Moderation of liquefied natural gas (LNG) prices due to the forecast of a warmer winter in the Northern hemisphere, falling crude oil prices and high LNG storage levels is estimated to help the profitability of urea players, rating agency ICRA said on Monday.
Natural gas is the key raw material for manufacturing urea and constitutes about 70% of the total cost of production of the fertiliser. Fertiliser sector receives natural gas under the pool price mechanism wherein all the players receive gas at same cost which is the weighted average of the cost of gas consumed by the urea manufacturers.
The pooled price for the fertiliser sector has risen substantially over the past one and a half years,owing to an increase in the domestic gas price, rising share of regasfied liquefied natural gas (R-LNG) in consumption mix of the fertiliser sector and a sustained increase in the R-LNG prices over the last one and a half years.
ICRA reports that imported R-LNG prices had been on an uptrend driven by strong Chinese demand as the country partly replaced coal with natural gas as a key source of energy to combat pollution.
Moving forward, ICRA estimates the natural gas price to show a declining trend.
On the impact of lower gas prices, K Ravichandran, senior vice-president & group head for Corporate Ratings, ICRA, said, “Spot LNG prices have already moderated by about 13% towards the beginning of December 2018 from the recent peak of US $11.5/mmbtu (million British thermal units) 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 the entire Q4 FY19. Given the outlook for the R-LNG prices, we expect pooled price to reduce to US $10.5/mmbtu for Q4 FY19 from the current level of US $ 11.8/mmbtu.”
Fall in natural gas prices also results in lower subsidy receivables and thus lower working capital borrowings and thereby lower interest outgo for urea manufacturers.
While energy savings would also decline with the fall in 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.