Fertiliser makers are looking at another year of delayed subsidy payments from the government, which will step up pressure on their credit profiles. The fertiliser subsidy requirement, including past arrears, increased to R1.05 trillion for FY14 against a budgeted R680 billion. The number is set to bloat afresh in FY15 due to higher arrears carried forward in the current year and increase in subsidy burden due to gas re-pricing, even as budgeting by the government remains flat.
For fertiliser makers, this sets the stage for another year of delayed payments from the government, with subsidy arrears expected to touch an all-time high of R450 billion by the end of the FY15 or about 28% more than the R350 billion likely to be seen at the end of the current fiscal.
The stretch in subsidy receivables for CRISIL-rated fertiliser manufacturers, which stood at 116 days of sales in FY13, is likely to increase to 127 days in
FY14. Subsidy bills for many fertiliser manufacturers have been cleared till mid-November through the second tranche of Special Banking Arrangement but further payments of current fiscal might be rolled over to next year.
The introduction of nutrient-based subsidy (NBS) in complex fertilisers has helped the government contain its bill on phosphate and potash fertilisers. The subsidy for urea continues to be vulnerable to increasing share of expensive regassified liquefied natural gas (RLNG) in total gas consumption for indigenous urea manufacturing and farm gate prices of urea not being cost reflective. For imported urea, the sharp correction in import parity price (IPP) in FY14 has worked favourably. Averaging $320 per metric ton (MT) in FY14, IPP has moderated from the peak of $457 per MT witnessed in FY12.
Re-pricing of domestic gas from April 1, 2014, will, however, crank up the Centre's subsidy burden. As per Ministry of Petroleum and Natural Gas’ notification of January 2014, the price of natural gas will be made market-driven and linked to international benchmarks. This could result in a significant increase in domestic gas prices from the current levels of $4.2/mmBtu. In FY13, nearly 70% of gas requirement of the indigenous urea manufacturers is estimated to have been met from domestic gas. The increase in the price of domestic gas will raise the subsidy burden on the indigenous urea manufacturers using the feedstock. For every $1/mmBtu increase in the price of gas, the government’s additional subsidy outgo is estimated at R3,000