Urea policy fails to thrill

The fertiliser industry and analysts do not seem to be gung-ho about the new investment policy for urea, which a ministerial panel cleared last week.

Their concerns stem from a “reluctance” of the government to raise the gas price ceiling up to which it will provide subsidy.

The policy, yet to be cleared by the Cabinet Committee on Economic Affairs, stipulates that subsidy will be given if gas price would be in the band of $6.5 to $14 per mmbtu (million metric British thermal units). The industry has demanded a raise in the ceiling to $20 an mmbtu. The government has reportedly agreed to look into the matter when prices exceed $14, but the industry has posed a question: “If it has to be done later, why not now?”

The negative sentiment is dominating the industry despite a minimum 12 per cent return on equity that the new policy promises new investments. A senior industry official said the effective return on equity “will not be very attractive”. Reason: the thin band of cost of production of urea.

The new investment push is happening after a long period of over 13 years. The industry is trying to make the most out of this opportunity, as no policy would come for the next 10-12 years. Hence the demand that the government agrees to raise the ceiling of gas price to $20 per mmbtu for the purpose of subsidy, according to analysts.

Satish Mishra of Mumbai-based PINC Research sees “a couple of loopholes” in this policy, though it “is quite practical and shows the clear intention of the government” to attract investments. “Firstly, not upping the ceiling on gas prices is raising suspicion in the industry.”

Analysts tracking the industry were expecting the gas ceiling to be raised at least to $16 or $18 per mmbtu. “Also,” Mishra adds, “there is also no clarity on the demarcation between greenfield and brownfield projects — unlike in the earlier policy..”

A $20 difference between the floors as well as ceilings of greenfield and brownfield investments would mean that investments in existing projects would not be as attractive as in the new projects, he says.

According to the new policy, the floor and ceiling of the cost of production has been fixed at $310 and $340 a tonne respectively for greenfield projects. For brownfield expansions, the floor and ceiling of the costs are kept at $290 and $320 a tonne respectively.

While the industry was comfortable with the capex of Rs 4,200 crore fixed by the government for brownfield expansions, it demanded the capex to be fixed at Rs 5,200 crore for greenfield projects. But the proposed policy restricts the greenfield investment at 4,700 crore, points out another industry official.

Uttam Gupta, former chief economist at the Fertiliser Association of India, says this seems to be a “mere cosmetic reengineering” of the earlier policy. “I do not see anything that is fundamentally different. Just revising some ranges will not help,” he notes. “The 12 per cent return on equity cannot be seen in isolation from the reimbursements for selling urea at below cost of production.”

However, some of the public sector units are optimist about the new policy. Rashtriya Chemicals and Fertilisers says the policy would help in attracting new investments. Its managing director R G Rajan, while opining on RCF’s plans to expand, says the public sector fertiliser company would expand its capacity by 1.27 million tonnes under the new policy.