Moneycontrol Pro Panorama | Gas shortage puts fertiliser industry in a tight spot

Representative Image

Dear Reader, 

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

The Russia-Ukraine war has affected not only the global energy sector, but also food markets directly and indirectly. Ukraine being the bread basket of Europe and the Middle East, the war has badly hit its wheat supplies. Back home, lower production in India has taken wheat prices to an all-time high level of Rs 32-36 per kg, depending on the variety.

Higher food prices can prove to be a big headache for the government and the RBI which are striving to keep inflation low.

But a bigger headache for the government is gas availability and prices. Rising spot prices have resulted in a higher fertiliser subsidy bill, which in the current fiscal is expected to rise to around Rs 2.3-2.5 lakh crore. In 2021-22, the finance minister had estimated fertiliser subsidy to be at Rs 1.05 lakh crore, but ended up paying Rs 1.62 lakh crore. The enhanced budget estimate for the current financial year was Rs 2.15 lakh crore, but that too will be surpassed.

In order to reduce the subsidy levels, India has tweaked the gas procurement policy for fertiliser companies, allowing them to buy about a fifth of their monthly needs through the local spot market. This will reduce the burden on the government, but will increase the cost for companies. The move is expected to reduce the subsidy bill by Rs 24,000 crore.

The government has amended 2015 gas procurement guidelines under which fertiliser plants had to procure 80 percent of their gas through long-term contracts, and the balance through three-month tenders. Since farm-gate fertiliser prices are fixed by the government, purchasing high-priced gas from the spot market would squeeze their margins.

Besides price, the bigger problem for fertiliser companies would be the availability of gas. Reports say the state-owned and largest gas utility GAIL (India) fears little to no supply of liquefied natural gas (LNG) from Russia’s Gazprom for at least 12 months.

GAIL is likely to face a shortfall of 8.5-9 million standard cubic metres per day (mscmd). The long-term 2.4 million tonnes per year (mtpa) LNG contract was paused in May 2022 after the Ukraine war.

To prevent supply-side disruption to domestic consumers, GAIL had to cut supplies to fertiliser plants, petrochemicals, and power generation units. GAIL’s own Pata Petrochemical plant (in Uttar Pradesh) is running at a utilisation rate of less than 40 percent.

GAIL commands a 70 percent market share in gas transmission. Any disruptions in its supply would impact the country.  If the war continues and gas supplies remain disrupted, India will have to pick up gas at a higher price.

While the fertiliser sector is under pressure, there is a bigger risk round the corner. COVID has raised its ugly head again in some important economies of the world. Here are two articles, one on the ground situation in China, especially on the availability of drugs and the second one on the response that the Indian government should take.

Investing insights from our research team

A portfolio of 19 stocks to stick with for a rewarding 2023

High on business moats, this week's Tactical Pick takes pole position

What else are we reading?

Does steep fall in Paytm, Nykaa stocks alter their risk-reward ratios?

Why Narayana Murthy is wrong even when he is right

Are ITC’s shares catching a budget chill?

Economic and social progress go hand in hand

Will India’s housing market be a global outlier in 2023?

India must step up Iran ties despite tough challenges

Investing in 2023: Equities still offer value in tough times (republished from the FT)

Elon Musk did it his way. Regrets? Banks have a few

Technical Picks: Jubilant FoodWorks, UCO Bank, Hindalco, BHEL and Copper (These are published every trading day before markets open and can be read on the app).

Shishir AsthanaMoneycontrol Pro​