After decontrolling phosphatic and potassic fertilisers, the government is set to enhance the freedom of companies to decide on the prices of the most commonly used fertiliser?urea.
Fresh investments in production facilities for urea are set to be more remunerative and the measures under consideration include giving near-import parity price on the extra output from the revamping of existing units. This will enable an investor to see the global price of urea in the local market.
Now, revamping a unit with an investment of Rs 1,000 crore would fetch a producer only 85% of the import parity price on the extra output. (The original output gets government subsidy to bridge the gap between production costs and the government fixed retail price plus a 12% return on investment.)
The existing urea investment policy of 2008 has specified the minimum and maximum retail prices of urea and the gap between the retail and the import parity prices goes to the producer as subsidy.
Under the proposed new policy to woo fresh investments, producers would be allowed full import parity price with a marginal 2% discount for the extra output from the revamped units.
Import parity price for urea in a given month is the average global price, together with freight charges for the preceding three months converted into Indian rupees at the average foreign exchange rate for the period.
The department of fertilisers keeps a record of the existing capacity of every urea factory in the country to verify the claims for benefits on capacity addition. ?The new policy has almost got a final shape and could be announced in a matter of weeks,? a person with knowledge of the matter told FE.
In the case of expansion of units with an investment of Rs 3,000 crore, the existing policy allows subsidies at the rate of 90% of the import parity price for the extra output. This is also expected to go up to almost full import parity price.
The retail price for urea from plants, which are revamped or expanded under the existing investment scheme, is calculated on a floor of $250 per metric tonne (mt) and a ceiling of $425 per mt. This covers the cost of natural gas?the feedstock?at $4.88 per million metric British thermal unit from Reliance Industries, together with taxes.
For green-field projects, the price is decided by a competitive bidding process, according to the existing policy.
But the major drawback of the existing urea investment policy is that it did not guarantee the availability of natural gas, which was the sole responsibility of the urea producer. This was a hurdle for producers and prevented them from taking advantage of the scheme.
An assured supply of gas at the government-set price of $1.79 per mmBtu was available till recently, but only to the earlier production capacity. Now, although the administered price has gone up to $4.2 per unit, the output from the earlier capacity would get higher subsidy.
Under the proposed new scheme, the government is thinking of guaranteeing supply of gas, possibly at a favourable price, to new facilities for a limited period. This is because 80% of the cost of urea production is attributed to natural gas. The government is also looking at giving some incentives for building gas pipelines to urea factories.
There have been no new investments in the urea sector for more than a decade now, and this will result in supplies falling short of demand by an estimated 1.9 crore tonne by the end of next year.