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National Fertilizers sees uncertainty over Ramagundam urea revival plan

LiveMint logoLiveMint 26-05-2014 Pranav Nambiar

New Delhi: Engineers India Ltd (EIL) is reconsidering its decision to participate in a project to revive the shuttered Ramagundam urea plant of Fertilizer Corp. of India Ltd (FCIL), throwing the venture into uncertainty.

EIL, FCIL and National Fertilizers Ltd (NFL) were to jointly execute the revival project, estimated to cost `4,500-4,700 crore. EIL decided to review its participation after the government withdrew a provision from the new investment policy (NIP) for urea factories under which it would buy unsold urea produced by new plants in the first eight years of operations, said NFL chairman and managing director Neeru Abrol.

The NIP was approved by the Cabinet in February, but the notification was deferred until the end of the April-May general election because of the model code of conduct for governments and political parties barring announcements that could sway voter behaviour.

“EIL was supposed to pick up 26% stake in the project, NFL also 26%, and FCIL 11% stake in the form of the land provided for the plant, with the remaining given to another private or PSU (public-sector unit) investor. But because of the withdrawal of the buyback guarantee, the EIL board has gone back to the drawing board to understand its viability,” said Abrol.

EIL’s chairman and managing director A.K. Purwaha did not respond to calls and messages for comment.

FCIL’s Ramagundam fertilizer unit, with a capacity of 1.2 million tonnes, is located in Karimnagar district, about 240km away from Hyderabad. Production was suspended on 1 April 1999 because its continued operation was found to be commercially unviable.

Abrol also flagged concerns that with the reimbursement on urea sales being linked to the import pricing parity (IPP) in the NIP, the cost of producing urea will not be met. IPP is the average of import price of urea into the country.

“The project is looking difficult because at an investment of `4,500-4,700 crore, the cost of production of urea will be $550 per tonne, and we will be reimbursed on the basis of IPP prices, which are currently ruling in the $350-370 tonne band,” said Abrol.

For existing urea units, fertilizer companies are compensated by the government on a cost plus basis for selling urea at the fixed maximum retail price of `5,360 per tonne. In other words, they are compensated to the extent their sale proceeds falls short of the cost of production.

But for new urea capacities, under the NIP, the reimbursement will be a function of IPP and the cost of gas. Reimbursements will occur within a price band based on the actual IPP for gas prices per mmBtu of between $6.5 and $14 and at the floor price for gas of more than $14 per mmBtu.

International urea prices are low because of a glut of the farm input, said an analyst at a Mumbai-based securities house. “The urea prices are set to go lower from 1July when export tax cuts come into effect in China, leading to further supplies hitting the global markets,” he said on condition of anonymity.

Abrol said NFL does not have the resources to go it alone in the Ramagundam project and might have to seek a new public sector partner if EIL decides to back out.

Apart from the Ramagundam plant, NFL isn’t planning any further urea capacity expansion as the reimbursements on new urea production are unattractive, Abrol said.

“The third phase of NFL’s Vijaipur urea unit has also been put on hold. We are looking to diversify into other areas like pet coke and single super sulphate,” Abrol said.

In 2012-13, NFL converted three urea units at Bathinda and Nangal in Punjab and Panipat in Haryana to use natural gas as feedstock instead of naptha. The plants now rely on costly imported liquefied natural gas (LNG) for feedstock requirements as domestic gas supply in insufficient.

“Though the gas is a pass-through.., the economics were worked out at $ 8 per mmBtu but now the landed cost is $ 22 per mmBtu. With delays in receiving subsidies from the government our working capital gets hit,” said Abrol.

On 31 March, NFL had `4,000 crore worth of working capital loans on its books with interest costs of `180 crore.

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