Domestic Gas price revision marginally positive for the urea sector: ICRA

With the recent revision in the domestic gas price from $3.69/mmbtu to $3.23/mmbtu, the pooled price for the fertiliser sector is expected to moderate by $0.19/mmbtu. This should result in lowering of the cost of production and subsidy receivables for the urea players, rating agency ICRA said in a research report.

Natural gas is a key raw material for manufacturing of urea and comprises nearly 70% of the total cost of producing urea. For the fertiliser sector, nearly 42% of the gas requirement of the fertiliser sector is met through domestic gas while the remaining is met through R-LNG imports. Moreover, the industry is supplied gas at pooled pricing, which takes into account weighted average of domestic and R-LNG prices, the agency said. “As per our estimates, the cost of production of urea changes by around Rs. 1600-1800/tonne for every $1/mmbtu change in the pooled gas price. As a result of the current revision in the domestic gas price, the subsidy outgo for the GoI would reduce by ~Rs. 400 crores in H2 FY2020,” said K. Ravichandran, Senior Vice-President & Group Head, Corporate Ratings, ICRA.

“With the share of the domestic gas falling in the overall consumption mix for the fertiliser sector, the impact of the change in domestic gas price has also been diminishing. Nearly 58% of the natural gas demand in the fertiliser sector is being met through long term R-LNG, wherein the prices are governed by the crude oil prices. Given the expectation of crude oil prices to remain rangebound at around mid-$60/mmbtu, the term LNG prices too are expected to remain rangebound at around the current levels of around $13/mmbtu,” Ravichandran said.

As per ICRA estimates, nearly ~Rs. 6000 crore is to be paid out to the urea players on account of the revised fixed costs. While several players have accrued the revised fixed costs since April 2014, the matter continues to be under deliberation at various levels in the GoI and any negative decision on this front will be credit negative for the industry as it will lead to significant write-off of the net worth for certain players.

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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