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New Delhi: The government may consider freeing gas prices for that part of urea production where the cost is benchmarked to international prices.

While this could dent profit margins for fertilizer firms, according to junior fertilizer minister Srikant Kumar Jena, it will “ensure uniform policy for all the existing gas-based urea units for the entire production."

He said this in an internal note to fertilizer secretary Ajay Bhattacharya on 5 July. Mint has reviewed a copy.

Bringing uniformity: Minister of state for chemicals and fertilizers Srikant Jena

Companies typically get gas under the administered pricing mechanism (APM) and that from the Krishna-Godavari gas fields of Reliance Industries Ltd at $4.2 per million British thermal units (mmBtu). ONGC C-series gas is sold at $5.25 per mmBtu while gas from the Panna-Mukta-Tapti (PMT) fields is priced slightly higher at $5.6-5.7 per mmBtu.

Domestic demand for gas is 30-31 mt. India produces 21-22 million tonnes of urea and imports the balance requirement.

At present, the notional cost of production of about a tenth of the urea produced domestically is pegged to international parity pricing (IPP). This production is over and above 110% of the capacity that these units had notified to the government when they were set up.

For this extra production, the government incentivises companies by allowing them a notional cost of production at 85% of the prevailing international price. While imported urea costs $430-450 per tonne, urea benchmarked to IPP costs $80-100 per tonne less.

Since urea is a subsidised commodity, such a calculation of the notional production cost is essential for determining the minimum profit the government can allow for fertilizer companies.

At present, gas for urea is “pass through", which means that the entire cost of gas going towards producing urea is borne by the government. Typically, the cost of gas makes up for 70-80% of the cost of producing urea, the most dominant fertilizer.

Of the 28 urea producing units in the country, 20 use gas as feedstock while the rest are fired by the more expensive naphtha, fuel oil, low sulphur heavy stock or furnace oil.

The government was mulling taking plants producing non-urea fertilizers off price-regulated gas and putting them on a free-market gas price mechanism, Mint reported on 11 December.

In a meeting on 24 February, an empowered group of ministers (EGoM) on gas asked the fertilizer ministry to come up with a mechanism to take non-urea units off the regulated gas price regime. Ministry officials said they have submitted their proposals on this.

“In the last EGoM meeting on gas issues, it was decided to recover the differential cost of cheaper gas made available to P&K (phosphatic and potassic—referring to non-urea fertilizers) industry, as P&K industry has been decontrolled and are making exorbitant profits by selling at free retail prices," Jena said in his note. “Similar reasoning also holds good for urea units benchmarked to international parity pricing and the department may, therefore, analyse the possibility of recovery of differential cost of cheap gas made available to the industry w.r.t (with respect to) market determined gas price."

Selling prices of non-urea fertilizers like di-ammonium phosphate and muriate of potash were freed from government control in April 2010. Urea prices continue to be government-controlled.

A proposal to raise the selling price of urea by 10%, which was taken up by the cabinet committee on economic affairs on 14 June, was referred back to a separate group of ministers looking into the issue after Jena opposed the move. Mint reported on Jena’s opposition on 28 June.

Jena’s opposition in this case was primarily on the industry’s demand for extra compensation to account for an inflationary increase in the fixed cost component within their notional cost structure.

The ministry’s proposal had allowed for an across-the-board fixed cost increase of 350 per tonne for all units, but Jena questioned the move saying such an increase was unwarranted.

There is, however, a divergence of views within the department of fertilizers on the issue. A top official in the department said unless the government incentivises companies they will have no reason to invest in the sector or keep running their units.

An executive in the main industry lobby group, Fertilizer Association of India, also opposed Jena’s suggestions.

“Such a move would mean that companies would have no incentive to add capacity and produce more," this executive said. He added that if companies stopped producing more than their mandated capacity, India’s import dependence on costlier urea will go up by at least 2 mt.

aman.m@livemint.com

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