India is Fertile Ground for Budding Urea Industry

24-Sep-2012 - India

The Indian government has revamped the urea industry in an attempt to reduce the heavy economic burden of a state-controlled sector, states new research by GlobalData.

The new viewpoint (Indian Urea Industry - Major Policy Decisions Made to Address the Supply Shortage and Curb Subsidy Expenditure) looks at the market for urea, an organic compound popularly used as a fertilizer in the agriculture sector due to its low cost and high nitrogen content. Urea is the most consumed nitrogenous fertilizer worldwide, and having realized its importance in the Indian agriculture sector, the government placed production under state control, fixing the price at a reasonable level.

However, changes in government policies over the last decade have made the urea industry unattractive to enter. The urea investment policy introduced in 2008 tried to encourage investment in natural gas based urea plants, but failed to insulate producers from natural gas price volatility. Therefore, despite demand for urea growing consistently over the last decade, production capacity remained stagnant, causing supply shortages and a heavy dependency on imports. Concerned by the lack of investment in the urea sector, the Indian government reformulated its policy in June 2012, including a provision which insulates producers from rises in natural gas prices.

Paradoxically, the production cost of urea is far higher than the sales price, and Indian producers therefore receive subsidies from the government under the New Pricing Scheme (NPS), which sets a floor price and ceiling price for the cost of production within urea plants. The government is employing all means to reduce the ballooning urea subsidy bill, which has aggravated the fiscal deficit within the country. Urea subsidies have increased at an impressive rate in the last decade and currently sit at $5.3 billion. This financial burden will remain until the urea industry is completely deregulated, but the government has adopted a two-way approach of reducing production costs and increasing sales prices in order to gradually shrink this enormous sum.

Thanks to the latest changes to the urea investment policy, many companies have announced planned projects, and over 6 Million Metric tons per annum (MMtpa) of capacity is expected to come on-stream in India within the next five years. However, it is predicted that the gap in demand and supply will persist.

Urea production capacity in India is expected to increase at a compound annual growth rate (CAGR) of 5.2% during 2011-2016, showing substantial improvement from the CAGR of 0.7% during 2005-2011.

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