Phosphorus Chemical Firms to Regroup

Chinese authorities raised the power price for yellow phosphorus makers, effective June 1st, by 50% or 100%, indicating that the government hopes to control the overcapacity in this energy-intensive industry. This possibly causes a new round of regrouping in this industry that has already withstood the pain that triple overcapacity brought about. The leading phosphorus companies expect more elimination than ever before because the regrouping can help them to beat off the numerous small scale competitors, although they themselves need to address the pressure caused by increased power prices. Eighteen months earlier, China upgraded the entry threshold for the yellow phosphorus industry (announced January 1st, 2009, CCR 2009 No.2 page 6) aiming to control new projects and eliminate small, outdated factories. That policy was judged by some players to stimulate the existing makers to expand their capacity.
   According to ChinaCCM, China's yellow phosphorus capacity amounted to 2.2 million t/a as of the end of 2009 while the output in 2009 was estimated to be around 650 thousand tons, representing a capacity utilization rate of 30% on average. China's ever-leading phosphorus company Yunnan Malong Industry Group Co Ltd is capable of producing 166 thousand tons of yellow phosphorus annually. It reported a 50.3% capacity utilization rate in 2009. The company understood that this governmental policy will play an important role in reducing the outdated factories and leaving a bigger market share for the dominating companies.
   Presently, yellow phosphorus is offered at RMB12 200-RMB12 500 per ton ex-factory. The cost was reportedly RMB12 500 per ton on average before June 1st and then around RMB13 200 per ton on June 11th. Of course, the new policy has no impact on those companies that own hydraulic power generators.
   For the purposes of the Chinese government, the policy can also help to slow the depletion of mineral resources.
   Not limited to phosphate rock reserves, other chemical minerals in China also have been consumed rapidly given the brisk economy in recent years. Such a status has made the government place more emphasis on protecting the nonrenewable resources in order to ensure the sustainable development.
   China Chemical Mining Association recently reported that China had 1.358 billion tons of phosphate rock reserves as of the end of 2007, accounting for 7.5% of the world total. The phosphate rock is mainly deposited in the southern regions such as Yunnan, Guizhou, Hubei, Hunan and Sichuan provinces, with the average phosphorus content being around 17%. The rich mineral rocks with phosphorus content exceeding 30% amount to only 330 million tons, and are mainly in Yunnan, Guizhou and Hubei provinces. Most of the rest is trace mineral rock that mainly contains tiny amounts of magnesium oxide, aluminum oxide and ferrous oxide and is difficult to dress and process. At the end of 2008 China had 376 companies engaged in digging phosphate rock. In 2008 China produced 50.74 million tons of phosphate rock (or apatites), of which 2 million tons were exported and the remaining was used to make 870 thousand tons of yellow phosphorus, 12.89 million tons of phosphate fertilizers and 1.85 million tons of calcium phosphate for feed. Export, phosphate fertilizers, yellow phosphorus, calcium phosphate accounted for 3.5%, 77.3%, 12.7% and 6.5% of the total consumption, respectively.  
   The irrational rapid consumption of rich phosphate rock has drawn attention of Chinese related authorities. Reported by the Ministry of Land and Resources of China, the country's reserve of rich phosphate rock was 1.108 billion tons in 2002, but only 330 million tons was left in 2007. Around 778 million tons, well over half the nation's reserve, had been consumed in five years. Mineral explorers scrambled to get rich rocks that are easy to dig and sell, while the users also like rich rocks even if they only need low-content rocks in their applications.
   As of 2008 China has 376 firms prospecting for phosphate rock. Around 85% of them are small scale companies with outdated technology and equipment, wasting a lot of minerals in the process of exploring.
   China has 13 companies with the technology to dress low-content rock, with a combined capacity of 14.7 million t/a. Neither governmental policy nor available grants encourage such a company to utilize low-content rock, which is the main reason that China's rich phosphate rocks disappeared so quickly.
   An expert of China Chemical Mining Association warns that if the government does not take efficient measures to guide the companies to use low-content rock more than rich rock, China will have no rich rock to use in coming years.
   Except for yellow phosphorus, China has been suffering from overcapacity in phosphorus-containing chemicals sectors. China was capable of producing more than 6 million t/a of phosphoric acid as of the end of 2009, while the actual output was only around 2.2 million tons. Overcapacity had driven the phosphorus chemical industry into cut-throat competition and price slashing.
   Before 2009 Chinese phosphorus chemical firms had relied more on cheap reserves, workforce and energies to enter the global markets, with 70% of output being exported. From 2009, amid more trade protection actions triggered by the global recession, other governmental constraints and the impact of cheap phosphorus chemicals made in South Africa, Chinese companies lost their former advantage in production cost, and the export of China's primarily processed phosphorus chemicals  declined, by around 9% year on year. Of course, China entirely stopped production and export of some highly toxic phosphorus-containing pesticides in 2009, contributing slightly to the reduction in exports.
   The combined export volume of phosphorus-containing chemicals, including fertilizers, involving around 40 customs codes, was 6.3 million tons in 2009, compared with the 7.91 million tons in 2008 and the 9.42 million tons in 2007. Deducting fertilizers, the export of phosphorus chemicals was 2.4 million tons in 2009, 4.18 million tons in 2008 and 2.98 million tons in 2007. If both the export of apatites and fertilizers are deducted, the export volume was 2.02 million tons in 2009, 2.18 million tons in 2008 and 2 million tons in 2007. Of the 6.3 million tons exported in 2009, the top five were diammonium phosphate, calcium triple superphosphate, sodium tripolyphosphate, phosphoric acids and apatites - together accounting for 73% of the total. Compared to 2008, the exports of seven codes - phosphorus trichloride, trisodium phosphate, sodium tripolyphosphate, phosphoric esters and derivatives, dimethyl phosphate, calcium triple superphosphate and diammonium phosphate - grew year over year, while all others suffered a drop, led by phosphorus-containing pesticides, compound fertilizers, apatites and yellow phosphorus.
   As the prices of energy began rising again at the end of 2009, the domestic phosphorus chemicals sector collapsed, although there are still tenacious voices from several companies. The leading phosphorus chemical company Yunnan Malong Industry Group Co Ltd (SH: 600792) reported a loss of RMB280 million in fiscal 2009, and a sale of RMB1.24 billion. The loss was RMB44.5 million in the first quarter of 2010. The company had also suffered losses in 2007 and 2006. To shed difficulties, Yunnan Malong Industry Group Co Ltd had tried to merge with Yunnan Yuntianhua Co Ltd, a chemical fertilizer maker, an effort which was announced to have failed in 2009 after a year of negotiation. In 2010, the company is trying to seek support of Kunming Ir