By Zhou Yue, Potash Branch of China Inorganic Salts Industry Association

Operating rate is down as profits are thin

   1. Capacity is stable with some increase, and output is down a bit

   The growth of resource-type potash fertilizer capacity in China slowed down in 2017, and the potash fertilizer sector entered a stage of further integration. At the end of 2017 the capacity to make resource-type potash fertilizers in China was 7 179 kt/a (K₂O), a YoY increase of 11.3%. Qinghai Salt Lake Industry Group Co., Ltd. operated around 44.7% of the total. Germu Zangge Potash Co., Ltd. operated around 14.6%. Xinjiang Luobupo Potash Co., Ltd. operated around 11.2%. The capacity of other enterprises accounts for the remaining 29.5%.
   Output in 2017 was 5 532 kt (K₂O), a YoY drop of 4.3%. Over 70% was potassium chloride. Around 25% was potassium sulfate. The output of potassium magnesium sulfate was quite small, only around 2%. Table 1 shows the details. Due to cost increases, poor market sales and inadequate rail transport, quite a few enterprises in Qinghai suspended production for the whole year of 2017. The output of enterprises such as Qinghai Cold Lake Bindi Potash Co., Ltd. and Qinghai Lianyu Potash Corporation was substantially reduced. The overall output of potassium chloride was lower than in the previous year. The output of potassium sulfate was basically stable.

      Table 1   Output of resource-type potash fertilizers in China, 2017  (kt)

   2. Profits turn thin
   As the many policies favoring the potash fertilizer sector are all basically cancelled, the freight cost of potash fertilizers is going up fast and manufacturer profits have slid steadily. The gross profit rate in the potash fertilizer sector was only around 4% in 2017. Main-business revenue in the sector was RMB33.896 billion in 2017, a YoY increase of 12%, but profit fell sharply to RMB1.548 billion, a YoY drop of 34.4%. The main-business profit rate was 4.6%, down 3 percentage points. Among the 65 potash fertilizer enterprises covered by NBS statistics, 23 (35.4%) suffered losses. The volume of loss was RMB1.22 billion, a YoY increase of 276.9%. Profit was the lowest ever. Table 2 shows the details.

     Table 2  Profitability of the Potash Fertilizer Sector in China, 2013-2017  (RMB billion)

   3. Import keeps expanding
   China imported 7 767 kt of potash fertilizers (physical goods) in 2017, a YoY increase of 11.3%. The import value was US$1 764 million, a drop of 0.1%. The import volume of potassium chloride was 7 533 kt, an increase of 10.5%, and the import value was US$1 714 million, a drop of 0.7%. The import volume of potassium sulfate was 64 kt, an increase of 24%, and the import value was US$20 million, an increase of 19.3%.
   4. Product prices differ somewhat
   The potash fertilizer market was stable overall in 2017. Product prices differed. The prices of potassium chloride first came down and then went up later in the year. Potassium sulfate prices increased steadily. The potassium sulfate market was much better in 2017 than in 2016, but prices still much lower than in 2013-2015. With sustained high pressure to protect the environment, potassium sulfate prices will remain firm in 2018.
   5. Both inventories & operating rates are down
   The operating rates of resource-type potash fertilizer enterprises in Qinghai in 2017 were slightly lower than the previous year. The average rate was 65.3%, a drop of nearly 6 percentage points. Potassium chloride producers in Qinghai will integrate further. Production of processing-type potassium sulfate was heavily affected by regional environmental inspections. The operating rate for potassium sulfate in major enterprises using the Mannheim process was around 60.2%, a little lower than the operating rate for resource-type potassium fertilizers.

   The combined port inventory of potassium chloride in China at the end of 2017 was around 2 000 kt, a YoY drop of around 200 kt. Enterprise inventories were also much lower. By the end of 2017, the combined inventory of potassium chloride in Qinghai was around 1 000 kt, whereas it had been over 2 000 kt at the beginning of the year. Supply and demand were more balanced, due to enterprises’ adjustments to sales strategies. The distributed volume in the market also came down. The inventories of distributors amounted to around 3 000 kt at the end of 2017, a YoY drop of 10.9%.

Supply & demand tend to be balanced, and environmental pressure is higher

  1. Supply & demand tend to be balanced
   The apparent consumption of potash fertilizers in 2017 was 17 224 kt (physical goods), a YoY increase of 2.2%. Agricultural consumption was around 16 000 kt, a drop of 0.84%. Of the total consumption, 9 735 kt was produced in China, a YoY drop of 4.6%, and the net import volume was 7 489 kt, up 12.7%. The demand structure of potash fertilizers is also changing. The chemical demand of products such as potassium sulfate, potassium nitrate and potassium hydroxide has increased somewhat. The demand increase in high-end fertilizers and industrial applications has led to constant growth in the total demand for potash fertilizers, offsetting the reduction in demand for potassium chloride. The supply and demand for potash fertilizers tended to be balanced in 2017.
   2. Leading enterprises accelerate nationwide actions
   Northeast China is the biggest consumption market of blended fertilizers, consuming nearly 1 300 kt of granular potash fertilizers a year. Due to a lack of large chemical fertilizer enterprises in the region, great quantities of chemical fertilizers must be shipped in from other places each year. A 300 kt/a granular potash fertilizer plant jointly constructed by Jilin Yuntianhua Agricultural Development Co., Ltd. and Inner Mongolia Tianyu Huijing Industry Co., Ltd. was completed and put on stream in Taipingchuan Town, Changling County of Jilin in 2017. Construction of a 400 kt/a granular potash fertilizer plant and 500 kt/a BB fertilizer plant was started by Liaoning North Salt Lake Industry Co., Ltd. in 2018. At a time when the overall profit in the potash fertilizer market is way down, large enterprises are taking actions in new regions. Besides getting closer to consumers, reducing freight costs and enhancing competitive advantage, this is an inevitable trend driven by adjustment of the industrial pattern and increased industry concentration.
   3. Prospecting for resources expands constantly
   The Mineral Resources Research Institute of China Geological Survey Bureau discovered potassium-rich brine in the north of Luobupo, Xinjiang in 2017. According to preliminary estimates, the total volume of deep-seated potassium resources in the region is 250 million tons. If these resources are successfully developed, the shortage of potash resources in China will be effectively eased.
   4. Byproduct hydrochloric acid becomes a headache to enterprises
   To producers of processing-type potassium sulfate, byproduct hydrochloric acid became a major constraint to production in 2017. Producers of processing-type potassium sulfate mainly use the Mannheim process. Producing 1 ton of potassium sulfate co-produces 1.2 tons of hydrochloric acid. Most of byproduct hydrochloric acid is sold to nearby enterprises for use in bleaching, electroplating and neutralization of papermaking wastewater. With the start of environmental inspections in 2017, quite a few of those enterprises consuming hydrochloric acid suspended production. So many potassium sulfate producers have had to reduce their operating rates to ensure the production/sales balance of hydrochloric acid. The price of hydrochloric acid from potassium sulfate producers in Shandong, Hebei and Liaoning is RMB50-300 lower than the production cost. The difficulty of selling off byproduct hydrochloric acid adds new indirect cost to potassium sulfate production. Indeed, byproduct hydrochloric acid has become a common headache for producers of processing-type potassium sulfate.

Four factors influence the market this year

   The potash fertilizer market has recovered notably from the fourth quarter of 2017. Potassium chloride prices and potassium sulfate prices both rose drastically. Conditions in 2018 are however still complicated and changeable. Major factors now influencing the potash fertilizer market are as follows.
   Domestically, supply and demand in the market for potash fertilizers for spring plowing in 2018 are still balanced. Overall, prices of potash fertilizers in 2018 will therefore be a little higher than in 2017. The total volume of potash fertilizers in China is expected to remain around 9 000 kt in 2018, basically equal to 2017. Oversupply will be further eased.
   Internationally, the potash fertilizer market also bottomed out and rebounded in 2017. Both output and sales volume increased. Prices of potash fertilizers in the international market went up by over US$20/t on average in 2017. Major potash producers have made optimistic forecasts for the global market in 2018. Their apparent consensus is that prices of potash fertilizers around the world will increase further in 2018. The global demand of potash fertilizers is expected to remain high in 2018, with the total demand likely reaching 67 000-68 000 kt.
   As for demand, the strategic reduction of application volumes and the increased effectiveness of chemical fertilizers will affect the overall demand for traditional fertilizers. The demand for potash fertilizers in agriculture is subject to their use in compound fertilizers, fluctuations in farm product prices, conditions in overseas markets, etc.
   There is another factor that should never be neglected: environmental protection policies. Environmental inspections will reduce the operating rates of compound fertilizer producers, affecting the demand for potash fertilizers. An environmental protection tax is now levied, and requirements on safety and environmental protection have become more stringent. The required higher investment in environmental protection will surely increase production costs, inevitably affecting operations. Some small and very small enterprises will continue to face reshuffling and elimination.