Soaring Gas Prices will take the fertilizer subsidy up

A 5% increase has been witnessed in Fertilizer  during the first five months of the current fiscal. Early monsoon showers and low inventories at the beginning of the season are some of the reasons which are most apparent. But urea fertiliser witnessed a tepid 2 per cent growth primarily because of the introduction of neem-coated urea, which curbed marketing and improved nutrient efficiency.

However, the growth may turn modest in the second half due to the weakening of monsoon towards the end of the current kharif season, Ravichandran said. K Ravichandran, who heads corporate ratings at ICRA, said in a release, “The recent revision in domestic gas prices will lead to an increase of approximately $0.35 per mmbtu (million British Thermal Units) in the pooled gas price for the fertiliser sector for the second half of financial year 2018. The cost of production for the fertiliser sector should increase in the second half of financial year 2018 owing to higher pooled gas prices, coupled with the recent depreciation of the rupee against the US dollar,”.

The subsidy outgo for fertilisers would go up by ₹1,000-1,100 crore during the second half of the current financial year on account of higher domestic gas prices, rating agency ICRA said. The demand of fertilisers is expected to grow only by a modest 2 to 4 per cent as a weaker monsoon and low reservoir levels could impact sowing in the rabi season.

Though the rise in gas prices would lead to an increase in working capital borrowings, resulting in higher interest costs, reimbursement of energy savings at higher gas prices would more than offset this additional burden at least for efficient players in the industry.

The government had recently announced an increase in the dealer margins for urea dealers to nearly ₹400/mt from around ₹180-200/mt as the workload would go up after the implementation of direct benefit transfer (DBT) in the fertiliser sector. The increase in dealer margins will be equally shared by the Central government and the industry which will lead to an increase of around ₹300 crore in the government subsidy, while the incentive on neem coating for the industry would reduce from 5 per cent to 3 per cent of urea MRP.