China’s Chemical Fertilizer Industry to Recover in 2014, Despite Stumbling in 2013

By Chen Li, CNCIC

China’s chemical fertilizer industry was in the doldrums last year, due to overcapacity, weak demand, intensified international competition, global economic recession and other adverse factors. Operating rates were low, and many enterprises ended up with disappointing profits. Some even lost money.
The industry is expected to turn around in 2014, with new vitality in the global economy, increased raw material costs, looser export policies, and efforts to increase competitiveness by adjusting the industry’s structure and transforming the development mode. Due to the serious capacity surplus, slow demand growth and fierce international competition, however, prudence should moderate our optimism in 2014.

2013: stumbling to grow

1. Capacity increased further while output growth slowed
In view of severe overcapacity, the Chinese government will approve no more construction of nitrogenous fertilizer and phosphate fertilizer capacity during the Twelfth Five-year Plan period. However, due to the soundness of China’s chemical fertilizer market during the Eleventh Five-year Plan period (2006-2010), enterprises initiated the construction of many new chemical fertilizer projects. Since chemical fertilizer projects have a long construction period, some of these projects will be completed during the Twelfth Five-year Plan period. China added close to 8 million t/a new capacity for urea in 2013, and 1 million t/a for potash fertilizers. It is estimated that by the end of 2013 the total chemical fertilizer capacity had reached 80.10 million t/a (100%, the same below), an increase of 5% over the previous year. Of the total, the capacity for nitrogenous fertilizers was 53.00 million t/a, an increase of 6% over the previous year; the capacity for phosphate fertilizers was 22.00 million t/a, being equal to the previous year; the capacity for potash fertilizers was 5.10 million t/a, an increase of 13% over the previous year.
According to the National Bureau of Statistics of China, the total output of chemical fertilizers in China was 67.1697 million tons during January-October 2013, an increase of 7.11% over the same period of the previous year. Of the total, the output of nitrogenous fertilizers was 44.8186 million tons, up 7.34% year-on-year; the output of phosphate fertilizers was 17.1916 million tons, an increase of 5.05% year-on-year; the output of potash fertilizers was 5.1595 million tons, an increase of 12.48% year-on-year. Although the output of chemical fertilizers increased, the growth rate was down drastically, compared with the two-digit growth for several consecutive years in the recent past.
2. Export volume was higher, export value was lower
To ease the pressure on enterprises, the chemical fertilizer export policies were loosened somewhat in 2013. The export tariff for nitrogenous fertilizers in the slack season was reduced from 5% to 2%. The window of the slack season for phosphate fertilizers was extended from 4 months to 5 months. To promote the export of chemical fertilizers, the benchmark price of urea and ammonium phosphate were also increased.
According to statistics of the General Administration of Customs of China, the total export volume of chemical fertilizers was 15.45 million tons during January-October 2013, up 17% year-on-year. Of the total, the export volume of urea was 6.53 million tons, an increase of 70% year-on-year; and the export volume of ammonium sulfate was 2.47 million tons, an increase of 40% year-on-year. (See Table 1 for details.) The main reason for the increase was the drastic reduction of the slack-season export tariff for nitrogenous fertilizers. Due to sustained sluggishness in the international market in 2013, the export value decreased somewhat, despite the considerable increase in volume. The slack the international market led to a reduction in both the export volume and export value of phosphate fertilizers, despite the relaxed export policies.
3. Market stayed slack and profitability was weakened
With impacts from various factors, the chemical fertilizer market in China was slack throughout 2013. The prices of many varieties were lower than in the previous year, and market competition was very fierce.
Urea: The average ex-factory price of urea in China first increased a bit and then slid for the rest of the year. During January-April, the market continued the rising trend from the end of the previous year. There was also a boost from the brisk demand in the spring sowing season. The price of urea made a stable increase from RMB2 000-2 100/t at the beginning of the year to RMB2 200-2 300/t in April. With impacts from capacity surplus, fierce competition and raw material cost reduction, as well as price drops and economic recession in the global market, the price of urea came way down in the months afterward, dropping to around RMB1 600/t in early November. The price of urea started to rebound in November, owing to the slack market and reduced operating rates in previous months, a supply shortage of coal and gas for winter heating, a rebound of raw material prices, the start of winter stockpiling, the increase of chemical fertilizer demand for spring sowing and news of a further reduction of the export tariff coming in 2014. By the end of December, the average price of urea had increased by RMB50-100/t.
Ammonium phosphate: In recent years, the price of ammonium phosphate in China declined year by year, caused mainly by severe overcapacity. It is estimated that China has twice the optimal capacity for ammonium phosphate. The average ex-factory price of ammonium phosphate fell further in 2013. The mainstream ex-factory prices of 55% monoammonium phosphate (MAP) powder were reduced from RMB2 300-2 550/t in January to RMB1 750-1 800/t at the end of October. With the start of fertilizer preparation for spring sowing, the operating rates of compound fertilizer producers went up in November. With the demand increase, the price of ammonium phosphate showed some signs of upturn. The mainstream ex-factory price of 64% granular diammonium phosphate (DAP) was also reduced from RMB3 000-3 100/t in January to RMB2 500-2 600/t at the end of October. With the start of fertilizer preparation for spring sowing, DAP prices recovered bit at the end of the year.
Potash fertilizers: The import dependence of potash fertilizers in China is as high as 50%. The price of potash fertilizers is mainly influenced by the international market. Globally, the potash fertilizer trade employs umbrella contracts, under which the price is relatively stable and only fixed once or twice a year. The price of potash fertilizers was basically maintained at RMB2 600-2 700/t during January-June 2013. As Uralkali announced plans to quit BPC and its sales tactics changed from “restricting production to maintain price” to “taking quantity as the priority,” the price reduction margin was increased in July and the price of 60% potassium chloride product was RMB2 000-2 100/t at the end of the year.
Due to sustained market slackness and reduced operating rates, in the financial performance of enterprises declined constantly. The sales profit rate of chemical fertilizers in China was 3.64% during January-October 2013, a drop of 1.79% from the same period of the previous year. Sales profit rates of nitrogenous fertilizers, phosphate fertilizers and potash fertilizers all slid. Enterprises suffered serious losses. The rate of loss in chemical fertilizer enterprises was 17%, being 42% in nitrogenous fertilizer enterprises and 22% in phosphate fertilizer enterprises.
4. The supply/demand pattern was changed by fierce competition in the global market
The capacity for chemical fertilizers worldwide was around 277.8 million tons (converted into the amount of pure chemical fertilizers, the same below) in 2012; the output was 237.6 million tons, the demand was 216.3 million tons and the surplus was 10%. The capacity for nitrogenous fertilizers was 169.0 million t/a; the output was around 141.0 million tons; the demand was 137.0 million tons; the surplus was 4.0 million tons. The capacity for phosphate fertilizers was 53.338 million t/a; the output was 44.312 million tons; the demand was 42.544 million tons; the surplus was 4%. The capacity for potash fertilizers was 43.20 million t/a; the output was 40.18 million tons; the demand was 32.03 million tons; the surplus was 8.15 million tons (20%).
The new capacity for chemical fertilizers in the world increased further in 2013. Resource-rich countries completed projects aiming at export, and countries with supply shortages completed projects aiming to fulfill domestic demand. Both of these aggravated China’s capacity surplus, changed supply/demand mode and led to fiercer competition in the global chemical fertilizer market.
The reduction of subsidies in India and the increase of self-sufficiency in Vietnam and the United States reduced the international trade volume of chemical fertilizers in 2013. The completion of export-oriented projects of urea and ammonium phosphate in the Middle East changed the trade pattern worldwide. Due to the withdrawal of Uralkali from BPC in July and the disintegration of Phoschem in October, the supply/demand mode of recent years was toppled and the market became slacker.

2014: optimistic but prudent

The world economy is expected to recover a bit in 2014. The Third Plenary Session of the Eighteenth Central Party Committee has defined the keynote of China’s economy development as “making progress while ensuring stability.” The macroeconomic environment for the development of China’s chemical fertilizer industry is favorable overall in 2014:
(1) Implementation of favorable polices: The Chinese Government will further increase subsidies to agriculture, rural areas and farmers, as well as further increase the minimum purchase prices of grains. Farmers’ initiative in grain planting will therefore be stimulated and the demand for chemical fertilizers will be increased.
(2) Slowdown of capacity growth: As the chemical fertilizer market had sustained slackness in 2013, some new projects have postponed construction. The new capacity for chemical fertilizers in 2014 will be lower than expected. Therefore, the problem of overcapacity will be eased to some extent.

Table 1   Export of major chemical fertilizer varieties in China during January-October 2013 (kt, million US$)

Product    Export volume    Growth (%)    Export value    Growth (%)
Chemical fertilizers    15 450.6    17.40    5073.6761    -6.06
Urea                     6 526.7    69.88    2086.2994    -87.77
Ammonium sulfate         2 471.1    40.37     410.7583     7.56
Ammonium nitrate         373.0    -7.28    132.6323     -25.10
Ammonium chloride used as fertilizer    315.1    -28.39    41.2824     -54.86
Triple superphosphate      520.1     -27.92     195.093        -40.28
Other superphosphates      552.6     -28.96        114.0481    -53.71
DAP                        2 924.0      -7.67     1356.6922    -22.18
MAP                          565.8      23.11         224.8052      0.89
NPK compound fertilizers   41.6      22.71       24.5134      18.42
NP compound fertilizers      493.7     -34.91      161.8814      -45.90
Small packages below 1-kg 225.2     -34.78      143.8047    -30.23
Others                      441.7      -2.43         181.8657     -8.43

(3) Further loosening of export polices: To support stable development of chemical fertilizer enterprises, export policies in China will be further loosened in 2014. The brisk-season export tariff for major varieties such as urea and ammonium phosphate will be decreased substantially. The export tariff for high-tariff varieties such as potash fertilizers and NPK compound fertilizers will be reduced considerably. The export tariff will also be reduced considerably for some small varieties such as triple superphosphate, calcium-magnesium phosphate, other phosphate fertilizers and ammonium chloride used as fertilizer. Competitiveness of chemical fertilizers exported from China will thereby be enhanced. So the export volume is expected to increase in 2014.
(4) Improvement of the international market: Due to last year’s slack market, the construction of some new capacity has been postponed, easing the status of oversupply. Mosaic, the biggest phosphate fertilizer company in the world, has been busy engaging in the purchase of phosphorus resources worldwide after it dissolved Phoschem, the largest phosphate fertilizer trading company in the world. The reconciliation of BPC members will be helpful in stabilizing the global potash fertilizer market. When Uralkali quit BPC, it announced plans to change its sales tactics from “restricting production to maintain price” to “taking quantity as priority.” The reformation of BPC indicates that the competition on price has come to an end and a stable new potash fertilizer trading mode is being formed. Overall, several changes in the international market are all favorable to the stabilization of the chemical fertilizer market.
Despite many favorable factors in the chemical fertilizer market, the overall status of oversupply cannot be change in the short run. Due to the popularization of formula fertilization by soil testing and the application of new types of fertilizers such as bio-fertilizers and controlled-released fertilizers, the demand growth of chemical fertilizers will be slowed down. Overall competition will therefore still be very fierce.
It is suggested that chemical fertilizer producers should stick to the course of adjusting product portfolios and transforming development modes. They are encouraged to develop products beyond chemical fertilizers. In order to enhance their competitiveness, great efforts should be made to reduce costs, gain market share and strengthen technological innovation.