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LATEST NEWS UPDATES | Fertilizer firms may have to refund subsidy gains-Aman Malik

Fertilizer firms may have to refund subsidy gains-Aman Malik

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published Published on Apr 12, 2012   modified Modified on Apr 12, 2012

Non-urea fertilizer prices were freed in April 2010, but GSFCL, DFPCL, RCF still got gas at regulated prices

The fertilizer ministry is considering asking three non-urea fertilizer makers to return part of the gains they have made since April 2010 on account of gas supplied to them at regulated prices while they were allowed to sell their products at market prices.

Rashtriya Chemicals and Fertilizers Ltd (RCF), Gujarat State Fertilizers and Chemicals Ltd (GSFCL) and Deepak Fertilisers and Petrochemicals Corp. Ltd (DFPCL) may have to take a hit on their earnings over the past two years if the ministry goes ahead with the move.

While the prices of non-urea fertilizers were freed in April 2010, the three firms continued to receive gas to use as feedstock at regulated prices. The cost of gas makes up a big chunk of the cost of production for both urea and non-urea fertilizer makers.

The combined net profit of the three companies rose by 62% to Rs.830.32 crore in the nine months ended 31 December 2011 from Rs.510.98 crore in the same period in 2009, before the government allowed fertilizer companies to set their own prices for non-urea fertilizers.

Two senior fertilizer ministry officials independently confirmed that the ministry is considering asking RCF, GSFCL and DFPCL to return the so-called windfall gains they earned since April 2010 because of cheap gas supplies. One of the two officials said an internal note to this effect had been circulated within the ministry. A final decision has not been taken on the matter, said both the officials, who declined to be identified.

The officials also said there was a difference of views within the ministry on the issue because any directive for retrospective return of profits could require cabinet approval and also have legal implications.

“This is a tricky issue. Companies could take us to court. So we will have to be careful,” said one of the officials.

R.G. Rajan, managing director of RCF, said he was aware of the plan within the fertilizer ministry but didn’t know the details.

“I don’t think they have worked out the numbers yet, so I cannot comment on it,” he said.

The first ministry official said the ministry had sought financial data from the companies in question.

“Industry feels that the government will recognize the fact that it fixed the nutrient-based subsidy in April 2010 and will take cognizance of the fertilizer industry’s cost dynamics and health before it takes a decision,” said Vivek Y. Kelkar, senior vice-president for strategic communication and investor relations at DFPCL.

An email sent to V.V. Vachhrajani, company secretary and deputy general manager (legal and industrial relations), at GSFCL remained unanswered.

Mint had first reported on 23 December that the government was considering taking non-urea fertilizer makers off price-regulated gas and putting them on a free-market gas price mechanism. This suggestion was made by the oil ministry on the grounds that since the prices of non-urea fertilizers had been deregulated, producers could pass on the burden of more expensive feedstock to customers.

An empowered group of ministers (eGoM) on gas allocation, which met on 24 February, had accepted the oil ministry’s contention and had asked the fertilizer ministry to devise a set of norms to implement the proposal by 24 May. The eGoM was, however, silent on the issue of asking fertilizer firms to return profits with retrospective effect.

According to the draft guidelines being prepared by the fertilizer ministry, it would calculate the difference between the price of imported ammonia and that produced locally, and ask the companies to make good the difference.

Ammonia is an important intermediate in the production of both urea and non-urea fertilizers, and is produced from natural gas. The price of domestic gas is typically cheaper than that prevailing in the international market. While the price of imported ammonia is currently hovering in the $400-500 per tonne range, it is produced at $200-300 per tonne locally.

Companies typically get natural gas under the administered-pricing mechanism and that from the Krishna-Godavari D6 gas fields of Reliance Industries Ltd at $4.2 per million British thermal units (mmBtu). Oil and Natural Gas Corp. Ltd’s C-series gas is sold at $5.25 per mmBtu, while gas from the Panna-Mukta-Tapti fields is priced slightly higher at $5.6-5.7 per mmBtu.

Manufacturers of urea, whose market price remains government-controlled, would, however, continue to receive cheap gas. The government is firming up a policy to deregulate urea prices.

Tarun Surana, an analyst with Mumbai-based Sunidhi Securities and Finance, said the actual amount the government can recover cannot be calculated unless the government fixes the return on equity (RoE) that it would allow the non-urea companies.

“In case of urea, calculations are done on the basis of an RoE of 12% per year. In case of non-urea fertilizers, there is no prevailing yardstick. So how would the government actually figure out how much they want to recover?” he said.

Live Mint, 12 April, 2012, http://www.livemint.com/2012/04/11222001/Fertilizer-firms-may-have-to-r.html?atype=tp


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