Urea

Indian Government to Finalise New Urea Investment Policy

01/09/2012 | Editor: Dominik Stephan

(Picture: PROCESS India)
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(Picture: PROCESS India)

The government is just one step away from finalising a new policy for attracting investments in the urea sector, according to two senior government officials familiar with the development, who declined to be identified.

New Delhi/India – The draft policy document was cleared by a committee of secretaries (CoS) led by Planning Commission member Saumitra Chaudhuri on Friday, the officials said. It will now be sent for approval to a group of ministers (GoM) looking into the matter. In the draft policy, the government has worked out a fresh formula for providing incentives under three broad categories—greenfield, or new plants; brownfield expansion of existing plants; and for improving plant efficiency to boost output. The government has also linked the floor price and ceiling prices of urea to the landed price of gas, subject to a maximum limit of $14 per million British thermal units (mBtu).

Price for Urea Correlates to Gas Prices

The floor price is the minimum cost of production of urea the government will consider while fixing the subsidy. The ceiling price is the maximum cost of production of urea the government will consider for various gas price points. The cost of gas itself will remain pass through—which means that the government will continue to bear the entire cost—till $14 per mBtu. If the price of gas goes above this mark, companies will take a hit, since the maximum retail price (MRP) of urea is government controlled. The price of gas, the main feedstock for urea, accounts for 70-80% of the cost of production.

Goverment Subsidises Cheap Urea Prices for Farmers

The floor and the ceiling prices have been pegged on an import parity price (IPP) basis. IPP is the price determined for a domestically manufactured commodity that is equated to its import price. Under the current regime, the government fixes the price at which companies can sell urea to farmers, which is typically lower than the the producer’s price. The government fills in the gap with a subsidy.

For greenfield investments, the CoS has fixed a minimum floor-ceiling price band for urea at $310-340 per tonne at a landed gas price of $6.5 per mBtu. “For gas prices higher than $6.5 per mBtu, and going up to a maximum of $14 per mBtu, the ceiling will keep going up at the rate of $20 per tonne for every $1 increase in the price of gas,” said one of the officials cited earlier. In other words, the maximum ceiling in this case will stand at $490 per tonne.

Special Regulations for new or Revamped Facilities

For brownfield expansions, the minimum floor-ceiling band will move between $290 and $320 per tonne, with the ceiling going up to a maximum of $470 per tonne. Here too, the landed gas price will move in a $6.5-14 per mBtu range.

For companies looking at improving efficiency by debottlenecking their existing units, the floor-ceiling band for the price of urea has been fixed between $250 and $280 per tonne, with a maximum ceiling of $410 per tonne. The gas price in this case will be fully subsidized between $7.5-14 per mBtu.

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