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Starved of revenue avenues, the government in all likelihood is expected to ride on receipts from the Gas Infrastructure Development Cess, in the 2012-13 budget to be announced tomorrow. News reports suggest that the government is keen on increasing the cess of Rs.197/mmbtu on the fertiliser sector by another 52 percent to round it off at Rs.300/mmbtu.
Should that happen, feedstock gas prices for the local fertiliser manufacturers would increase by another 48 percent from July 2012, considering that OGRA is all set to increase the gas prices for all consumer categories come the next fiscal year. The new feedstock gas price is likely to settle at Rs.462/mmbtu ($5/mmbtu), narrowing the gap with the regional fertiliser players (India & China), who pay in the range of $6-7/mmbtu.
In the yesteryears, local urea manufacturers needed no second invitation to fully pass on the impact of increased feedstock gas price to the end consumer to keep their primary margins intact. But times have changed, and changed significantly, in the past six months since the imposition of the cess.
Although, there is still a huge difference between the imported and locally manufactured urea price of nearly Rs.1,000 per bag, the local industry, of late, has struggled in passing on the price taking a hit on gross margins.
The presence of cheap imported urea and an all-time record high urea inventory forced the leading urea manufacturer to slash the urea price by Rs.140 per bag, a step which was next to unthinkable, a couple of years ago. Should the feedstock gas price increase after the budget, the local urea industry will have to take a considerable hit on its margin, as farmers have not positively responded to the recent slash in urea price.
Moreover, another urea inventory consignment is expected to touch the shores in June 2012, which would further strengthen the supply glut, making it even tougher for local players to pass on the impact of increased raw material cost. That said, local fertiliser players gross margins are still on the higher side, averaging 45 percent for CY11, versus a regional average of 10 percent, according to Thomson One Analytics.
Needless to say, the gross margins will take a hit, as estimated by local analysts, expecting a 7-10 percent slide in the earnings forecast for CY12.
The government is moving in the right direction, as local gas prices have to be brought at par with imported gas price, which will be added to the grid sooner or later. But in doing that, it should also ensure that the gas supply is prioritised efficiently.
The government should now ensure that the fertiliser industrys gas requirements are met which would not only enable them to keep their margins intact but also result in a reduction in urea prices and in the import bill, as the current capacity is enough to meet the local requirement.

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