R-LNG (Regasified Liquified Natural Gas) prices are expected to moderate given the forecast of a warmer winter in the Northern hemisphere, falling crude oil prices and high LNG storage levels in Japan, China and South Korea, the top three LNG consumers of the world, says a press release from Indian rating agency, ICRA .
Natural gas is the key raw material for manufacturing urea and constitutes almost 70% of the total cost of production of the fertiliser. The pooled price for the fertiliser sector has risen substantially over the last one and a half year owing to an increase in the domestic gas price, rising share of R-LNG – frim 49% in 2017 to 56% in 2019 – in consumption mix of the fertiliser sector and a sustained increase in the R-LNG prices over the last one and a half year.
Commenting on the impact of lower gas prices Mr. K. Ravichandran, Senior Vice-President & Group Head, Corporate Ratings, ICRA said, “Spot LNG prices have already moderated by approximately 13% towards the beginning of December 2018 from the recent peak of US $11.5/mmbtu achieved in the beginning of November 2018. The LNG prices are expected to moderate further to around US $8.5-9/mmbtu by January 2019 with similar levels expected for entire Q4 FY2019.”
“Given the outlook for the R-LNG prices we expect pooled price to reduce to US $10.5/mmbtu for Q4 FY2019 from current level of US $ 11.8/mmbtu. As a result, the profitability from production beyond RAC will become viable for urea units with energy consumption in the range of 6.5 to 6.8 Gcal/MT while profitability from production beyond RAC would improve for players having energy consumption in the range of 5.5 to 6.2 Gcal/MT,” he added
Fall in natural gas prices also result in lower subsidy receivables and thus lower working capital borrowings and thus lower interest outgo for urea manufacturers. While energy savings would also decline with the fall in the gas prices, the impact of the same is relatively smaller given the energy norms for several urea units have already been tightened in accordance with the New Urea Policy (NUP)-2015.