Tata Chem hopes govt allows urea capacity build-up

The government’s new urea policy will assure 12-20 percent post-tax return on fresh capital infused by the manufacturers for setting up of new plants as well as for expansion and revamp of the existing ones. Govt will also cover the entire cost of natural gas, which is the main feedstock of urea. The policy is a welcome move said PK Ghose, CFO of Tata Chemicals in an interview to CNBC-TV18.

Poor offtake due to erratic monsoon and high prices has led to a build-up in inventory of urea and non-urea fertilizers. Urea consumption has been marginally down by 3.5 percent in the kharif season.
Speaking about availability of gas, Ghose said fertilizer companies can procure it from ONGC, GAIL or other suppliers. It may be mentioned that even though government has made amendments in the urea policy, availability of gas remains a concern. However, he hopes that the government will allow urea capacity to scale-up, despite not meeting its objective on subsidies. Below is an edited transcript of PK Ghose’s interview on CNBC-TV18 Q: With regards to the new urea policy, is 12-20 percent post tax return and covering the cost of the gas a good move by the government? Does that cover up most of the loopholes and do you think it is a blueprint to enable better production of urea in the country?
A: The industry has been waiting for this policy. It was much awaited and it’s a welcome move from the government. We want to be self-sufficient in urea and one cannot afford to import 7-8 million tonne every year at abnormal prices. One is helpless in terms of the other two fertilizers because you have to import quite a lot of it, both phosphorus and potassium (P&K).

It is important that urea capacity build-up is allowed by the government despite the fact that it may not meet government’s objective on the subsidy part. So you are still subsidising the product, yet this is a welcome move.

Q: What about availability of gas despite the fact that there could be new urea capex which comes on board. Where exactly would be the availability of natural gas to produce urea?
A: We have been told to contract GAIL or ONGC or rather suppliers. But it is too early and we are in discussions right now. They may not be very long-term contractors in the past but certainly five year contracts would be available, renewable later. Q: Looking at your financial performance for the quarter that you reported last, while there was not much to complain about revenues, there was pressure on margins both in chemicals and in fertilizers. How did Q3 pan out and how is Q4 looking? Is the second half likely to do better in terms of margins?
A: So far as the chemical business is concerned, the Indian and the US portion of the business have done as per the expectations or even better. We faced some headwinds in Kenya and in UK and both are mainly weather related. This is because now-a-days with the global warming scenario in a place like Kenya, which is pretty arid with flashfloods affecting logistics, they are taking time to recover.
The second is in UK, a very severe winter back in December 2010 affected plant and even after a considerable amount of work done there, a few small items do come up. Otherwise the chemical businesses from the other two plant, which are the two main units, US and India have been doing well.

On the fertilizer front urea is a steady cash flow business and now the full effect of debottlenecking is coming into play. In the phosphatic part, the huge stock build-up a few months ago had its impact and therefore the huge profits that you had this year, do no reflect in phosphatic this year. Q: Should we understand that domestic business in the second half would be flat or marginally lower than the first half while in your overseas businesses you could do a tad better in the second half?
A: I think the US and India will continue to do well and India will continue to do better. I mentioned the two areas, UK and Kenya, which are of concern to us, should get sorted out in the near future.