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Fertilisers: Uncertainty looms large - Views on News from Equitymaster
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  • Aug 27, 2001

    Fertilisers: Uncertainty looms large

    Though urea de-control has been talked of since 1990s it remains a distant dream for the fertiliser industry, especially for the efficient players. The finance minister in his last budget speech assured complete de-control of urea by 2006. However, till the time this happens there is absolutely no incentive for efficient players to stay in business.

    Currently, the GoI controls the final selling price of Urea. The current selling price, termed as the farm gate price is fixed at Rs 4600 per ton, excluding local levies. The difference between the sale price and the retention price (the cost of production as assessed by the government plus reasonable return on net worth) is paid as subsidy to the individual manufacturing unit.

  • Read more on how Retention Price works

    Since the government decides the retention price on a cost plus model, there is no reward for efficiency. No wonder the subsidy bill of the government on fertilisers has shot through the roof reflecting a rise in production cost of urea. More importantly, fertiliser prices being a politically sensitive issue, successive governments have shown reluctance in raising the selling price of fertilisers over the years. Apart from the retention price subsidy the government also bears equated freight subsidy. Imported fertilisers are also subsidized.

    The production cost of fertiliser units varies depending upon the age of the unit, feedstock used, capacity utilization, cost of inputs etc. In regard to producers price, the finance ministry recently, announced replacement of existing unit-wise Retention Pricing Scheme (RPS) by a group-wise concession scheme. To put it in simple terms, the government would continue to fix urea prices, only difference being, instead of plant wise price fixing, the retention price would now be determined based on fuels used by plants viz., whether the plant is run on gas, naphtha, fuel oil or on mixed fuels.

    As is apparent from the above chart, most of the Naphtha and coal based are highly unviable if the current farm gate prices are considered to be a benchmark. Considering this, only new gas based urea plants are expected to survive in the long run. There are only two options available to the government to reduce the burgeoning fertiliser subsidy bill. One is to let inefficient units die a natural death or increase the selling price of urea, which is a politically sensitive issue and hence the government is not expected to take an immediate stand on that. Meanwhile, the fertiliser consumption levels in the country remain one of the lowest in the world.

    While the uncertainty of the government policy looms large over the industry trapped in regulatory issues, efficient producers (for e.g. Indo-Gulf) have nothing but a hope that there would be light at the end of the tunnel.



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