Lower Imported Prices Could Reduce Offtake from Upcoming Domestic Urea Plants

India Ratings and Research (Ind-Ra) opines a fall in imported urea prices and a hike in imported LNG prices would increase the price payable to new urea manufacturing units set up under the New Investment Policy (NIP) 2012 to about 50% compared to imported urea prices. This would further increase the subsidy burden of the government. Thus, the off-take from these plants could come under pressure.

However, most of the companies setting up new plants believe that the offtake should not be a problem, given the government's drive towards make in India.

Also, if the imported urea prices were to increase about 55% to USD375/t, the offtake risk for new plants set up under NIP would become lower. However, as these plants are being set up on the basis of the NIP 2012 offering attractive returns to the investors, any offtake lower than reassessed capacity (RAC) could lower the returns from the plant.

Under the NIP 2012, the amount reimbursable to the urea units is benchmarked at 95% of import parity price, subject to floating floor and ceiling prices of USD305/MT and USD335/MT, respectively, at a gas price of USD6.50/MMBtu), which are linked to delivered gas prices.

Additionally, for each USD0.10/MMBtu revision in delivered gas price, the floor and ceiling price of urea change by USD2/MT till the delivered gas price is USD14/MMBtu. In case the delivered gas price exceeds USD14/MMBtu, only the floor price would increase by USD2/MT for every USD0.10/MMBtu increase in the delivered gas price.

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