DEPARTMENT OF FERTILIZERS

BRIEF ON FERTILIZER SECTOR FOR ECONOMIC EDITORS

CONFERENCE ON 7.11.2006 AT 2.30 PM
…

1. PRODUCTION – CONSUMPTION

Production of urea during Kharif 2006 has been 97.61 lakh MTs as compared
to 101.32 lakh MTs in Kharif 2005. Production of DAP has been 24.70 lakh MTs in
Kharif 2006 as compared to 20.94 lakh MTs during Kharif 2005. However, the
gap has been compensated by higher imports of about 18.16 lakh MTs in 2006 as
compared with the 11.76 lakh MTs during Kharif 2005.

Production of complex grade fertilizers during Kharif 2006 was 33.62 lakh
MTs as against the 30.27 lakh MTs during the corresponding period of last year
registering an increase of 11.1%.

During Kharif 2006 season, as against the requirement of 122.37 lakh MTs of
Urea, 33.10 lakh MTs of DAP and 14.66 lakh MTs of MOP, the availability had been
124.93 lakh MTs, 48.85 lakh MTs and 19.6 lakh MTs respectively. The provisional
sale of Urea, DAP and MOP during Kharif 2006 had been 113.65 lakh MTs, 32.06
lakh MTs and 9.99 lakh MTs which is higher by 5.55%. 27.37% in respect of urea
and DAP respectively, while sale of MOP has been lower by about 24.6% as
compared to the sale during Kharif 2005.

During the current Rabi 2006-07 season as against the requirement of 127.08
lakh MTs of Urea, 48.19 lakh MTs of DAP and 18.57 lakh MTs of MOP, the
availability is expected to be about 127.32 lakh MTs of urea, 53.09 lakh MTs of
DAP and 22 lakh MTs of MOP.

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 Severe floods in Gujarat State lead to disruption of Gas Supplies through HBJ
pipeline and closure of KRIBHCO’s Hazira Plant leading to loss in production of
urea of about 1.32 lakh MTs.

In order to meet the very heavy demand for fertilizers in 2006-07, high level
of imports of urea on Government account have been arranged during the year.

2. New Pricing Scheme for urea units

A group based New Pricing Scheme (NPS) for urea units replacing the cost
plus Retention Price Scheme (RPS) was introduced with effect from 1.4.2003. The
primary consideration and goal of the NPS is to encourage efficiency parameters of
international standards based on the usage of the most efficient feedstock, state-of-art
technology.

NPS is being implemented in stages. Stage-I was of one-year duration, from

1.4.2003 to 31.3.2004. Stage-II is of two years’ duration from 1.4.2004 to 31.3.2006.
The Department of Fertilizers has fixed normatively determined efficiency promoting
pre-set energy levels per tonne of urea and are effective from 1.4.2004. Reduction in rates
of concession during Stage-II of NPS on account of reduction in capital related charges
have also been announced, which are effective from 1.4.2004.

3. FORMULATION OF POLICY FOR UREA UNITS FOR STAGE-III

At the time of introduction of NPS, it was envisaged that the modalities of Stage-
III would be decided by DOF after review of the implementation of Stage-I and Stage-II.
Accordingly, a Working Group was constituted under the chairmanship of Dr. Y.K.
Alagh to review the effectiveness of Stage-I and II of NPS and for formulating a policy
for urea units for Stage-III commencing from 1.4.2006. The Working Group was also
asked to examine issues pertaining to formulation of feedstock policy especially with
regard to nature, pricing and availability, demand and supply of urea upto the end of 11th
Five Year Plan, fixing milestones for conversion of existing naphtha and FO/LSHS based

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units to NG/LNG, mode of determination and methodology of payment of concession to
urea units, de-control of movement and distribution of urea, balanced fertilization
through urea pricing etc. The Working Group has submitted its report on 26.12.2005.

Recommendations of the Working Group have been examined in the Department

of Fertilizers in consultation with the fertilizer industry and concerned Ministries of the
Government of India with a view to formulate a policy for urea units for Stage-III of
NPS. Formulation of policy for Stage-III of NPS for urea is under active consideration of
the Government and is expected to be finalized soon.

4. PRICING POLICY FOR INVESTMENT MADE IN NEW AND

EXPANSION UREA PROJECTS
A pricing policy was announced on 29.1.2004 for setting up new urea projects and
expansion of existing urea projects for augmenting the domestic production capacity of
urea to meet the growing demand for enhancing the agricultural production in the
country. The new policy will enable the entrepreneurs to decide about their investment
plans in the fertilizer sector. The new policy will encourage setting up of plants with
international efficiency standards for fresh investment in new projects and expansion of
existing units. The new and expansion urea units will be based on natural gas/LNG as
feedstock which is the most cost effective and the least polluting feedstock in fertilizer
sector today.

The following companies are considering for setting up of expansion projects:

S. No. Name of the Unit Proposed capacity

(LMTPA)
1. KRIBHCO- Hazira 10.56
2. Indo Gulf- Jagdishpur 11.385
3. RCF, Thal 11.55
33.50

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5. POLICY FOR TREATMENT OF DE-BOTTLENECKING/REVAMP/
MODERNISATION OF EXISTING UREA UNITS

The Policy announced in January 2004 recognizes the efficiency and environment
friendliness of natural gas. According to the policy, de-bottlenecking/revamp/
modernization will also be allowed if the additional production comes from using natural
gas/LNG as feedstock. The policy envisages that the measures proposed by the applicant
fertilizer units for the de-bottlenecking/revamp/modernization of the plant would result at
least in 10% increase in existing urea production capacity. Such investments contributing
to additional capacity from existing urea plants have also been given significant
incentives under the new policy, in the form of retention of energy saving gains and
coverage of this additional capacity in the existing concession scheme for urea units
under certain conditions.

The Working Group has made certain recommendations with regard to existing
policy for de-bottlenecking and the same are under examination as part of the policy for
Stage-III of NPS. In this context, a policy for incentivising additional production from
existing gas based urea units beyond 100% of their installed capacity with a view to meet
the growing demand of urea and to reduce dependence on imports is under consideration
of the Government.

The following companies are considering creation of additional capacity by way

of de-bottlenecking/revamp/modernization of their existing urea units:

S. No. Name of the Unit Proposed capacity

(LMTPA)
1. Indo Gulf- Jagdishpur 2.442
2. CFCL-Gadepan-I 2.90
3. CFCL-Gadepan-II 2.244
4. TCL-Babrala 2.90
5. NFCL-Kakinada-I 2.60

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 6. NFCL-Kakinada-II 2.60
7. IFFCO-Aonla-I 1.353
8. Aonla-II 1.254
9. IFFCO-Phulpur-I 1.254
10. IFFCO-Phulpur-II 1.254
11. SFC-Kota 0.415
12. RCF-Thal I & II 3.97
Total 25.186

6. POLICY FOR CONVERSION OF EXISTING NON-GAS BASED UREA

UNITS TO NATURAL GAS/LNG FOR FEEDSTOCK/FUEL

In January 2004 Government also formulated a policy for conversion of existing

naphtha/FO/LSHS based urea units to natural gas/LNG as feedstock. The plants based on
naphtha/FO/LSHS are less energy efficient and have a higher production cost. Therefore,
the policy aims to encourage early conversion to natural gas/LNG so that they acquire a
competitive edge in the deregulated and liberalized economic scenario. With a view to
encouraging investments for switchover to NG/LNG as feedstock, the investor is assured
that savings on account of energy efficiency after conversion would be retained by the
plants for a maximum period of 5 years in respect of naphtha based plants and 10 years in
respect of FO/LSHS based plants. Switchover to NG/LNG as feedstock would also result
in a significant subsidy saving.

The Working Group has made certain recommendations with regard to existing
policy for conversion of non-gas based units to NG/LNG and the same are under
examination as part of the policy for Stage-III of NPS.

Naphtha based urea units situated in the vicinity of HBJ pipeline have already
started taking steps for conversion to natural gas/R-LNG. Gadepan-II unit of Chambal
Chemicals & Fertilizers Limited (CFCL) and Phulpur-I & Phulpur-II units of IFFCO

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have already converted to NG/LNG. Shriram Fertilizer’s naphtha based urea unit at Kota
is expected to switchover by the end of the current financial year.

Conversion of non-gas based urea units to natural gas/LNG will result in a subsidy
saving of about Rs. 3300 crore per annum.

7. Tying up availability of gas/LNG and its connectivity to fertilizer plants:

With a view to preparing a credible plan of action for conversion of non-gas based
units to natural gas/LNG and securing supplies of natural gas/LNG for fertilizer units, the
Department has actively pursued these issues with the Ministry of Petroleum & Natural
Gas and the prospective suppliers of NG/LNG. As per the position emerging from the
deliberations held with Ministry of Petroleum & Natural Gas, it has come out that that the
domestic gas availability scenario will remarkably improve from 2008-09 and there
should be no problem of general availability of gas/LNG from the year 2008-09 onwards.

On the issue of pipeline connectivity, it is stated that broadly 37 urea units (28
functional units, 2 units under shutdown and 7 closed units of HFC and FCI) can be
placed in 5 categories, namely (a) 13 gas based units on the HBJ pipeline (b) 9 gas based
units on other pipelines (c) 5 naphtha based units (d) 3 fuel oil/low sulphur heavy stock
(FO/LSHS) based units (excluding GNVFC-Bharuch, which currently uses FO/LSHS as
feedstock for urea but has gas connectivity) and (e) 7 closed units of HFC and FCI.

While connectivity already exists for the units in the first two categories, it is
likely to be available in the next 3 to 4 years, in respect of other units too, except in
respect of units at Goa, Mangalore and Tuticorin. These three units will have to explore
alternative feedstock like Coal Bed Methane (CBM) and Coal Gas. It is expected that
adequate gas supply would be available to all the functional units by 2008-09 and for 7
closed units by 2009-10.

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8. CONCESSION SCHEME FOR DECONTROLLED P & K FERTILIZERS

Government of India decontrolled all phosphatic & potassic fertilizers w.e.f.

25.8.1992 on the recommendations of the Joint Parliamentary Committee. To ensure
unform price of these fertilizers throughout the country, the Government of India
announced indicative MRPs w.e.f. 1.4.1997 of these fertilizer under the Concession
Scheme except for SSP. The MRP of SSP is being announced by the State Governments.
The present MRPs and the concession rates of decontrolled fertilizers are given below:

(Rs./per Mt)

Product MRP as on date Base Concession Rates for 2006-07

DAP 9350 Indigenous DAP - Rs. 6355
Imported DAP - Rs. 5206
MOP 4455 Rs. 5972
Complexes 6980 - 9080 Group I - 2053 - 6205
Group II - 4020 - 7163
SSP MRP fixed by State Rs. 975
Governments.

9. EXPERT GROUP UNDER CHAIRMANSHIP OF PROF. ABHIJIT SEN

Cabinet Committee on Economic Affairs while approving the phosphoric acid

prices for the year 2004-05 directed Department of Fertilizers to evolve a methodology
for working out concessions of P&K fertilizers based on the international prices of DAP
to be adopted as a benchmark. Accordingly, Department of Fertilizers had constituted an
Expert Group under the Chairmanship of Prof. Abhijit Sen, Member Planning
Commission to examine the issues related to pricing of P&K fertilizers.

Expert Group submitted its report in December 2005. After examination of

recommendations of the Expert Group, Department of Fertilizers decided to place the
recommendations before CCEA for approval and accordingly, circulated a draft CCEA
note for inter ministerial consultation. Department of Commerce in their comments

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stated that in the new proposed dispensation of concession to indigenous DAP as
recommended by the Expert Group, the third component of subsidy which is payable to
indigenous DAP manufacturers is discriminatory under WTO guidelines. Since this
component is payable to domestic manufacturers only, it can not be treated as a pass
through to farmers and hence is discriminatory in nature.

Department of Commerce suggested that in lieu of third component to domestic

manufacturers, the present custom duty of 5% on imported fertilizer inputs may be
reduced to zero, while keeping the custom duty on imported finished fertilizers at the
current level of 5%. Alternatively, the third component of subsidy should be recast and
reflected as payments by the Government to the domestic manufacturers through a public
funded Government programme either for research and development or payment for
extension and advisory services. However, this re-crafted component should not have
any linkage with the price of the fertilizer or the level of the production.

In view of the comments received from Department of Commerce, Department of

Fertilizers has constituted an Inter Ministerial Group ( IMG ) to examine the following
issues :-
1. Benchmarking of concession on indigenous DAP with imported DAP especially
in light of WTO provisions and Expert Group recommendations.
2. Linkages of subsidy on SSP with that of indigenous DAP.
3. Rationalization of Concession Scheme on complex fertilizers with reference to N,
P, K pricing & “other costs”.
4. Rationalization of MRPs of complex fertilizers.
5. Review of performance of the normated phosphoric acid formula which is being
implemented in the year 2006-07.

The IMG is required to submit its report shortly. However, in the meantime
Government has accepted the formula recommended by Expert Group in their interim
report for working out the normative derived price of phosphoric acid based on
independent transparent parameters of international prices of DAP, Ammonia and freight.

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The concession rate for the phosphatic fertilizers are being worked out based on the
derived price of phosphoric acid during the year 2006-07.

10. AMOUNT OF SUBSIDY/CONCESSION SPENT ON UREA AND

DECONTROLLED PHOSPHATIC AND POTASSIC FERTILIZERS

The amount of subsidy/concession spent on urea and decontrolled phosphatic and

potassic fertilizers from 1992-93 to 2006-07 is given in the table below:-

Rs. in crore
Period Amount of Amount of subsidy disbursed on Total for
concession urea all
disbursed on Indigenous Imported Total for fertilizers
decontrolled urea urea urea
fertilizers
1992-93 339.73 4800.00 996.11 5796.11 6135.84
1993-94 517.34 3800.00 598.97 4398.97 4916.31
1994-95 527.95 4075.00 1166.00 5241.00 5768.95
1995-96 500.00 4300.00 1935.00 6235.00 6735.00
1996-97 1671.77 4743.00 1163.08 7577.85 7577.85
1997-98 2596.00 6600.00 721.96 9917.96 9917.96
1998-99 3789.94 7473.00 124.22 11387.16 11387.16
1999-2000 4500.00 8670.00 74.07 13244.07 13244.07
2000-01 4319.00 9480.00 0.98 13799.98 13799.98
2001-02 4503.52 8257.00 47.34 12807.86 12807.86
2002-03 3224.52 7790.00 0.00 7790.00 11014.52
2003-04 3326.00 8521.00 0.00 8521.00 11847.00
2004-05 5142.18 10243.15 493.91 10737.06 15879.24
2005-06 6596.20 10460.17 1398.07 11858.24 18454.44
*2006-07 (BE) 5749.00 10410.37 1093.54 11503.91 17252.91
+ Ist 600.00 900.00 1500.00
Supplementary

Total 6349.00 10410.37 1993.54 11503.91 18752.91

* The actual requirement for financial year 2006-07 has increased to Rs. 32,840.30
crores (Gross) which includes Rs. 26926.36 crores for the current year and Rs.
5913.94 crores as carry-over liability from financial year 2005-06.

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11. RAILWAY FREIGHT

The concession rates for decontrolled P&K fertilizers are being worked out based
on recommendations of the Tariff Commission. The quarterly final concession rates are
being updated with reference to the prevailing prices of raw material and US$/Re.,
exchange rate as per the formulae recommended by Tariff Commission. There is no
provision in escalation/de-escalation in the other cost components particularly increase in
Rail Freight etc. announced by the Indian Railway.

The Indian Railway has increased the freight on Fertilizers by way of change in the
Classifications w.e.f. 1.12.2005 and again w.e.f. 1.6.2006. Due to increased cost of
transportation, the P&K manufacturers/importers are reluctant to go to farther distance
particularly to the Northern States which are away from the place of manufacturing
activities/ports. This is leading to tight availability position of these P&K fertilizers in
the Northern States. The FAI and the manufacturers/importer have represented to this
Department to give the increase in freight component in case of decontrolled fertilizers
on the same line as being allowed in case of urea.

Keeping in view of the above, Department of Fertilizers has prepared a proposal of

increase in Rail/Road freight components for consideration of CCEA. At present the note
has been circulated for Inter Ministerial comments. The proposal will be put up for
consideration and approval of CCEA after incorporating the views/comments of the
concerned Ministries/Department.

12. INDO OMAN FERTILIZER PROJECT

Oman India Fertilizer Company’s (OMIFCO) project in Oman is a mega joint venture
project conceived in the Sultanate of Oman. The project is promoted by Indian Farmers
and Fertilizers Cooperative Ltd. (IFFCO) and Krishak Bharati Cooperative Ltd.
(KRIBHCO) and Oman Oil Company from the Omani side. The Indian sponsors
together hold 50% of the equity of OMIFCO and have contributed US $ 80 million each
(approximately Rs. 370 core each) and the remaining equity of US $160 million is held
by Oman Oil Company. The Indian sponsors have a major role in setting up, operation

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and maintenance of this plant in Oman. This is a manifestation of recognition of Indian
competence and experience in the field of setting up and operation of mega fertilizer
plants international standards.

The plant was commissioned in July, 2005 to produce 16.52 lakh tones of urea
and 2.48 lakh tones of surplus ammonia per annum. The Government of India has
entered into a long-term buy back arrangement for urea produced for first 15 years at
pre-determined price. This buy back arrangement will also help in stabilizing the
international prices of urea and ammonia for the Indian consumers/importers. A total of
13.25 lakh Mts of urea was imported during the year 2005-06 and 9.57 lakh Mts of urea
has been imported during April – September 2006, from OMIFCO project. The fixed
price of imported urea from Oman is much cheaper than the present prevailing
international prices.

13. Exploration of possibilities for JV Urea projects abroad.

As the cost of gas in countries, such as Kuwait, Iran, UAE, Nigeria etc., which have
large reserves of gas, is less than US $ 1/MMBTU as compared to APM NG price of
about US $ 2.5-3.0 MMBTU and PLL’s RLNG price of about US $ 5/MMBTU, the
Department is exploring the possibilities of setting up urea JV projects abroad with buy
back arrangements or for entering into long-term arrangements for procuring feedstock
from abroad.

The Department is holding negotiations with Kuwait, Vietnam, Saudi Arabia, Iran,
Myanmar, Syria, Nigeria and Angola for exploring the possibilities of setting up JVs in
these countries or for tying up long term supplies of natural gas etc. We are also looking
for their collaboration in revival of closed urea units.

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14. EXPLORATION ON JOINT VENTURES PRODUCTION FACILITIES
WITH BUY BACK ARRANGEMENTS IN OTHER COUNTRIES.

India is mostly dependent on imported raw material for production of Phosphatic

and Potassic fertilizers. The Government has been encouraging Indian Companies to
establish Joint Ventures production facilities with buy back arrangement in other
countries which have rich reserves of Rock Phosphate and Potash. The Department of
Fertilizers and the Indian fertilizer industries has been exploring such possibilities in
sourcing phosphate economically by entering into Joint Venture projects in the countries
like Jordon, Morocco, Tunisia, Algeria, Egypt, Senegal, Syria and Saudi Arabia. Already
there is substantial progress by the Indian entities at Jordan and Morocco which are rich
in phosphate deposits and are amongst the biggest producers of phosphate in the World.
Indian delegation led by Secretary (Fert.) visited these countries and held discussions
with the Government officials and major companies in phosphate sector located there.
The area of cooperation as well as investments in this sector are mainly for entering into
collaboration with major companies in mining of rock phosphate and downstream
processing by setting up Joint Venture phos acid plant. Similarly, exploration on the
possibilities for sourcing potash economically from countries like Argentina, Belarus and
Thailand are also ongoing actively and there is a good progress in this regard.

15. BALANCED USE OF FERTILIZERS

A Task Force on the “Balanced use of Fertilizers” constituted by Department of

Agriculture & Co-operation submitted its report in 2005-06. The task force recommended
for nutrient based subsidy instead of the present product-based regime of subsidy. In
addition to it, the Task Force recommended for encouragement to the usage of organic
manure, bio-fertilizers and NPK mixture fertilizers and their judicious use with chemical
fertilizers. It impressed upon the application of nutrients, which are soil specific and
crop/climate specific. The Task force recommended that the basket of the fertilizers
subsidy may be extended to other fertilizers such as those covering secondary and
micronutrients to ensure to its optimal use by the farmer for mitigating the deficiencies
and sustaining balanced fertilization. It also recommended for strengthening the soil
testing laboratories, fertilizers quality control laboratories and to prepare soil fertility

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maps in the country. Further, it recommended for fortification of the major fertilizers
with the appropriate grade of secondary/micro nutrients, customized and value added
fertilizers.

An Inter Departmental Group under the chairmanship of Secretary (Agriculture)

was set up to look into the recommendations of the Task Force and comment on its
relevance, suitability and implementability by Department of Fertilizers, Department of
Agriculture & Co-operation and other concerned Ministries/Departments of Government
of India. So far, the Group has held its two meetings. The first meeting was held on
17.4.2006 under the chairmanship of Secretary (Agriculture) and the second was held
under the chairmanship of Secretary (Fertilizers) on 16.6.2006. The report of the Inter
Departmental Group is awaited.

16. REVIVAL OF CLOSED FERTILIZER UNITS

The Union Cabinet had in September, 2002 decided to close down entire Hindustan
Fertilizer Corporation Ltd. (HFCL), Fertilizer Corporation of India Ltd.(FCI) excepting
its Jodhpur Mining Organization (JMO) and Dehradun & Saladipura unit of Pyrites,
Phosphates & Chemicals Ltd.(PPCL) due to their unviability. The decision to close the
remaining unit of PPCL at Amjhore unit and the entire company was taken on 5.6.2003.

Keeping in view the need for generating various options for revival of closed units
of HFC and FCI, in keeping with the national commitment of the UPA Government and
the requirement of fertilizer production in Eastern Region of the country, which does not
have any urea production capacity at present, the Department is examining the revival of
closed urea units of HFC and FCI based on natural gas/LNG/CBM/coal gas. With the
concerted efforts of the Department of Fertilizers, a plan of action for availability of gas
and pipeline connectivity for the revival of closed units has been firmed up with the
Ministry of Petroleum & Natural Gas.

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17. FINANCIAL RESTRUCTURING OF FACT AND MFL

The Board for Reconstruction of Public Sector Enterprises (BRPSE) has

recommended the financial restructuring in respect of Fertilizer and Chemicals
Travancore Ltd. (FACT) and Madras Fertilizer Limited (MFL). Pursuant to
recommendation of BRPSE, the CCEA has already approved the financial restructuring
proposal in respect of FACT on 30.03.2006.

As regards MFL, the Department is working on various options for financial

restructuring of company including exploring the possibility of its merging with a profit
making fertilizer PSU/Cooperative society under administrative control of the DOF or
making it a subsidiary of such PSU. The Department has recently released Rs. 63 crore
at one go so that the production operations of the plant do not suffer.

***

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