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Tata Chemicals, Aditya Birla Nuvo may lead $9 billion urea spending

In bid to increase urea capacity by almost 50%, govt says it will assure new urea units a 12-20% profit margin
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First Published: Wed, Dec 26 2012. 11 24 PM IST
An increase in urea capacity will also boost agricultural productivity, say analysts. Photo: Ramesh Pathania/Mint
An increase in urea capacity will also boost agricultural productivity, say analysts. Photo: Ramesh Pathania/Mint
Updated: Thu, Dec 27 2012. 12 43 AM IST
Mumbai: Aditya Birla Nuvo Ltd and Tata Chemicals Ltd may lead $9 billion (around Rs.50,000 crore) of spending to increase India’s urea capacity by almost 50%, spurred by a government policy guaranteeing returns on investments.
“Producers of the nitrogen-based soil nutrient including state-run companies and co-operatives may add 10 million tonnes (mt) of capacity over the next five years,” said S.C. Sharma, an officer at the Planning Commission, which assesses and allocates the nation’s resources. “The government will assure new urea units a profit margin 12% to 20%,” food minister K.V. Thomas said in New Delhi on 13 December.
“As much as Rs.50,000 crore ($9 billion) of investments could come,” Sharma said in an interview in Mumbai. “They’ll start flowing in after this policy change.”
Government control on the price of urea and ambiguity over natural gas feedstock costs have deterred new investments in the sector for more than 10 years, leading to an increase in imports and state subsidies. An increase in urea capacity will also boost agricultural productivity, helping feed two-thirds of India’s 1.2 billion people that live on less than $2 a day and contain inflation that averaged 7.5% in 2012.
“India has to support a large population base on a small land area, so the use of fertilizers like urea is critical and will only rise,” said Apurva Shah, an analyst at Dalal and Broacha Stock Broking Pvt. Ltd in Mumbai. “Other fertilizer makers not present in urea may plan setting up a unit to expand their product base. In three to four years, there’s bound to be large-scale investments in this sector.”
Billionaire Kumar Mangalam Birla may spend as much as $1 billion to double Aditya Birla Nuvo’s urea capacity after the government approves the new policy, managing director Rakesh Jain said in an interview on 8 November. Aditya Birla Nuvo, the $4 billion group, is also present in businesses including financial services, clothing and information technology. Kumar Mangalam Birla’s net worth is estimated at $9 billion, according to the Bloomberg Billionaires Index. His fortune has risen about 10% this year.
Tata Chemicals planned to double urea capacity at its unit in Uttar Pradesh at an estimated cost of Rs.3,500 crore, it said in October 2010.
The company was waiting for government assurances on supplies of natural gas, the main fuel used to produce urea, it had said.
Other planned urea projects include Rashtriya Chemicals and Fertilizers Ltd’s 1.15 mt unit, for which it secured environment approval in 2006, in Maharashtra.
Chambal Fertilisers and Chemicals Ltd plans to build a similar-sized factory in Rajasthan.
State-owned GAIL India Ltd, Coal India Ltd and Rashtriya Chemicals have planned a venture to build a coal gasification and fertilizer project in Orissa at an estimated cost of Rs.8,000 crore, while Oil and Natural Gas Corp. Ltd is seeking a partner to build a urea factory in the eastern part of the country.
On Wednesday, shares of Aditya Birla Nuvo fell 0.06% to Rs.1,077.75. Tata Chemicals rose 0.5% to Rs.341.55. Rashtriya Chemicals jumped 3.5% to Rs.57.60, while Chambal Fertilisers rose 0.75%.
India imports about 33% of the 28 mt urea it needs and the quantity is increasing by about 1 mt each year, according to a Planning Commission report last year.
Supply shortages may widen to 12 mt by March 2017 should new capacities fail to be added, the commission said.
The government’s subsidy burden increased as urea prices surged to a three-and-a-half year high of $515 in April.
Urea imports are estimated to have risen to about 7 mt in the year ended 31 March, inflating the subsidy by 21% to Rs.29,400 crore from a year earlier, according to the report.
The new policy will save Rs.4,760 crore of subsidies and reimburse producers the cost of natural gas, which comprises about 80% of the input cost, Dalal and Broacha’s Shah said.
Plans to expand the nation’s urea capacity by 50% to 34 mt have been held back by companies, pending a well-defined state policy. The reopening of a unit in Assam was the only major urea project to come on stream since 1999, according to the fertilizer ministry’s annual report.
At a conservative estimate, urea units will need at least 72 million standard cu. m. of gas fuel daily (mmscmd) by March 2017, compared with the current availability and demand of 41 mmscmd and 43 mmscmd, respectively, according to the commission report.
Should all plans to start new plants, expand existing facilities and resume closed units be implemented, the required quantity may exceed 100 mmscmd.
“India needs a robust pipeline network to carry natural gas for urea and other industries,” said Ashok Kumar Balyan, managing director at Petronet LNG Ltd, the state-owned owner of LNG terminals in the western and southern coast of India. “While our Kochi terminal is ready, the lack of a pipeline network is a constraint.”
Petronet is planning to set up a 5 mt LNG terminal by 2016 at a cost of Rs.4,500 crore in the east coast to meet demand in the eastern part of the country.
“We’re prepared to supply LNG to urea makers as and when capacities come up,” Balyan said on 19 December on the sidelines of an energy conference in Mumbai. “The new policy will boost investments in urea capacity expansion and boost demand for natural gas”.
Aditya Birla Nuvo plans to sell the increased urea output in Bihar, Jharkhand, West Bengal, Uttar Pradesh and in Chhattisgarh, Jain said last month. The company declined to comment after the new policy was approved.
The government will provide financial support to private entrepreneurs for making capital investments in the fertilizer sector, the then finance minister Pranab Mukherjee had said in his budget speech in March. On 11 October, the cabinet increased urea prices by Rs.50 a tonne and approved direct transfer of the fertilizer subsidy to the farmers. “At current prices, it is better to import liquefied natural gas (LNG) and produce urea locally, Planning Commission’s Sharma said. “There should be higher activity in this industry that has not seen much interest.”
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First Published: Wed, Dec 26 2012. 11 24 PM IST
More Topics: Urea | Plan | Tata Chemicals | Aditya Birla Nuvo |