Lower gas prices to benefit urea producers, reduce subsidy needs: Icra

Topics Gas prices | ICRA

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The decline in domestic gas prices is likely to benefit urea producers as it will lower the cost of production and reduce the requirement of subsidy, ratings agency Icra said.

However, the increase in prices of phosphoric acid is expected to moderate the profitability of phosphatic fertiliser producers, Icra said in a report.

The sector saw robust growth in April-September 2020-21, driven by early as well as cautionary buying by farmers in the light of COVID-19 pandemic, growth in sowing levels, and support for agriculture from various government schemes, the report said.

On raw material side, urea players continue to benefit from subdued natural gas prices, it said.

On the domestic gas front, the government mandated price for October-March FY21 has declined to USD 1.79 per metric million British thermal unit (mmbtu) on Gross Calorific Value (GCV) basis, in line with global pricing benchmarks to which the pricing of domestic gas is linked, the report said.

"Nearly 41 per cent of the natural gas requirement for the fertiliser sector is met through domestic gas with the remaining 59 per cent being met through a mix of term LNG and spot LNG.

"With the domestic gas price for H2 2020-21 being set at the lowest level since the Rangarajan formula was instituted, the pooled price for the fertiliser sector should witness a decline of USD 0.25 per mmbtu," Icra Group Head and Senior Vice President K Ravichandran said.

Low gas prices will keep the cost of production and thus, the subsidy requirement low for urea players, he said.

With low gas prices, the production benchmarked to the International Parity Pricing will also remain competitive against imports and the profitability on the same is also expected to remain healthy, he added.

Thus, for indigenous urea manufacturers, the working capital borrowings for urea operations are expected to moderate significantly in FY21, which coupled with lower interest rates will significantly ease the burden of interest costs.

However, part of the savings in the subsidy for indigenous production will be offset by the increased subsidy requirement for imported urea.

The subsidy requirement for imported urea will rise, driven by an increase in imported urea volumes and higher subsidy outgo on imported urea replacing the urea imported from Oman India Fertiliser Company (OMIFCO) earlier at a concessional price, the report pointed out.

Further, Icra said phosphatic fertiliser prices and key raw material prices, particularly that of phosphoric acid, had remained subdued for a large part of FY20.

However, since the start of the COVID-19 pandemic and the increased focus of countries across the globe on agriculture, phosphatic fertilisers have witnessed a surge in demand and prices as well, it added.

The demand for phosphatic fertilisers from the US, Brazil and India has been strong, given the strong agricultural season being witnessed across the three major agricultural countries, the report said.

"With the rise in the phosphoric acid prices, the input costs for the phosphatic fertiliser manufacturers will increase, although the cost of other raw materials, that is ammonia and sulphur, continue to remain subdued. The contribution margin on the sale of DAP/NPK fertilisers is expected to moderate sharply to absorb the increase in the raw material cost," Icra Senior Analyst Varun Gogiasaid.

For manufacturers who are backward integrated into manufacturing of phosphoric acid using rock phosphate, the impact would be much lower, he said.

"While the contribution margins would certainly moderate, they would revert to normal levels as during the current kharif season the contribution levels had expanded significantly due to low raw material prices, firm retail prices and minor reduction in the subsidy rates for FY21," he added.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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