Natural Gas Price Rise to Hit Fertiliser Industry Earnings
Operating profits likely to decline by 100 bps from 11% reported last year, says analysts
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.