Tighter energy norms to cut urea profitability; gas prices may cushion hit: Crisil
New Delhi, August 12
Tighter energy norms could reduce urea manufacturers' profitability by nearly 25% to around Rs 1,250 per tonne, while the impact could vary depending on gas prices, with higher prices potentially reducing the decline by Rs 75-100 per tonne this fiscal, Crisil said.
The rating agency said in its report, India's urea manufacturing capacity is broadly divided into two categories: legacy plants, which account for around 74 per cent of total capacity, and plants established under the New Urea Policy (NUP) 2012.
It noted, plants under NUP 2012 are assured a 12 per cent return on equity and remain insulated from the latest tightening of energy norms until the policy period expires. The legacy plants are heavily reliant on government subsidies, which contribute 80-85 per cent of their revenue.
Subsidy support comprises compensation for variable costs based on prescribed energy norms and a fixed cost component per tonne. The fixed-cost component for legacy plants was last revised in March 2007, while additional support introduced in 2020 only partly offset rising fixed costs, resulting in under-recoveries for several manufacturers.
Due to this, the operating profitability for legacy plants has become increasingly dependent on energy efficiency, with manufacturers retaining the benefit of savings achieved below prescribed norms. The government has tightened these norms to improve sectoral efficiency, most recently in April 2018 and October 2020.
By the end of FY25, the composite energy norm stood at around 5.77 Gcal per tonne, compared with actual consumption of about 5.5 Gcal per tonne.
"This difference translated into energy-efficiency gains of nearly Rs 1,300 per tonne. The composite norm has now been reduced to about 5.67 Gcal per tonne from April 1, 2025 onwards," Crisil noted.
With tighter norms, legacy urea plants are expected to undergo a structural reset. "Crisil Ratings expects energy-efficiency gains for these plants to decline, resulting in ~25% reduction in their profitability to ~Rs 1,250 per tonne from ~Rs 1,700 per tonne."
However, the impact is likely to be uneven, with a sharper hit for manufacturers more dependent on legacy urea operations and plants that benefited most from earlier efficiency-linked savings.
At the same time, gas prices will likely influence the eventual impact on profitability. Higher gas prices, including those stemming from the West Asia conflict, could partly offset the decline in profitability by around Rs 75-100 per tonne this fiscal.
"Going forward, the pace and effectiveness of energy-efficiency capex will bear watching. Any policy support, including an upward revision in fixed-cost reimbursement, could further cushion profitability," Crisil noted.
— ANI
Reader Comments
The irony is that India pushes for higher gas prices to cushion profitability, but we're importing most of our gas! A West Asia conflict driving up prices is not a "cushion"—it's a double-edged sword. The fixed cost for legacy plants hasn't been revised since 2007. That's nearly two decades! Policy makers need to look beyond short-term subsidy math.
As a farmer's daughter, this hits home. We already pay a premium for DAP and other fertilizers, and now urea might get costlier too. The 12% return for NUP plants is only for the lucky few. What about the old plants that feed most of our farms? Efficiency is good, but not at the cost of food security. Government should fix the fixed-cost component first.
Actually, this is a step in the right direction. India's urea plants are among the most inefficient in the world. Tightening norms from 5.77 to 5.67 Gcal/tonne may seem small, but it pushes modernization. The ones who complain are the same legacy operators who've been milking subsidies for decades. Time to upgrade or exit.
This is classic policy paradox! Tighter norms reduce profitability, but higher gas prices from a "conflict" cushion the decline? So we're hoping for geopolitical chaos to save our fertilizer industry? Why not just revise the fixed cost or speed up the approval of energy-efficiency upgrades? Indian bureaucracy at its finest. 😒
What about the environment? The composite norms dropping to 5.67 Gcal/tonne is actually good news for
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