Nat­u­ral Gas Price Rise to Hit Fer­tiliser In­dus­try Earn­ings

Op­er­at­ing prof­its likely to de­cline by 100 bps from 11% re­ported last year, says an­a­lysts

The Economic Times - - Companies & Economy - Ashish.Kul­shrestha @times­

Hy­der­abad: The In­dian fer­tiliser in­dus­try is ex­pected to see sub­dued earn­ings due to an in­crease of nearly a sixth in nat­u­ral gas prices, which con­sti­tutes more than three-fourth of the cost of fer­tiliser, mainly urea. The up­ward re­vi­sion of around 17% in nat­u­ral gas prices, which came on the back of six-monthly price re­vi­sion that took place on Septem­ber 29, is likely to slow down the in­dus­try’s earn­ings that was see­ing a re­vival.

An­a­lysts ex­pect a de­cline in op­er­at­ing prof­its by 50-100 ba­sis points from around 11% re­ported last year and also project a cas­cad­ing ef­fect of a surge in the gov­ern­ment’s fer­tiliser sub­sidy outgo.

“This has been the first time since the in­cep­tion of New Do­mes­tic Gas Price Pol­icy in 2014 that there has been a rise in nat­u­ral gas prices,” said Urvisha H Ja­gasheth, re­search an­a­lyst with Care Rat­ings. “This 17% in­crease in prices doesn’t bode well for the fer­tiliser in­dus­try which had started see­ing green shoots af­ter pro­longed slug­gish­ness in the in­dus­try.” As per the New Do­mes­tic Gas Price pol­icy, the price of do­mes­ti­cally-pro- Prices of do­mes­tic nat­u­ral gas rose by nearly from till Septem­ber 2017 to duced nat­u­ral gas is to be re­vised ev­ery six months — April 1 and Oc­to­ber1— us­ing weighted av­er­age or rates preva­lent in sev­eral global nat­u­ral gas hubs: Henry Hub of the United States, Na­tional Bal­anc­ing Point of the United King­dom, rates in Al­berta (Canada) and Rus­sia.

The prices of do­mes­tic gas, which con­sti­tutes half of the 30.47 bil­lion cu­bic me­tres nat­u­ral gas con­sumed by the fer­til­izer com­pa­nies, had been on the fall from $5.05 per MMBtu in March 2015 to $2.48 per MMBtu in Septem­ber 2017. The prices were re­vised to $2.89 per MMBtu from Oc­to­ber1, 2017. Mean­while, in­ter­na­tional gas prices have been volatile.

Nat­u­ral gas is a ma­jor raw ma­te­rial for man­u­fac­tur­ing of urea which con­sti­tutes 60% of the to­tal fer­til­izer con­sump­tion in the coun­try. Also, of the 30 urea plants in In­dia, 27 are gas­based while the re­main­ing three use naph­tha, a de­riv­a­tive of crude oil. on Oc­to­ber 2017

“We ex­pect our work­ing cap­i­tal re­quire­ments to go up by 5-6% be­cause of this in­crease in prices of nat­u­ral gas. Also, gen­er­ally there’s a three-month lag in sub­sidy dis­bur­sal so there will be a slight pinch,” said DV Parikh, chief fi­nan­cial of­fi­cer, Gu­jarat Nar­mada Fer­til­iz­ers and Chem­i­cals.

Fur­ther, Care Rat­ings’ Ja­gasheth said, “The third and fourth quar­ter fi­nan­cials of the fer­til­izer com­pa­nies will cer­tainly be af­fected due to their in­creas­ing work­ing cap­i­tal re­quire­ments and the in­dus­try’s over­all growth is ex­pected to be 10-10.5%,” adding that it will also in­crease the gov­ern­ment’s sub­sidy bur­den. As the de­pen­dence of com­pa­nies such as GNFC on nat­u­ral gas is lower, the im­pact of price in­crease won’t hurt much but oth­ers which are highly de­pen­dent on do­mes­tic sourc­ing will bear the brunt, said ex­perts.

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