Although RIL’s KG basin gas is positive for the fertiliser industry, the benefits are long term and indirect
WITH natural gas starting to flow out of Reliance Industries’ (RIL) fields from this month, a new chapter has begun for India’s fertiliser industry. The perennial shortage of natural gas - a major worry for the urea manufacturers - has become a thing of the past. However, the benefits to the industry are rather long-term and indirect. The direct benefits will all accrue to the government, which will see a reduction in its subsidy payout.
Natural gas is a feedstock for manufacturing urea, which accounts for nearly 56% of the country’s total fertiliser consumption. The total demand from urea units connected to the natural gas grid is estimated at 43 million cubic metres per day (mcmd). However, the current supply falls short by around 14 mcmd, resulting in either under-utilisation of the capacity or use of costly naphtha instead. The recent gas supply agreements signed between RIL and fertiliser companies are set to bridge this gap.
Apart from this, there are several urea plants, which are currently running entirely on costly liquid fuels, such as naphtha or fuel oil, and are yet to be converted to natural gas. Once these plants get natural gas connectivity within the next three years, demand for natural gas from this industry alone would shoot up to 76 mcmd.
Over the last few years, dependence of fertiliser companies on government’s subsidy payments had increased due to rising input costs. For example, in the case of Rashtriya Chemicals & Fertilisers (RCF), the subsidy receipts grew at a cumulative annual growth rate (CAGR) of 35.1% in the last five years, whereas sales of urea grew at 14.1%. Thus, any delays in payments or issue of special bonds instead of cash by the government strained the cash flows of urea manufacturers.This meant higher indebtedness and interest costs. RCF’s total debt more than tripled to Rs 1,243 crore in FY08, while the interest cost jumped eight times to Rs 66 crore.
With the additional gas the cost structure of fertiliser companies will ease, helping them bring down their dependence on the government’s subsidy payouts. Similarly, the government may do away with the practice of paying subsidy by way of bonds - the illiquid nature of which hurts fertiliser companies.
The direct benefit to companies’ bottom lines would come in the form of better capacity utilisation. For example, RCF can now recommission its 3.3-lakh-tpa capacity at Trombay. Similarly, production volumes will go up for companies, such as Tata Chemicals and Chambal Fertilisers that have added capacities by way of debottlenecking. In the long run, the additional availability of natural gas is likely to induce fresh investments in the industry .
WITH natural gas starting to flow out of Reliance Industries’ (RIL) fields from this month, a new chapter has begun for India’s fertiliser industry. The perennial shortage of natural gas - a major worry for the urea manufacturers - has become a thing of the past. However, the benefits to the industry are rather long-term and indirect. The direct benefits will all accrue to the government, which will see a reduction in its subsidy payout.
Natural gas is a feedstock for manufacturing urea, which accounts for nearly 56% of the country’s total fertiliser consumption. The total demand from urea units connected to the natural gas grid is estimated at 43 million cubic metres per day (mcmd). However, the current supply falls short by around 14 mcmd, resulting in either under-utilisation of the capacity or use of costly naphtha instead. The recent gas supply agreements signed between RIL and fertiliser companies are set to bridge this gap.
Apart from this, there are several urea plants, which are currently running entirely on costly liquid fuels, such as naphtha or fuel oil, and are yet to be converted to natural gas. Once these plants get natural gas connectivity within the next three years, demand for natural gas from this industry alone would shoot up to 76 mcmd.
Over the last few years, dependence of fertiliser companies on government’s subsidy payments had increased due to rising input costs. For example, in the case of Rashtriya Chemicals & Fertilisers (RCF), the subsidy receipts grew at a cumulative annual growth rate (CAGR) of 35.1% in the last five years, whereas sales of urea grew at 14.1%. Thus, any delays in payments or issue of special bonds instead of cash by the government strained the cash flows of urea manufacturers.This meant higher indebtedness and interest costs. RCF’s total debt more than tripled to Rs 1,243 crore in FY08, while the interest cost jumped eight times to Rs 66 crore.
With the additional gas the cost structure of fertiliser companies will ease, helping them bring down their dependence on the government’s subsidy payouts. Similarly, the government may do away with the practice of paying subsidy by way of bonds - the illiquid nature of which hurts fertiliser companies.
The direct benefit to companies’ bottom lines would come in the form of better capacity utilisation. For example, RCF can now recommission its 3.3-lakh-tpa capacity at Trombay. Similarly, production volumes will go up for companies, such as Tata Chemicals and Chambal Fertilisers that have added capacities by way of debottlenecking. In the long run, the additional availability of natural gas is likely to induce fresh investments in the industry .
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