Government close to finalizing new urea investment policy

Government close to finalizing new urea investment policy
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First Published: Wed, Dec 28 2011. 11 28 PM IST

Updated: Wed, Dec 28 2011. 11 28 PM IST
New Delhi: The government is a step away from finalizing a new policy for attracting investments in the urea sector, according to two senior government officials familiar with the development, who declined to be identified.
The draft policy document was cleared by a committee of secretaries (CoS) led by Planning Commission member Saumitra Chaudhuri on Friday, the officials said. It will now be sent for approval to a group of ministers (GoM) looking into the matter.
In the draft policy, the government has worked out a fresh formula for providing incentives under three broad categories—greenfield, or new plants; brownfield expansion of existing plants; and for improving plant efficiency to boost output. The government has also linked the floor price and ceiling prices of urea to the landed price of gas, subject to a maximum limit of $14 per million British thermal units (mBtu).
The floor price is the minimum cost of production of urea the government will consider while fixing the subsidy. The ceiling price is the maximum cost of production of urea the government will consider for various gas price points.
The cost of gas itself will remain pass through—which means that the government will continue to bear the entire cost—till $14 per mBtu. If the price of gas goes above this mark, companies will take a hit, since the maximum retail price (MRP) of urea is government controlled. The price of gas, the main feedstock for urea, accounts for 70-80% of the cost of production.
The floor and the ceiling prices have been pegged on an import parity price (IPP) basis. IPP is the price determined for a domestically manufactured commodity that is equated to its import price.
Graphic by Yogesh Kumar/Mint; photograph by Hindustan Times
Under the current regime, the government fixes the price at which companies can sell urea to farmers, which is typically lower than the the producer’s price. The government fills in the gap with a subsidy.
For greenfield investments, the CoS has fixed a minimum floor-ceiling price band for urea at $310-340 per tonne at a landed gas price of $6.5 per mBtu. “For gas prices higher than $6.5 per mBtu, and going up to a maximum of $14 per mBtu, the ceiling will keep going up at the rate of $20 per tonne for every $1 increase in the price of gas,” said one of the officials cited earlier. In other words, the maximum ceiling in this case will stand at $490 per tonne.
For brownfield expansions, the minimum floor-ceiling band will move between $290 and $320 per tonne, with the ceiling going up to a maximum of $470 per tonne. Here too, the landed gas price will move in a $6.5-14 per mBtu range.
For companies looking at improving efficiency by debottlenecking their existing units, the floor-ceiling band for the price of urea has been fixed between $250 and $280 per tonne, with a maximum ceiling of $410 per tonne. The gas price in this case will be fully subsidized between $7.5-14 per mBtu.
Under the present investment policy, implemented in September 2008, the floor and ceiling prices of urea have been fixed at $250 and $425 per tonne, respectively.
The proposed changes have failed to enthuse the industry. “Such a policy signals the continuance of a controlled regime. Unless the government frees up the price of urea, the investment scenario will remain bleak,” said U.S. Awasthi, managing director, Indian Farmers Fertiliser Co-operative Ltd (Iffco).
A senior executive with Chambal Fertilisers and Chemicals Ltd said the government should have given extra consideration to companies that have already carried out the process of debottlenecking.
If the government comes up with a viable investment policy, anywhere between six and eight urea plants could come up, attracting an investment of as much as Rs40,000 crore, said Tarun Surana, an analyst with Mumbai-based Sunidhi Securities and Finance Ltd. Apart from Chambal and Iffco, companies such as Rashtriya Chemicals and Fertilizers Ltd (RCF), Indo Gulf Fertilisers Ltd and Zuari Industries Ltd have plans to set up urea manufacturing units, he said.
The government itself is looking at reviving as many as eight closed urea manufacturing units.
On 6 October, Mint had said that a proposed 3 million tonnes per annum (mtpa) urea manufacturing plant in West Bengal by Matix Fertilisers and Chemicals Ltd had been stuck as the investment policy had not yet been finalized.
The government is also in the process of finalizing a policy for deregulating the MRP of urea.
India’s last greenfield urea project was set up in 1995. A number of greenfield and brownfield expansion projects have been delayed as investors await the new policy framework, the report said.
The CoS approval comes after the finance ministry rejected in November a previous policy formula that had been mooted by the Planning Commission, the apex policymaking body of the government. The Planning Commission had argued against a gas-linked formula and had proposed fixing the floor price of urea at $370 per tonne and the ceiling price at $470 per tonne.
The Planning Commission’s stance was at variance with a previous proposal mooted by the fertilizer ministry, in which it had said that the ceiling price should be linked to gas price. Mint had first reported the details on that proposal on 19 August 2010.
The ministry has been considering changes to the current policy as it has failed to attract new investment to overcome the shortfall in local urea production. About 22 million tonnes (mt) of urea is produced in the country compared with an annual requirement of 27 mt. The balance is imported.
aman.m@livemint.com
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First Published: Wed, Dec 28 2011. 11 28 PM IST