New Delhi: The new fertilizer investment policy being finalized by the government may help revive the industry because it allows for the creation, in new as well as existing units, of capacities that will fall outside the purview of the existing price control regime.
An official at the fertilizer ministry, who did not wish to be identified, said the government would not regulate producer prices for any “new capacity” that is at least “10%” more than the existing capacity of a plant.
The government mandates the price at which fertilizers can be sold. It makes up the difference between this and the cost of production, plus an agreed upon profit margin—this is called the producers’ price.
The fertilizers being produced outside the purview of the price control regime, could be bought by the government (it currently imports fertilizers to make up for a shortfall in supply) at the same price at which it imports them. The government will benefit from this by saving on logistics costs related to imports. It could also consider allowing the fertilizers being produced to be exported. Export of price-controlled fertilizers is currently restricted.
“India is the world’s second largest producer of urea and DAP (di-ammonium phosphate). We have a huge industrial base to reap economies of scale (in this business). We also have skilled manpower. We welcome the policy proposals if exports of urea are allowed,” said a senior official at the Indian Farmers Fertilizer Cooperative Ltd (Iffco), who did not wish to be identified.
Manufacturers say they could, however, face problems in expanding their capacities or creating new ones if the price of gas, a critical input, is high. “Considering that there has been no fresh investment in the fertilizer sector for more than a decade now, the new policy proposals appear promising. But it all depends on the price at which the gas is delivered to a manufacturer.
The delivered price should not be more than $5(Rs205)/mbtu anywhere in India,” said U.S. Jha, chairman and managing director of Rashtriya Chemicals & Fertilizers Ltd.
Gas accounts for almost 80% of the production cost of fertilizers. B.K. Handique, minister of state for chemicals and fertilizers, while answering a question in Parliament, said if the delivered price of gas goes beyond $5, then the new investments (in production of fertilizers) may turn uncompetitive.
Officials at the Fertilizer Association of India (FAI) say making gas available across the country at low rates may not be easy. “The response to the gas price is likely to vary from one producer to another. Some may benefit, but others may require the government’s guarantee to buy a certain minimum amount (of fertilizers) from them before setting up a new plant which involves considerable time and monetary investment,” said a FAI official, who did not wish to be identified. According to industry estimates, setting up a new urea plant requires an investment around Rs3,500-4,000 crore, and it takes three years for a plant to start operations.