Govt to clear only four urea plant proposals

New Delhi: After receiving an unexpectedly large number of applications from fertilizer makers to set up new urea plants and expand existing capacity, the government has opted to approve only four of the proposals, and to choose them through a bidding process.

add_main_imageAs many as 15 applicants submitted investment proposals, attracted by the government’s offer of a lucrative return on equity ranging from 15-20% and the assured purchase of 100% of their urea output for the first eight years. Two of the proposals are to set up greenfield units, or build plants from scratch, and the remainder are for capacity expansion.

The government invited the applications under a new investment policy notified in January to reduce India’s dependence on imports of urea, a key farm nutrient. India produces some 22 million tonnes of urea a year, 8 mt short of demand, importing the remainder at an estimated annual cost of $2.5 billion. No urea factory has been set up in the country for the past 13 years.NextMAds

A department of fertilizer (DoF) official said the department hadn’t expected to get so many applications in response to the investment policy. “At best, we imagined 4-5 companies coming forward,” the person said on condition of anonymity. “At that time, the atmosphere for new investments was highly negative with no company interested in investing.”

The new investment policy didn’t put an upper limit to the number of urea plants that would be allowed nor did it specify any selection procedure. The government has now advised the fertilizer companies that submitted applications not to go ahead with the projects until they receive approval from the DoF. A letter to this effect was sent to all the applicants by DoF on 9 May. Mint has reviewed a copy of the letter.

“There is a need to provide transparent and objective criteria for giving approval to the proposals received so that only as much capacity is added as is required to meet the demand and supply gap,” the ministry said in its letter to the companies.

Apart from concerns of a urea glut, the government is deterred by the scarcity of domestic gas and exorbitant price of liquefied natural gas (LNG), the main feed stock for urea and which makes up two-thirds of the cost of running a plant.

Importing urea is cheaper than producing the nutrient on imported gas.

“If we import LNG at $20 per mmbtu (million metric British thermal unit), one tonne of urea will cost us around $600 while imported urea costs us around $400,” the official cited above explained.sixthMAds

The fertilizer department will take the bidding route for shortlisting the four plants, the official said. “The bids would be invited on fixed cost,” he added. For a gas-based urea plant, fixed cost mainly comprises establishment cost, working capital, interest, wages, and so on.

Companies that submit the four lowest price bids will receive the go-ahead.

“The process of making necessary changes in the investment policy are underway and it should take at least 3-4 months for the policy to take a final form,” he said.

On 29 March, Mint first reported that government may introduce a bidding process for new urea factories. The proposal had been made by former fertilizer minister M.K. Alagiri just before he resigned from the government in March when his Dravida Munnetra Kazhagam (DMK) pulled out of the ruling United Progressive Alliance.

Any changes to the new investment policy would require it to be sent again to the cabinet for approval.

One expert said the decision to tweak the new investment policy for urea plants was a wise option.

“It had to happen. if the government had allowed all the 15 units to come up with an implicit sovereign guarantee (to buy back their produce), it would have been a fiscal suicide. Sanity has finally prevailed,” said Sanjay Jain, director at Taj Capital Partners Pvt. Ltd, a New Delhi-based investment firm that has interests in the fertilizer sector.

Of the 8 mt of urea that India requires to import, 2.5 million is supplied by Oman India Fertiliser Co. SAOC under a long-term agreement at a price that’s cheaper than the cost of domestic urea, said Jain. “Therefore to limit the number of plants to four is a sensible decision,” he said.

The list of fertilizer companies that offered to set up urea plants and received the DoF letter to put the plans on ice includes Indian Farmers Fertiliser Cooperative Ltd (Iffco), Krishak Bharati Cooperative Ltd (Kribhco), Chambal Fertilizers and Chemicals Ltd, Indo-Gulf Fertilizers and Chemicals Corp. Ltd, Tata Chemicals Ltd, Nagarjuna Fertilizers and Chemicals Ltd, Shriram Fertilizers and Chemicals Ltd, Gujarat Narmada Valley Fertilizers Co. Ltd, Gujarat State Fertilizer and Chemicals Ltd, Kanpur Fertilizer and Cements Ltd, Matix Fertilisers and Chemicals Ltd, and Kribhco Shyam Fertilizers Ltd.

Rashtriya Chemicals and Fertilizers Ltd and Fertilizers and Chemicals Travancore Ltd were not sent the letter because they are under the direct control of DoF.

Gujarat State Fertilizer will “abide” by the policy change, said H.V. Kachhadia, executive director of Gujrat State Fertilizer Corp. Nagarjuna Fertilizers, while remaining neutral on the policy change, said it had “no major impact” on the company.

Matix Group has also been served the letter by DoF. Its proposal to set up a urea plant was approved before the notification of the new investment policy, and managing director P.R. Dhariwal says that “the plant is expected to achieve mechanical completion by year-end.” Dhariwal is confident of getting the plant up and running because its feedstock is coal-bed methane and not natural gas.

Companies that have already made initial investments may feel the impact. “We had already committed ₹ 50-60 crore by the time we were asked not to proceed,” said the managing director of a fertilizer company on the condition of anonymity.

The person questioned the wisdom of opting for the bidding route. “Bidding is a recipe for making a unit sick to begin with,” he said. “In the zeal to win the bid, the companies may quote unviable numbers, which they might not be able to sustain later.”