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Uncertainty over gas demand in India-VI: The next big surprise can come from the fertilizer industry
Jul 05: The next big crisis that gas suppliers will face can emanate from the fertilizer industry.
8Policy makers will face a classical battle when new urea capacities -- from a series of new Rs 6000 crore ammonia-urea plants -- come into existence.
8They will have to decide between either highly subsidizing these high cost urea units to produce domestically or import urea, which the international suppliers' lobby will price significantly below the cost of production in India. This is because global suppliers have access to low cost gas and India has been the world's largest importer of urea.
8Since the government does not want to raise the price of urea, if the new capacity is funded through LNG, the cost differential will balloon and it will have to be borne by the government by way of a significantly higher subsidy bill. The finance ministry will have to fund the subsidy.
8If the international supplier lobby keeps the price of urea at a significantly lower level, which they are quite capable of doing if their fixed costs are covered, policy makers may well decide to keep new fertilizer capacities shut in India, albeit temporarily, if the opportunity cost of imports is lower.
8The other option will be to allocate higher quantity of low cost gas to these urea units to keep them "competitive" at the cost of allocations to other sectors.
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