Until last year, ballooning subsidy on fertilizers and its inevitable effect on fiscal deficit was haunting the government. The prime cause for this was control on selling price of urea on one hand increase in prices of feedstock and fuel on the other. The latter in turn was due to increase in international price of crude oil and imported LNG [liquefied natural gas].
During the current year, the scenario has turned for the better. Thanks to a constellation of forces leading to emergence of excess global supply, the international price of crude has plummeted from a high of around US$ 105 per barrel in June 2014 to below US$ 50 per barrel currently. And, there is nothing stopping the downward movement.
Likewise, the price of LNG [invariably, in all international transactions this is indexed to the price of crude oil] has declined from a high of around US$ 20 per million Btu [British thermal unit] to around US$ 7 per mBtu [in the spot market]. The excess supply globally and weak demand from China continues to drive down the prices.
Importers of LNG in India viz., Indian Oil Corporation [IOCL], Gas Authority of India [GAIL], Bharat Petroleum Corporation [BPCL] who are also members of the consortium Petronet LNG [along with ONGC] are leveraging the buyers market to the hilt to seek still lower prices [IOC in its latest tenders is gunning for a price as low as around US$ 6.5 per mBtu for October-December, 2015 delivery].
Over 80% of urea manufacturing capacity is based on natural gas. Of the total requirement of gas, around 2/3rd is met from domestic sources [mainly from ONGC, OIL and RIL fields in K-G basin] and the remaining 1/3rd from imported LNG. Under new pricing guidelines notified last year, the price of all domestic gas from November 1, 2014 was US$ 5.61 per mBtu. From April 1, 2015, this was reduced to US$ 5.18 per mBtu and from October 1, 2015 this is slated to further touch below US$ 4 per mBtu.
As a consequence, all of the gas based urea manufacturers are experiencing a substantial reduction in the cost of production. Even the plants using naphtha as the feedstock viz., Madras Fertilizers Limited [MFL], Mangalore Chemicals & Fertilizers Limited [MCFL] and Southern Petrochemicals Industries Corporation Limited [SPIC] are also able to produce at significantly lower cost. This is because even naphtha price has plummeted and is even ruling below comparative price of imported LNG
All of this will result in substantial reduction in subsidy outgo on urea which during current year is budgeted at around Rs 50,500 crores [indigenous urea Rs 38,200 crores and Rs 12,300 crores imported urea]. The reduction could have been more if only the government had increased urea selling price [already being very low, there was good amount of space for it]. A 10% hike can yield a saving of about Rs 1600 crores annually.
The manufacturers of phosphate fertilizers viz., DAP [di-ammonium phosphate], other complex fertilizers and SSP [single super phosphate] too have benefited from steep reduction in international price of sulphur besides lowering of LNG price. The latter helps producers like Deepak Fertilizers and Petrochemicals Corporation Limited [DFPCL], Rashtriya Chemicals and Fertilizers [RCFL] and Gujarat State Fertilizer Company [GSFC] who use imported LNG for making ammonia.
The very helpful situation in the near term is expected to sustain even in the medium term and most probably in the long-term. First, China which has slid in to a low growth trajectory of 7% annually will remain in this trap for a fairly long period in the years ahead. The resultant weak demand will continue to exert downward pressure on price of crude, LNG and sulphur. Second, unlike in the past, Saudi Arabia – biggest contributor of crude in OPEC [Organization of Petroleum Exporting Countries] – is unlikely to cut its output for fear of loosing its market share. Yet another factor behind persisting ease is resurrection of supply from Iran [following agreement on its nuclear program and removal of trade embargo by western nations].
As regards LNG, a virtual explosion in supply from Australia has exacerbated pressure on prices. Since, most of the supplies from therein is locked in long-term contract with Asian countries which are indexed to the price of crude and since, latter will continue to be on a downward trajectory, the price of LNG will only follow suit. Further, given the highly competitive environment in the gas market, even supply of LNG from middle-east will continue to be available at a lower price.
The government should use this opportunity to implement long-pending big ticket reforms in fertilizers and get rid of the subsidy regime forever. At about US$ 5 per mBtu [weighted average price of domestic and imported gas], the feedstock cost of producing a ton of urea is US$ 120 [using 24 mBtu for a ton]. Add about US$ 50 towards processing cost, production cost is US$ 170 per ton. This will be significantly lower than current landed cost of imported urea about US$ 300 per ton.
The decontrol of urea at this juncture will enable all efficient domestic urea manufacturers to unleash their energies and capabilities to substantially increase production and deliver it at lower price. To the extent, this results in lowering of high cost import, the overall cost to economy will be reduced. With more supplies coming from indigenous source, there will be sobering effect on price of imported urea [as India can negotiate from a much stronger position]. However, to get the best results, government should permit urea import by any one [at present, these are allowed only through designated agencies viz., MMTC [Minerals and Metals Trading Corporation], STC [State Trading Corporation] and Indian Potash Limited [IPL].
Despite the benefits of reduced cost, the price to farmers in a decontrolled environment around Rs 11,000 per ton would still be higher than current MRP Rs 5360 per ton. But, this won’t be a fair comparison as the latter is an ‘artificial’ price and has no economic rationale. True, farmers will pay more but this was long overdue. Even so, government can protect resource poor farmers from this by extending them direct income support. The financial and IT infrastructure offered by JAM [Jan Dhan Yojna, Aadhaar and Mobile] can be effectively used for this purpose.
Last year, Modi – government took the historic decision of decontrolling diesel and dismantling subsidy regime from November, 2014 leveraging decline in global price of crude. This has been smoothly absorbed by the system producing no ripples anywhere in the economy. Now, with decline in crude price continuing and even price of gas decreasing drastically, time is ripe for Modi to take a call in regard to urea decontrol as well.
It will be a win-win for all stakeholders viz., industry which will get a chance to deliver its best at lower prices; government which will save hugely on subsidy outgo and farmers who will benefit from customized solutions [impossible to come under extant controlled regime] that help in increasing efficiency of fertilizer use and higher crop yield and better quality.