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Lower gas prices for the benefit of urea producers, reduction in subsidy needs: Icra

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Lower domestic gas prices are expected to benefit urea producers, as it will reduce the cost of production and the need for a subsidy, the Icra rating agency said.

However, the increase in phosphoric acid prices is expected to moderate the profitability of phosphate fertilizer producers, Icra said in a report.

The sector experienced robust growth in April-September 2020-21, driven by early and cautious farmer purchases in light of the COVID-19 pandemic, growth in planting levels, and support for agriculture of various government programs, according to the report.

On the raw materials side, urea players continue to benefit from moderate natural gas prices, he said.

On the domestic gas front, the government mandated price for October-March FY21 has dropped to $ 1.79 per million British thermal units (mmbtu) on a gross calorific value (GPC) basis, in line with prices global benchmarks to which the price of domestic gas is linked, according to the report.

“Almost 41% of the natural gas needs of the fertilizer sector are met by domestic gas, the remaining 59% being met by a mixture of forward LNG and spot LNG.

“With the domestic gas price for the second half of 2020-21 set at the lowest since the introduction of the Rangarajan formula, the common price of the fertilizer sector is expected to decline by USD 0.25 per mmbtu,” said the director of the Icra group and senior vice president K. dit Ravichandran.

Low gas prices will keep the cost of production and therefore the subsidy requirement low for urea players, he said.

With low gas prices, production compared to international price parity will also remain competitive with imports and its profitability is also expected to remain healthy, he added.

Thus, for local urea manufacturers, working capital borrowing for urea operations is expected to moderate considerably in FY21, which, together with lower interest rates, will significantly alleviate the burden. burden of interest charges.

However, part of the savings on the subsidy to local production will be offset by the increased subsidy requirements for imported urea.

The subsidy requirement for imported urea will increase, due to increased volumes of imported urea and increased subsidies for imported urea replacing imported urea from Oman India Fertilizer Company (OMIFCO) earlier at a preferential price, the report said.

In addition, Icra said the prices of phosphate fertilizers and the prices of key raw materials, especially phosphoric acid, remained weak for much of fiscal year 20.

However, since the start of the COVID-19 pandemic and the increased interest of countries around the world in agriculture, phosphate fertilizers have also seen an increase in demand and prices, he added.

Demand for phosphate fertilizers from the United States, Brazil and India has been strong, given the strong agricultural season seen in the three major agricultural countries, according to the report.

“With the rise in prices of phosphoric acid, input costs for phosphate fertilizer manufacturers will increase, although the cost of other raw materials, namely ammonia and sulfur, continues to remain subdued. contribution on the sale of DAP / NPK fertilizers should moderate strongly to absorb the increase in the cost of raw materials, “said senior analyst at Icra, Varun Gogias.

For manufacturers who are integrated upstream in manufacturing phosphoric acid using rock phosphate, the impact would be much smaller, he said.

“While contribution margins would certainly moderate, they would return to normal levels as during the current Kharif season, contribution levels had increased significantly due to low commodity prices, firm retail prices and the minor reduction subsidy rates for fiscal year 21, “he added. .

(Only the title and image of this report may have been reworked by Business Standard staff; the rest of the content is automatically generated from a syndicated feed.)

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