Dec. 26 (Bloomberg) -- Aditya Birla Nuvo Ltd. and Tata Chemicals Ltd. may lead $9 billion of spending to increase India’s urea capacity by almost 50 percent, spurred by a government policy guaranteeing returns on investments.
Producers of the nitrogen-based soil nutrient including state-run companies and co-operatives may add 10 million metric tons of capacity over the next five years, said S.C. Sharma, an officer at the Planning Commission, which assesses and allocates the nation’s resources. The government will assure new urea units a profit margin 12 percent to 20 percent, Food Minister K.V. Thomas said in New Delhi on Dec. 13.
“As much as 500 billion rupees ($9 billion) of investments could come,” Sharma said in an interview in Mumbai. “They’ll start flowing in after this policy change.”
Government control on the price of urea and ambiguity over natural gas feedstock costs have deterred new investments in the sector for more than 10 years, leading to an increase in imports and state subsidies. An increase in urea capacity will also boost agricultural productivity, helping feed two-thirds of India’s 1.2 billion people that live on less than $2 a day and contain inflation that averaged 7.5 percent in 2012.
“India has to support a large population base on a small land area, so the use of fertilizers like urea is critical and will only rise,” said Apurva Shah, an analyst at Dalal & Broacha Stock Broking Pvt. Ltd. in Mumbai. “Other fertilizer makers not present in urea may plan setting up a unit to expand their product base. In three to four years, there’s bound to be large-scale investments in this sector.”
Billionaire Kumar Mangalam Birla may spend as much as $1 billion to double Aditya Birla Nuvo’s urea capacity after the government approves the new policy, Managing Director Rakesh Jain said in an interview on Nov. 8. Aditya Birla Nuvo, the $4 billion group, is also present in businesses including financial services, clothing and information technology.
Kumar Mangalam Birla’s net worth is estimated at $9 billion, according to the Bloomberg Billionaires Index. His fortune has risen about 10 percent this year.
Tata Chemicals planned to double urea capacity at its unit in the northern state of Uttar Pradesh at an estimated cost of 35 billion rupees, it said in October 2010. The company was waiting for government assurances on supplies of natural gas, the main fuel used to produce urea, it had said.
Other planned urea projects include Rashtriya Chemicals & Fertilizers Ltd.’s 1.15 million ton unit, for which it secured environment approval in 2006, in western Maharashtra state. Chambal Fertilisers & Chemicals Ltd. plans to build a similar-sized factory in the northern state of Rajasthan.
State-owned GAIL India Ltd., Coal India Ltd. and Rashtriya Chemicals have planned a venture to build a coal gasification and fertilizer project in eastern Odisha state at an estimated cost of 80 billion rupees, while Oil & Natural Gas Corp. is seeking a partner to build a urea factory in the eastern part of the country.
Shares of Tata Chemicals rose 0.6 percent to 341.85 rupees in Mumbai. Aditya Birla Nuvo fell 0.3 percent to 1,075.75 rupees. Rashtriya Chemicals jumped 3.5 percent to 57.70 rupees, while Chambal Fertilizers rose 0.8 percent.
India imports about 33 percent of the 28 million metric tons of urea it needs and the quantity is increasing by about 1 million tons each year, according to a Planning Commission report last year. Supply shortages may widen to 12 million tons by March 2017 should new capacities fail to be added, the commission said.
The government’s subsidy burden increased as urea prices surged to a 3 1/2-year high of $515 in April. Urea imports are estimated to have risen to about 7 million tons in the year ended March 31, inflating the subsidy by 21 percent to 294 billion rupees from a year earlier, according to the report.
The new policy will save 47.6 billion rupees of subsidies and reimburse producers the cost of natural gas, which comprises about 80 percent of the input cost, Dalal & Broacha’s Shah said.
Plans to expand the nation’s urea capacity by 50 percent to 34 million metric tons have been held back by companies, pending a well-defined state policy. The reopening of a unit in the eastern state of Assam was the only major urea project to come on stream since 1999, according to the fertilizer ministry’s annual report.
At a conservative estimate, urea units will need at least 72 million metric standard cubic meters of gas fuel daily by March 2017, compared with the current availability and demand of 41 mmscmd and 43 mmscmd, respectively, according to the commission report. Should all plans to start new plants, expand existing facilities and resume closed units be implemented, the required quantity may exceed 100 mmscmd.
“India needs a robust pipeline network to carry natural gas for urea and other industries,” said Ashok Kumar Balyan, managing director at Petronet LNG Ltd., the state-owned owner of LNG terminals in the western and southern coast of India. “While our Kochi terminal is ready, the lack of a pipeline network is a constraint.”
Petronet is planning to set up a 5 million metric ton LNG terminal by 2016 at a cost of 45 billion rupees in the east coast to meet demand in the eastern part of the country.
“We’re prepared to supply LNG to urea makers as and when capacities come up,” Balyan said on Dec. 19 on the sidelines of an energy conference in Mumbai. “The new policy will boost investments in urea capacity expansion and boost demand for natural gas.
Aditya Birla Nuvo plans to sell the increased urea output in the eastern states of Bihar, Jharkhand, West Bengal, the eastern region of Uttar Pradesh and in the central state of Chhattisgarh, Jain said last month. The company declined to comment after the new policy was approved.
The government will provide financial support to private entrepreneurs for making capital investments in the fertilizer sector, the then Finance Minister Pranab Mukherjee had said in his budget speech in March. On Oct. 11, the cabinet increased urea prices by 50 rupees a ton and approved direct transfer of the fertilizer subsidy to the farmers.
“At current prices, it is better to import liquefied natural gas and produce urea locally,” Planning Commission’s Sharma said. “There should be higher activity in this industry that has not seen much interest.”
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