Indian urea makers will make lesser money now

**Akshara** (0:04)
In today's episode, we'll break down an interesting story. We'll talk about Indian urea makers making lesser money now.
Welcome back to The Daily Brief by Zeerudha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Thursday, 20th August. Coming to the first story.
So we were reading a crystal report last week with a fairly dry headline. Tidier energy norms are going to cut the profitability of urea makers by about 25 percent. Our reaction was, well, maybe this is business as usual. The government tells factories to burn less fuel, factories grumble, spend money on new equipment, and margins take a hit for a while. And we've seen various versions of this play out in steel, cement, and refining. But the urea case was a bit peculiar. In short, the government moved one number in a formula from 5.77 to 5.67, and chrysal reckons that alone will take operating profit for these plants from about rupees 1,700 a ton to about rupees 1,250.
So we went digging. And it turns out, urea plants don't make money the way you would assume. See, in many industries, an energy norm is one among many standards you have to meet. In urea, the energy norm itself is a very large determinant of profits. That's the story we'll be narrating today. But before we get there, how does a urea plant actually work? A urea plant is essentially a gas plant making fertilizer. So you take natural gas, turn it into ammonia, and then combine that ammonia with carbon dioxide to make small white prills of urea, which are eventually used by farmers.
Gas is both a key raw material to make urea, and also the fuel that runs the whole energy hungry process. So naturally, a useful measure of how efficiently a urea plant runs is how much energy it uses to make one ton of urea. And that's measured in giga calories per ton, or Gcal per tea. On average, Indian urea plants collectively consumed about 5.5 Gcal per tea last fiscal. Now in a normal business, the less Gcal per tea you use, the more profitable you are. But urea is not a normal business. The person using the product is not really paying its full economic cost, because urea is sold to farmers at a price the government controls at levels that have barely moved for years. That price doesn't move around with gas costs, plant expenses, or global urea prices. So the government keeps it low to make fertilizer affordable for farmers, and a sharp increase would have serious consequences for farm economics. So they bear the price on behalf of the farmer with a subsidy. Now, the tempting way to think about this is that the company sells urea, earns revenue, and then gets some subsidy on top from the government. Well, yes, but for legacy urea plants, the subsidy is the revenue. As per Cricil, subsidy inflows make up about 80-85% of revenue, which raises the obvious question. If the government is paying for most of it, how does it decide what to pay?
For legacy plants, the subsidy calculation has two core cost components. The first is fixed cost compensation, which is a defined rupees per ton amount meant to cover costs that don't change much with production, like staff, maintenance, and the general expense of keeping a large industrial plant running. Now you would expect that amount to be revised over time as costs rise, right?
Well, the last time the base fixed component was revised was March 2007
There was some additional support in 2020 for certain plants, but it only partly offset the rise in fixed costs, and in simpler terms, several Urea manufacturers still weren't recovering enough to cover their fixed costs. The second cost component is variable cost compensation, which covers costs that move with production. Now, energy is a big part of this, and because the fixed cost side wasn't recovering enough, plants increasingly depended on what they could make on the variable side for their profitability.
Now say you're the government, and you're paying a plant's energy bill. You could simply say, send me your gas invoices, and I'll settle them. But that wouldn't be a great idea. If a plant gets reimbursed for whatever it burns, it has very little reason to burn less and be more efficient. So instead, the government says, for every ton of urea you make, I'll calculate your energy compensation, assuming you consumed a specific amount of energy.
So that specified amount is the energy norm. Burn more than the norm and you bear the extra cost. Burn less than it and you get to keep the savings. And this was what urea plants banked on to survive. Now, last fiscal year, the composite norm by the government was set at 5.77 Gcal per tonne, while the actual industry consumption was around 5.5 Gcal. So that left a positive gap of 0.27 Gcal per tonne. And this is the amount of energy that industry saved and made surplus money on. In rupee terms, that translated to rupees 1,300 per tonne of profitability for the urea plant. Now compare that with total operating profitability of roughly rupees 1,700 per tonne. Nearly 75% of operating profitability from urea for these plants was linked to energy efficiency gains. Now, the government announced the new norm on July 30th, 2026, but made it applicable retrospectively from April 1st, 2025