Make versus Buy: India can both manufacture and import ureahttps://indianexpress.com/article/india/make-versus-buy-make-versus-buy-5867702/

Make versus Buy: India can both manufacture and import urea

In June, domestic and imported re-gasified liquefied natural gas (R-LNG) was being delivered to urea-making units at an average uniform “pooled” price of Rs 813.76 or $ 11.72 per mmBtu (million metric British thermal units) on a gross calorific value (GCV) basis.

A farm labourer applying fertiliser at a field in Allahabad, UP. (File)

Is it worth “making” urea at $ 400 per tonne or more, when you can import (“buy”) at under $300? That’s what most critics of the Narendra Modi government’s aggressive plans for achieving self-sufficiency in this critical nitrogenous fertiliser would ask.

They may well have a point.

In June, domestic and imported re-gasified liquefied natural gas (R-LNG) was being delivered to urea-making units at an average uniform “pooled” price of Rs 813.76 or $ 11.72 per mmBtu (million metric British thermal units) on a gross calorific value (GCV) basis. The seven new urea plants that have already or are about to come up are comparatively energy-efficient: They need only up to 5 giga-calories (GCal) for producing one tonne of urea, as against the existing units that consume between 5.5 and 6.5 GCal.

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But at $ 11.72/mmBtu — or $ 12.98 (1.108 times) on a net calorific value (NCV) basis — and 0.25 GCal for every one mmBtu, the feedstock cost alone comes to almost $ 260 per tonne of urea. Adding a $ 155 fixed cost, which “substantial expansion/brownfield” projects such as Chambal Fertilisers’ Gadepan III are entitled to, takes the total to $ 415 per tonne. The fixed cost — supposed to cover all other charges, inclusive of interest, depreciation and profit, and payable for a period of eight years from the start of production — is even higher, at $ 175, for “greenfield/revival” projects being established through state-run joint ventures. Either way, the total cost of “making” works out much more than the current landed (cost and freight, Indian ports) price of $ 290-295 per tonne for imported urea.

There are problems, though, with the above computations.

For one, they ignore customs duty and other levies (both Central and state government) on feedstock; natural gas isn’t covered under the goods and services tax regime. Netting out the estimated 18% taxes would bring down the basic delivered pooled price of gas to $ 10.65/mmBtu (from $ 12.98) and the variable cost of urea to $ 213 per tonne (from $ 268). The total production cost, too, reduces to $ 368-388 per tonne (from $ 415-435).

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Secondly, it is wrong to compare prices of imported bulk urea arriving in vessels at ports with the cost of fully-bagged domestically manufactured material. The imported urea has to be discharged and bagged. The bagging, stevedoring and other port-handling charges in this case would be around Rs 950 or $ 13.75 per tonne. The $ 368-388 per tonne cost of domestic urea, on the other hand, includes bagging expenses.

Thirdly, the new urea plants are mostly in the northern and eastern hinterland. The differential cost of moving urea to Bihar or Purvanchal from any port vis-à-vis from Barauni, Gorakhpur and Sindri would be Rs 500-600, which is another $ 7-9 per tonne. That further narrows the make-versus-buy gap to $ 55-75 per tonne. There are also other deductions — such as delayed subsidy payments to domestic manufacturers (not possible in imports, where the entire cost has to be met upfront) and taxes paid on imported equipment, erection charges and services during construction stage — that would keep the gap well within a $ 40-50 per tonne range.

Finally, with the building of LNG terminals and pipelines crisscrossing much of the country, it is going to become increasingly easier to import and transport gas than urea to the hinterland. In the event, urea imports would make sense mainly for feeding the western and southern markets. However, for North and East India — which is where the next Green Revolution should be — there is a strong case for having sufficient domestic manufacturing capacity. If the urea plants at Bhatinda, Nangal and Panipat served the cause of farmers in Punjab and Haryana during the seventies, the same logic can be extended to the upcoming facilities supplying to East UP, Bihar, Jharkhand, West Bengal and Odisha (The Modi government has, incidentally, also approved a greenfield 0.86 million-tonnes-per-annum plant at Namrup in Assam).

Instead of aiming for 100% self-sufficiency, a sounder long-term strategy for urea may be to “make” more in Northern and Eastern India, while exploring greater “buy” options for Peninsular India alongside closing down some of the older energy-inefficient units.