Ups and Downs of the Yellow Phosphorus Market in 2007    

1  Surplus capacity

The rapid growth of the economy in China promoted drastic development of the yellow phosphorus sector from 1985 to 2004. The capacity of yellow phosphorus expanded rapidly from 100 000 t/a in 1985 to 1.2 million t/a in 2004 with an average annual growth of around 14.0%.
   The yellow phosphorus market was very brisk and the price was skyrocketing in 2004. Local producers all got great profits. Other enterprises followed to construct a lot of yellow phosphorus units in 2005 and 2006. By the end of 2006 China had more than 150 yellow phosphorus producers with the total capacity increasing sharply to nearly 1.9 million t/a with an average annual growth of around 26.5%.
   The yellow phosphorus sector started to be restricted by power supply and policies since 2007 and its expansion became slow. The data for the first half of 2007 show that the total capacity of yellow phosphorus is close to 2.0 million t/a in China. According to the projection, the demand for yellow phosphorus in China will be around 800 000 tons in 2010 and around 1.0 million tons in 2020.
   The sustained rapid growth of the economy in China has brought heavy loads to the energy supply. In peak power consumption periods the central government often has to restrict the power consumption in energy intensive industrial sectors. The yellow phosphorus sector is among those affected by the power restriction. The relatively high operating rate only happens in the high flow season - at most four months a year. In other periods the operating rate is basically maintained at less than 35%.

2  Export barrier

Starting from 2000 yellow phosphorus produced in China already held a leading position in markets of Asia, Latin America and Africa. China has become a major yellow phosphorus supplier in the international market. Global demand for yellow phosphorus has been kept at around 1.0 million tons a year with no great changes. China produces over 50% of yellow phosphorus in the world in recent years and exports around 15% of its output. Yunnan, Sichuan, Guizhou and Hubei provinces are major yellow phosphorus producing regions in the world.
   The yellow phosphorus production is a sector with high energy consumption and high pollution. The Chinese Government eliminated the 8% export rebate for yellow phosphorus on January 1st, 2005 and the export cost of yellow phosphorus was increased by more than US$100 per ton higher than ever before. The export amount of yellow phosphorus, however, still reached 50 900 tons from January to June that year, an increase of 22.62%. The average FOB price was US$1 679.97 per ton, an increase of 23.47%. The negative impact on the cost caused by the elimination of export rebate was basically offset. The elimination of the export rebate caused the output to slow down, but the price of yellow phosphorus had considerable elasticity and the gross profit at producer side was even higher.

Output and Export of Yellow Phosphorus in China from 2000 to H1 2007
       (thousand tons)
Year    2000    2001    2002    2003    2004    2005    2006    2007 (Jan. - June)
Output    493        595        620        670        730        670        770        360
Export    124.5    149.5    165.7    139.3    109.9    99.3    79.0    33.5
FOB price (US$/t)
    999.7    886.3    891.5    958.5    1 486.3    1 683.2    1 662.3    1 674.8
Source: CNCIC


   On June 1st, 2006 the Chinese Government increased the export tariff of yellow phosphorus to 20%. The export amount was 79 000 tons in 2006, a drop of 20.42%. It seems that the government is determined to rectify sectors with high energy consumption, including yellow phosphorus production. The development prospect of the yellow phosphorus industry is full of worries.

3  Market price ups and downs

The demand for yellow phosphorus in China has been maintained at a level of 600 000 tons with no great changes for many years. The major factor for the price change is the supply. The supply of yellow phosphorus in China is influenced by the supply of hydraulic power and the change of production capacity. The period from May to September is the high flow season in China. During that period power suppliers have the ability to provide adequate hydraulic power to the yellow phosphorus industry. Yellow phosphorus producers therefore increase their operating rate, the supply amount in the market increased drastically and the price goes down. The power supply becomes tense after September, the output of yellow phosphorus is down, the supply amount in the market is reduced and the price goes up. If there is no policy intervention, the price rise will last up to early May of next year. The price reaches the peak in May and then starts to come down. Both the overall capacity to produce yellow phosphorus and the supply of power have changed dramatically in recent years. There are also impacts from the administrative intervention of the central government. The price trend of yellow phosphorus is therefore quite bewildering.
   In the first half of this year the selling price of yellow phosphorus was RMB10 000/t-RMB10 600/t, being lower than its average production cost of RMB10 822 per ton and producers suffered a serious loss. The price of yellow phosphorus was still low in early July. Power consumption restriction started to be imposed on sectors with high energy consumption (including the yellow phosphorus production) in Yunnan from July 2nd to mid August. Most sites producing yellow phosphorus in Yunnan province discontinued production. Except for a few producers with small hydraulic power stations of their own, all units have discontinued production. The output of yellow phosphorus in Yunnan province has been reduced by nearly 70% - 80%. The supply shortage of yellow phosphorus has led to a price rise in the domestic market.

4  Small price float in H1 2007

    (1) Energy supply

In normal cases the power cost accounts for around 60% of the total yellow phosphorus production cost in China. Based on the present process level in the world, producing one ton of yellow phosphorus consumes 14 000 kWh of power. There is almost no possibility for a downward readjustment to the power price in industrial sectors.

   (2) Raw material cost

Yellow phosphorus production in China depends on phosphate ore. The cost of phosphate ore is around 25% of the total production cost. Producing one ton of yellow phosphorus to consumes 8-9 tons of phosphate ore. Production of yellow phosphorus has strict requirements on the quality of phosphate ore, so not all kinds of phosphate ore can be used to make yellow phosphorus. More than 70% of phosphate ore is supplied to chemical fertilizer producers. The phosphate fertilizer sector in China enjoys support from the government. It has a strong d