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Decline in gas prices will reduce urea subsidy, India Ratings says |
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COIMBATORE: The indigenous urea subsidy bill will be arrested marginally (by around Rs 930 crore) in 2015-16 following the 7.72% cut in domestic natural gas prices to $4.66 per mmbtu (million metric British thermal unit) from $5.05 per mmbtu, according to India Ratings & Research.
The downward revision in gas prices, which is applicable between April 1 and September 30, is due to the decline in gas prices at the benchmark indices of Henry Hub (HH), US, National Balancing Point (NBP), UK, Canada's Alberta Hub and Russia's energy hub over the reference period (January 2014-December 2014).
Natural gas, which forms a majority of the raw material cost for urea production in India, is a pass through for gas-based urea producers up to their respective reassessed capacities. Around 80% of indigenous urea is produced using domestic gas.
Retail prices of urea is controlled by the government, which absorbs any change in gas prices through subsidies. The subsidy burden for indigenous urea had increased due to the upward revision of gas prices in November 2014. However, factoring in the November 2014 increase in gas prices, the recent downward revision will partly offset, albeit marginally, the subsidy burden by 2.4%, India Ratings estimated.
"Nevertheless, urea subsidy requirements will continue to remain high despite the proposed reduction, as gas prices remain higher than the 2013-14 level of $4.2 per mmbtu," it said.
The upward revision in gas prices during November 2014 had significantly altered the urea production feasibility at post-cut-off production levels. However, reduction in gas prices could support post-cut-off production for some plants.
Beyond cut-off production levels, gas prices are not a pass-through as urea subsidy mechanism is an interplay between urea import parity prices, dollar-rupee exchange rates and the price of natural gas.
Reduced gas prices could support post-cut-off urea production in the short-term, India Ratings said. A paradigm shift in the fertilizer policy with urea price de-control is the only sustainable solution to support the domestic urea industry, it said.
The Union government has increased the subsidy allocation for indigenous urea to Rs 36,000 crore in 2014-15 from Rs 26,500 crore 2013-14 and revised it to Rs 38,200 crore for 2014-15 and 2015-16.
Increased subsidy requirements are partially due to the increase in domestic gas prices from 2013-14 levels as well as a marginal increase in the use of costly imported liquefied natural gas.
Source : timesofindia.indiatimes.com
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