Rising Natural Gas Prices may Impact Urea Production

With rising gas prices and subdued international urea prices, the production beyond re-assessed capacity (RAC) for high energy consumption domestic urea units is expected to remain unviable, the report said, adding, while the contribution margin for the energy efficient players is expected to decline, leading to lower profitability from production beyond RAC.

With the rising share of high-cost R-LNG in the gas consumption mix for the fertilizer sector, firm international spot gas prices and higher term LNG prices given the high crude oil prices; the pooled price for the fertilizer sector is expected to remain elevated in the near term.

ICRA reported that the rising natural gas prices in recent times are expected to adversely impact domestic urea production in 2018-19.

Domestic has a price for the second half of Financial Year 19 is also expected to increase owing to increase in international gas prices, which will result in further upward movement in pooled prices, the rating agency added.

"The rise in gas prices has been adversely impacting in urea players," it said.

ICRA opined that rising gas prices will lead to higher subsidy receivables for the area players, leading to higher working capital borrowings and associated interest costs leading to negative impact on profitability.

ICRA Senior Analyst, Shri Varun Gogia said: "The impact, however, will be largely offset by the energy savings for units which are energy efficient vis-vis their pre-set norms as energy savings will be reimbursed at higher energy costs."

ICRA noted that the delay in fixed cost reimbursement by the government is expected to weaken the profitability of urea units.

"As a result, urea production may decline in FY19 unless the department of fertilizer undertakes measures to keep production beyond RAC viable," said Gogia.