Under new pricing guidelines notified in October, 2014, the price of all domestic gas was fixed at US$ 5.61 per mBtu [million British thermal units] on net calorific value [NCV] basis w.e.f November 1, 2014 which was an increase of 33% over US$ 4.2 per mBtu prior to that date. The price was applicable till March 31, 2015.
The price was arrived at by taking a weighted average of gas prices in Henry Hub [USA], NBP [National Balancing Point] [UK], AGR [Alberta Gas Reference] [Canada] and Russia. It was to be revised once in 6 months based on movement in these indices for a full year three months prior to the date of next revision. Thus, for price effective from April 1, 2015, the reference period would be January–December, 2014.
For April 1 –September 30, 2015, this was reduced to US$ 5.18 per mBtu. From October 1, 2015, the price has been further reduced to US$ 4.24 per mBtu. This will lead to substantial reduction in subsidy outgo on indigenous urea [budget for current year Rs 38,200 crores]. To work out the quantum of savings, let us note down some basic numbers.
Annual urea production is 23 million tons [mt]. Of this, 77% or 18 mt is based on gas including 8.5 mt during first half of financial year and 9.5 mt in second half. Since, domestic gas meets only 2/3rd of total requirements of gas-based urea units, production likely to be affected are 5.7 mt [8.5×2/3] and 6.3 mt [9.5×2/3] for first and second half respectively.
During April-September, 2015, on 5.7 mt production , taking 24 mBtu needed for a ton of urea, reduction in gas price by US$ 0.43 per mBtu [5.61-5.18] applicable to this period would have led to saving of about US$ 60 million [24×0.43×5.7] or about Rs 390 crores [US$ 1=Rs 65]. During October 2015-March 2016, on 6.3 mt production, reduction of US$ 1.37 per mBtu [5.61-4.24] would lead to estimated saving of about US$ 210 million [24×1.37×6.3] or about Rs 1365 crores. For the full year, total savings will be Rs 1755 crores [1365+390].
1/3rd of gas-based output or 6 mt is met from imported LNG. Its price has recorded a much sharper decline from around US$ 10 per mBtu at beginning of current fiscal to US$ 7 per mBtu now. This would yield US$ 432 million [24x3x6] or Rs 2810 crores. So, total gain would be about Rs 4500 crores [2810+1755]. But, the big take away is that it can help in bringing about much needed and long-pending structural changes in this sector.
Gas cost alone accounts for 75-80% of urea production cost. Until last year, every unit was paying a different price depending on the mix of domestic and imported gas. On March 31, 2015, CCEA put in place ‘uniform’ gas pricing for all urea units [by pooling domestic and imported gas] thereby putting them at par in regard to delivered cost of gas at plant site.
The rest is processing cost [overheads, interest, return, depreciation, maintenance expenses etc] which depends on efficiency and cost effectiveness of individual manufacturers. There is absolutely no valid reason to reimburse them for this on unit-specific basis which is happening under extant unit-wise NPS [new pricing scheme]. Clearly, there is a strong case for bringing them under uniform pricing.
The government should remove distribution controls [at present, state exercise control even on so called 50% decontrolled urea]. Alongside, extant unit-specific system of reimbursing primary freight also has to go. All units should all be given uniform freight in addition to uniform ex-factory price. These changes will force inefficient and high cost units to perform and reward efficient and low cost producers in all areas of supply chain.
There are three plants on naphtha viz., Madras Fertilizers Limited [MFL], Mangalore Chemicals & Fertilizers Limited [MCFL] and Southern Petrochemicals Industries Corporation Limited [SPIC]. The naphtha price has declined sharply and is currently lower than price of LNG. But, this would still be higher than pool gas price. These plants should be brought on gas without delay; till then, a price differential support may be given.
At pool price of around US$ 5 per mBtu [4.24×0.67+7.0×0.33], feedstock cost of producing a ton of urea is US$ 120. Add about US$ 50 towards processing cost, resultant production cost US$ 170 per ton is lower than the landed cost of imported urea about US$ 300 per ton. So, there is great opportunity to save on subsidy by replacing imported urea [currently annual import is 8 mt].
At present, urea imports are allowed only through designated agencies viz., MMTC, STC and Indian Potash Limited [IPL]. This has led to inflated cost at more than double the price given to an efficient gas-based plant [in the past, India bought urea even at “extortionate” Rs 50,000 per ton e.g. in 2008-09]. Urea import should be freed which will bring down the cost drastically.
The government should also pursue joint ventures [JV] in countries where gas is available in abundance. For instance, the proposed JV in Iran where it is negotiating for a price as low as US$ 1.5 per mBtu for 1.2 million ton urea plant there is an excellent move in that direction
Modi should full leverage gas price bonanza to stem the mess in urea industry for long-term gains. This brooks no delay.
Lower gas prices will reduce working capital commitments & reduce interest cost. Govt should use lower subsidy this year to clear earlier year outstanding subsidies. This will provide capital to units to invest in efficiency investments.