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Nutrient self-sufficiency: Better make in Iran than in India

The proposed revival of closed urea plants in the eastern region makes little economic sense.

Written by Harish Damodaran | Updated: August 6, 2015 6:15:08 am
urea plants, urea plants eastern India, Hindustan Fertiliser Corporation, Fertiliser for crops, Fertiliser subsidy, HFC, Fertiliser Corporation of India, FCIL, indian express, business news On March 31, the Union Cabinet approved the revival of HFC’s Barauni unit in Bihar and that of FCIL’s at Gorakhpur in Uttar Pradesh, both non-operational since 2004.

The current government has embarked on a plan to ‘revive’ closed urea plants in eastern India belonging to Hindustan Fertiliser Corporation (HFC) and Fertiliser Corporation of India Ltd (FCIL).

On March 31, the Union Cabinet approved the revival of HFC’s Barauni unit in Bihar and that of FCIL’s at Gorakhpur in Uttar Pradesh, both non-operational since 2004. This was followed by a similar approval, on May 21, for restarting the Sindri (Jharkhand) plant of FCIL that last produced urea in 2002.

In all three cases, the proposal is to invite bids to set up practically new plants of around 1.3 million tonnes (mt) capacity, each costing Rs 5,000-6,000 crore, at these locations. The government’s hopes of attracting bidders comes even as its estimated Rs 30,000 crore of fertiliser subsidy dues to the industry has left existing investors jittery. Tata Chemicals, for one, is reportedly mulling selling its the fertiliser business, while Kumar Mangalam Birla has clearly stated that “there is no economic rationale for further investment” in the sector.

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Still, on the face of it, the proposed revival plans may appear to make sense for two reasons. First, as Prime Minister Narendra Modi has pointed out, India needs a “second” Green Revolution from eastern India. This region currently has just two operational urea plants at Namrup in Assam, producing some 0.35 mt annually. “Farmers here require urea, which is why our government has decided to reopen the closed factories through fresh investment of arabon-kharabon rupiah (thousands of crores),” Modi said at a foundation stone-lying event in Hazaribagh (Jharkhand) on June 28. We’re likely to hear more of this in the coming days in the run up to the Bihar Assembly elections.

himSecond, India’s urea imports have surged almost 14-fold to 8.75 mt in the last decade, whereas domestic output has stagnated at below 23 mt. To that extent, there is a case to augment indigenous production. And why not in states where the demand for fertilisers would really come from? On July 25, the very day he launched the NDA’s poll campaign, Modi inaugurated the first-phase construction of a 922-km gas pipeline from Jagdishpur to Haldia that would also supply to the proposed Gorakhpur, Barauni and Sindri urea plants through separate spur/feeder lines. But it raises a fundamental question: How viable are these planned urea capacities going to be? The main issue is gas. The existing urea plants consume roughly 42.5 million metric standard cubic metres per day (mmscmd) of gas, of which 26-27 mmscmd comes from domestic fields and the balance 16-17 mmscmd through imported liquefied natural gas (LNG). The new plants would require additional imported LNG at twice the cost of domestically sourced gas. Even at a ‘pooled’ uniform price, the final delivered cost will not be below $10 per million British thermal units (mBtu).

Now, one can expect newly-commissioned units to be highly energy-efficient, requiring say, only 5 giga-calories (Gcal) to produce one tonne of urea, as against 5.5-7 Gcal for most existing plants. But at $10/mBtu — one mBtu equals 0.25 Gcal — the feedstock cost alone would still be $200 per tonne of urea. Adding conversion costs of $50 — towards wages and salaries, chemicals, consumables, repairs and maintenance, selling expenses, etc — takes it further to $250.

On top of this are capital costs. For a project costing Rs 5,500 crore financed through 70:30 debt-equity, the interest component (at 10 per cent) would be $46 per tonne on an annual production of 1.3 mt. Inclusive of depreciation $42 (at 6.33 per cent per annum over 15 years on 95 per cent of asset cost) and $36 return on equity (12 per cent post-tax or 18 per cent pre-tax), the total production cost of urea from a new plant will work out to about $375 per tonne. That compares to $290 for an existing fully-depreciated plant consuming 6 Gcal/tonne.

Is it worth setting up new urea plants producing at such high cost in India using predominantly imported gas at $10/mBtu? What will be the implications for fertiliser subsidy, when the government is already struggling to pay even existing manufacturers? Would any lender be willing to fund these projects under the circumstances?

These questions have relevance, especially in the present scenario where imported urea costs have plunged to $300 per tonne levels (see chart). Why should India ‘make’ at $375 when it can very well ‘buy’ at $300? The chances of global prices falling further cannot be ruled out, considering the substantial new capacities coming up worldwide (see chart). With China turning from the world’s largest urea importer to the largest exporter and the US, too, set to become self-sufficient, we are probably entering a buyer’s market.

But then, it is also true that global prices are volatile. India imported urea at an average landed cost of $482 per tonne in 2011-12 and $528 in 2008-09. A reasonable degree of self-sufficiency is, therefore, worth targeting. However, the way forward to achieve it would be to make not in India for India, but in countries where gas is available relatively cheap. India imports about 1.65 mt of urea annually through the Oman India Fertiliser Company (OMIFCO) at an average $160 per tonne landed cost. These supplies against a long-term government-backed offtake agreement at pre-determined prices — OMFICO is a 50:25:25 joint venture of Oman Oil Company, Indian Farmers Fertiliser Cooperative and Krishak Bharati Cooperative — have partly insulated the country against extreme volatility in international prices, including in 2008 when they even crossed $800 per tonne.

What we need is an extension of the OMIFCO model to other countries where gas can be sourced at below $5/mBtu. At that delivered rate, the feedstock cost for a new plant will not exceed $100 per tonne of urea, enabling imports at well below $300 levels. These rates can, indeed, come down further through concerted bilateral negotiations.

India is now in talks with Iran for establishing a 1.3 mt urea plant at the Chabahar region through an OMIFCO-like joint venture, involving Rashtriya Chemicals & Fertilisers and Gujarat Narmada Valley Fertilisers. The Iranian government has apparently indicated a gas price of $2.9 per mBtu for the project, which isn’t difficult to lock into in a depressed global oil market (Oman had, in 2002, contracted to supply gas to OMIFCO at $0.77/mBtu, which was subsequently in 2012 revised upwards to $3/mBtu). In urea, Modi’s ‘Make in India’ strategy clearly needs tweaking to mean investing overseas to make for India. There isn’t a better time for stitching these deals than when global commodity prices are ruling low. And that will deliver true nutrient security even for Bihar’s farmers without reopening the shuttered Barauni plant.

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