The inevitable has happened. The government has finally decided to curtail feedstock gas supply of the fertilizer industry.
Low gas provision implies lesser fertilizer production and higher imports. Its blow on countrys foreign exchange is calculated to be around $25-30 million per month. Nonetheless its impact on larger economy is hard to compute, as the gas redirected to generate electricity can potentially improve industrial production, hence exports.
The duration of the reduction is yet to be known, but if it prolongs beyond a couple of months, it could have a significant impact on the countrys agriculture sector.
Fertilizer companies in the north will now be provided 20 percent lesser gas for feedstock purpose, whereas those in the south will be fortunate enough, due to technical reasons, to be deprived of only 12-13 percent feedstock gas.
Gas curtailment would naturally mean lesser urea production, which may go down by 17 percent on weighted average basis. In anticipation of lower urea sales as a consequence, fertilizer companies have reportedly hinted at raising urea prices by 10 percent or Rs75-80/bag in south and by Rs50 per bag in north.
Given urea shortage and the strong pricing power of local manufacturers, it is safe to assume that their respective revenues and margins will, by and large, remain strong, with a minimal decline, if any.
For the government, it would mean more imports of nearly 80,000 tons urea per month sold on subsidized rates. The additional economic cost resulting from curtailing gas would be nearing Rs400 million for a month. It may not be a huge sum, but any pressure on the fiscally constrained government is not the ideal solution.
The burden could have been higher, had it not been for the increased domestic urea price, which would now mean that the government will just have to equate the imported urea price with that of the local market.
Who is the biggest loser in this episode? Yes, it is the usual scapegoat farmers community. A sudden 10 percent hike in the major input cost would undoubtedly result in panic amid calls for higher support prices - eventually leading to a round of higher inflation.
Moreover, this may also have a daunting impact on the application of DAP fertilizer to the soil, as farmers have historically halted DAP usage in any untoward situation. Phosphate fertilizer prices are already on the rise and this could just deliver the killer blow resulting in lower crop yields.
Whether or not the subsidy itself should be provided is a different debate, but should threats of decline in revenues be construed as the right justification for fertilizer makers to raise prices at their will? Mind you, lesser gas or not, they are still getting the gas at subsidized rates and the increase in price will defy the very purpose of the subsidy.
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IMPACT OF GAS CURTAILMENT
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Pre- Post
Unit curtailment curtailment
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Domestic urea Rs/bag 800 880
Imported urea (landed cost) Rs/bag 1550 1550
Feedback subsidy Rs/bag 350 350
Import subsidy Rs/bag 750 670
Additional subsidy Rs/bag 400 320
Additional urea import/month tons 80000
Additional amount Rs(mn) 512
Total economic cost/month* Rs(mn) 379
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* Total economic benefit is calculated on the benefit accrued on lesser subsidy value per ton after the price increase.
Source: BR Research, NFDC
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