Increase in IPP cap on production beyond reassessed capacity is a credit positive for urea manufacturers, says ICRA
New Delhi [India], Apr 4 : Credit rating agency ICRA on Tuesday said that the Cabinet Committee on Economic Affairs (CCEA) has approved certain amendments related to increasing the IPP-linked cap on urea production beyond re-assessed capacity (RAC) in the New Urea Policy-2015 (NUP-2015) in a meeting held on March 31, 2017.
Further, to address any future fluctuations in the import parity price (IPP) that would have an adverse impact on the production beyond the RAC by urea units, the Department of Fertilizers (DoF) has been authorised to take an appropriate decision in consultation with Department of Expenditure.
Although amendments to NUP-2015 were approved by the CCEA, no decision was announced related to the reimbursement of higher fixed costs, as specified in the Modified NPS-III, which is a long-pending demand from the industry.
"Increase in the IPP-linked cap on urea production beyond the RAC is a positive step by the Government to promote the indigenous production of urea. In recent months, low international urea prices had made production beyond the RAC unviable for some units under the existing cap of IPP + incidental charges (~USD 15 per MT)," said Senior VP and Group Head Corporate Ratings, ICRA, K. Ravichandran.
However, with the increase in cap by an additional ~USD 15 per MT towards incidental charges, there will be additional headroom to compete against imported urea for the above units. With a subdued outlook for R-LNG prices, and a marginal decline in the domestic gas price, the upward revision in the cap on production beyond RAC should provide an impetus to domestic production and improve the profitability for high energy-consuming units.
Furthermore, autonomy given to the DoF to make further intervention on the policy if the international urea prices were to decline sharply is a positive for the industry. That apart, the non-revision of fixed costs commensurate with the current cost structure of urea units is a disappointment, which will continue to result in under recoveries on fixed costs.
For production up to the RAC, fixed costs are referenced to 2002-03 levels.
While the modified NPS III allowed an upward revision in fixed costs at the rate of Rs. 350/MT with certain other caveats, the decision has not been notified yet, resulting in under recoveries for urea units. (ANI)