Phosphoric Acid, Phosphates & Fertilizers Experts

Gas price hike likely to hit fertiliser companies’ earnings

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 per cent 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 point to a fall in operating profits by 50-100 basis points from around 11 per cent 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 per cent increase in prices doesn’t bode well for fertiliser industry which had started seeing shoots of green after prolonged sluggishness in the industry.”

As per the New Domestic Gas Price policy, the price of domestically produced natural gas is to be revised every six months — April 1 and October 1— 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.

Prices of domestic gas, which constitutes half of 30.47 billion cubic metres natural gas consumed by the fertiliser 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 October 1, 2017. Meanwhile, international gas prices have been volatile.