The New Urea Policy 2015 announced by the Union Cabinet earlier this week may not be uniformly beneficial for the industry. The policy tightens energy consumption norms and aims to increase production by two million tonne. This, according to a CRISIL report, would have a mixed impact that would vary between manufacturers. While the new norms on energy savings would be a credit negative since they reduce the profit on production up to a specified cut-off capacity, profit can be higher for production beyond that threshold.

The negative impact will depend on what energy norms are applicable for each unit and scope for further efficiencies. The positive impact will depend on capacity utilization, specifically, the extent of production possible and any fixed-subsidy allocated per tonne in order to incentivize production  So far, urea manufacturers have benefited because their energy consumption has been less than the norms set by the government. And subsidy was given based on these norms for production up to the cut-off.

The new policy is yet to be notified but the government estimates subsidy savings of Rs.2,600 crore in four years by resetting energy consumption norms. Besides, there will be indirect saving of Rs 2,211 crore (total savings will be Rs 4,829 crore) on account of revised specific energy consumption norms and import substitution respectively during the next four years. 

According to CRISIL, this will be directly mopped up from the bottomlines of urea manufacturers because stricter norms will translate into lower gains from energy savings unlike before. However, the policy will push manufacturers to further enhance their energy efficiencies.

For production beyond cut-off, the prevailing subsidy was linked to import-parity prices of urea. But in the last fiscal, import-parity price fell, domestic natural-gas prices rose, and consumption of imported re-gasified liquefied natural gas (RLNG) also increased because of which profit from production beyond cut-off capacity had almost dried up for most manufacturers.

Depending on the domestic-imported gas mix, and in the absence of any change in policy, production beyond cut-off had also become unviable for some manufacturers.

CRISIL said the New Urea Policy aims to increase domestic output by encouraging production beyond cut-off. But the extent of increase in profits can be ascertained only once the fixed subsidy, if any, payable for production beyond cut-off is known.

The increase in profit will largely offset the impact of tightening of energy norms for production up to cut-off. And fixed subsidy for production beyond cut-off capacity will add to stability in cash flows. For urea manufacturers that haven’t revamped their plants and do not produce beyond 100 per cent capacity, the policy will largely be negative. 

Urea production can be divided into two parts: production up to cut-off capacity (nearly 90 per cent of domestic capacities) and production beyond cut-off capacity (nearly 10 per cent of domestic capacities)

Among the companies that are likely to be impacted are Chambal Fertilisers and Chemicals Limited, Indian Farmers Fertilisers Co-operative Limited, KRIBHCO Shyam Fertilizers Limited, Krishak Bharati Cooperative Limited, Mangalore Chemicals and Fertilizers Limited, National Fertilizers Limited, Rashtriya Chemicals and Fertilizers and Tata Chemicals Limited.

The Union Cabinet on Monday approved a comprehensive New Urea Policy for the next four financial years. The policy is aimed at maximizing indigenous urea production and promoting energy efficiency in urea units to reduce the subsidy burden on the Government. "It will enable the domestic urea sector having 30 urea producing units, to become more energy efficient, would rationalize the subsidy burden and incentivize urea units to maximize their production at the same time," said a government statement.

It is expected to result in additional production of around 20 lakh/MT annually. Presently, India is importing about 80 lakh metric tonnes of urea out of total demand of 310 lakh metric tonnes.

Earlier the Government had approved gas pooling policy under which all urea units would get gas at a uniform price. The government had also decided in January to allow urea producers to produce neem coated urea upto 100 per cent of production and making it mandatory to produce a minimum of 75 per cent of domestic urea as neem coated, so that farmers are benefitted. Neem coated urea is required less in quantity with same plot size and gives higher crop yields. Underground water contamination due to leaching of urea also gets reduced with neem coating since nitrogen in the neem coated urea gets released to plants very slowly. Neem coated urea is not fit for industrial use, so chances of its illegal diversion to industries will also be lesser. 

The MRP of urea for the farmers has been kept the same at Rs. 268/- per bag of 50 kgs. excluding local taxes. Farmers have to pay an additional price of only Rs.14/- per bag of neem coated urea. 

The Government also decided to continue the existing subsidy rates for Phosphatic and Potassic (P&K) fertilizers (22 grades including DAP, Single Super Phosphate (SSP), Muriate of Potash (MOP), etc.) under the Nutrient Based Subsidy (NBS) policy for the current year. Subsidy rate for DAP remains same at Rs 12350/- per metric tonne while it is Rs 9300/- for MOP. Separate subsidy for boron and zinc coated fertilizers has also been continued. 

There are 19 units producing phosphatic fertilizers and 103 units making SSP. The entire requirement (approximately 30 lakh Metric Tonnes) of MOP is met from imports, since there is no resource of potash in India. About 90 percent of the phosphates are imported.