of some crops and the loss of land fertility in many growing centres is attributable to the skewed use of NPK. The villain is the administration of subsidy, which makes available urea at a retail price of Rs 5,360 a tonne against the average industry cost of production of Rs 20,000 a tonne.

Government subsidy for urea amounts to close to 75 per cent of production cost. However, because of de-control, the other fertilisers become a lot more expensive at retail points, prompting farmers to use urea in more than ideal quantities.

Besides large imports of urea, the country is totally import dependent for potash. Around 90 per cent of our requirements of phosphates are also met by imports. A good news for the heavily import-dependent India is the weakness in fertiliser raw materials prices. HDFC Bank Investment Advisory Services says in a report, “the fall in prices has been largely on the back of global capacity addition in fertiliser raw materials... Close to 200 expansion projects... at an investment of about $110 billion are at an advanced stage of development. The projects coming up in Morocco, Saudi Arabia, China, Brazil, Canada and Russia are to become operational in the next four-five years.”

Both government-owned and private fertiliser companies here have seen the merit of building plants abroad by joining hands with local groups for production of fertilisers and raw materials thereof. Such joint ventures have a buyback clause, which gives India security of supply at all times. For instance, the 1.3 mt urea venture the country is contemplating to build in gas-rich Iran at an investment of $900 million will be on the condition that the entire production will be shipped here.