India revises gas procurement rules for fertilizer firms

India has revised the gas procurement policy for fertilizer companies, allowing them to buy about a fifth of their monthly needs through the domestic spot market to help the government cut its subsidy bill, reports Reuters.

The federal government provides financial support for domestic fertilizer sales at rates below the market to insulate farmers from high prices and to contain inflation.

The government expects to cut its fertilizer subsidy bill by up to 240 billion rupees if the fifth of companies' supplies is bought through bilateral contracts or gas exchange, said one of the government officials, who declined to be identified.

India, which imports up to 40% of the 50 million tons of fertilizer annually, has been hit hard by rising prices after Russia's invasion of Ukraine disrupted supplies. Russia is a major fertilizer producer.

Early last month, Fertilizers Minister Mansukh Mandaviya said that due to higher global prices, India's fertilizer subsidy bill for the fiscal year would rise to a record 2.25 trillion rupees from about 1.5 trillion rupees the previous year.

"To help rein in the fertilizer subsidy bill for next fiscal, the fertilizer ministry is trying to rework the mechanism of how gas is procured by fertilizer plants," said a second government official, who also declined to be identified.

Both of the officials are directly involved in the issue but are not authorized to speak to media.

The government has amended 2015 gas procurement guidelines under which fertilizer plants had to procure 80% of their gas through long-term contracts, and the balance through three-month tenders, they said.

"Three-month prices are high as there is lot of padding and hedging by suppliers, more so since there is so much volatility in global gas prices," the first official said.

Under the revision, fertilizer companies will have to buy 40% of their supplies under a "take or pay" rule, in contrast to no minimum purchase required under the guidelines previously, the official added.

The "take and pay" rule led to shares of state-run fertilizer companies, National Fertilizers Ltd, Rashtriya Chemicals and Fertilizers Ltd, falling by 4% to 5% after the news, under performing the broader index.

Fertilizer plants can source gas through the Indian Gas Exchange and inter-company contracts. The new rule also allows fertilizer companies to withdraw tenders if they feel the bidding has led to higher-than-expected prices.

Fertilizer plants bought gas at US$38 per million British thermal units (mmBtu) for supply in the October-December quarter through a tender. The maximum price quoted in the tender was US$55 while gas was available at the Indian Gas Exchange and bilateral markets for US$15 to US$20 per mmBtu.

Asia's third-largest economy needs crop nutrients to feed its huge agriculture sector, which employs about 60% of the workforce and accounts for 15% of nearly US$3 trillion economy.