Han Yongqi, Industrial Research Center of Eastern Shandong

Domestic fertilizer market has ushered new highlights in supply-demand balance, trade volume and prices since 2021 on the back of affluent global liquidity and increasing imported inflation. Opportunities and challenges will coexist in the development of China's fertilizer industry in the future. In the shorter term, exports will remain active, and the domestic prices will decline, consolidate, and then rally slightly.

China's fertilizer market environment and market fundamentals have had great changes by now. The short-term impact of the pandemic on globalization is changing into a long-term impact. The resurgence of pandemic cases in the world slowed the worldwide economic recovery. In China, new pandemic cases have been found in 19 provinces (cities and districts), which will affect China's fertilizer market for sure. Given the big challenge of climate changes, the resources and environment are still constrained significantly; the further contagion of protectionism and unilateralism in developed countries has heightened the security risks of the industrial chain, intensified trade and investment disputes, and significantly added uncertainties of international economic operation; there is a superimposed effect between export tightening and domestic de-capacity and de-leveraging, which is also profoundly affecting and changing Chinese fertilizer market. Therefore, in such a market environment, where will the domestic fertilizer market go?

First, domestic industries are still threated by the shortage of coal, electricity and oil, and weather the supply of energy and raw materials as well as transportation are in place will affect the fertilizer market, especially the nitrogen fertilizer market. Fertilizer products, such as urea, are high energy-consuming products, but power supply has been tightening since the third quarter of 2021 when a number of province-class electricity grids were switched off or restricted to alleviate the severe power shortage issue across the country. The power supply will be distinctly seasonal in the future. The supply will be extremely short in the dry season and power consumption peak period, which will significantly restrict the production of fertilizer. The production of nitrogen fertilizer in China, especially urea, is mainly fed by natural gas, coal and heavy oil. Coal is the raw material used in the central and eastern part of China, while natural gas is the raw material of large-scale units in the western part. However, the tightness of supply of coal, electricity, oil and gas continues, and this issue will remain pending for a long time. In the meanwhile, the railway transportation, which has been a longstanding barrier to the economic development, becomes tighter, and the utilization rate of major railways is almost saturated. The transport capacity of road and water is also tightening. The port capacity is not big enough to cover the needs, so the devices are in overloaded operation. Domestic urea plants are generally close to the market and far away from the production areas of raw materials, leaving the transportation cost of raw materials to be much higher than that of products. The short supply of coal and electricity as well as the tightening transportation are lingering in the market. In addition, the prices of coal, natural gas and oil continue to rise, resulting in a sharp rise in the cost of fertilizer. Coal, especially lump anthracite, accounts for more than 60% of the raw materials used in China's synthetic ammonia production, and the prices of lump anthracite have rose sharply.

Urea production cost increases in line with higher coal levels. The production cost of phosphate fertilizer also rises on the heels of an increase in the prices of synthetic ammonia and raw materials such as sulfur, pyrite and phosphate ore. In addition, the tight railway transportation in China forces some fertilizer producers to choose higher-cost highway transportation. The implementation of Law of the People's Republic of China on Road Traffic Safety has added the freight by 30-70%. Therefore, it becomes commonplace that in areas where fertilizer production is relatively concentrated, fertilizer products cannot be delivered out, and the main raw materials of fertilizer (coal, phosphate ore, etc.) cannot be transported in; a sharp rise in the prices of the main raw materials of nitrogen fertilizer such as anthracite, natural gas has pushed up the cost of fertilizer production and hence the prices of fertilizer. The lofty urea prices keep traders from storing a large number of goods, and most of them choose buying and selling fast, leading to a low level of the overall social inventory. Therefore, when demand is increasing or supply is decreasing, the market response is sensitive and it is easy to see urgent calls on goods and resultant price rising. Of course, the central government has issued regulatory measures and hence the prices of coal, electricity and oil have declined by now. If the tightness of resource supply continues to be eased, coupled with the impact of cost and international factors, the prices of urea will decrease in the longer term, and the prices of phosphorus and compound fertilizer will also fall. Given the change in the supply-demand balance and market forecast on fertilizer prices on the back of lower electricity and oil prices, the prices of fertilizer will remain stable-to-lower. China's fertilizer market is expected to go into a consolidation after falling in the winter of 2021, and will rise slightly after the Christmas and New Year’s Day holidays.

Second, higher international grain prices and the implementation of domestic rural revitalization and agricultural support policies have perked up domestic peasants' enthusiasm for farming, which will further boost the demand of fertilizer. Higher planting incomes in line with sharp increases in international corn, soybean and wheat prices as well as domestic corn prices have stimulated the expansion of grain planting areas and the growth in fertilizer demand. The increased corn prices are being passed downward to the fertilizer sector. At present, given the growth of rigid demand for grain in China and the regulatory tightening on resources and environment, it is more and more difficult to increase the planting area and output of grain. The planting area was about 119 230 060 hectares in 2016, the largest in recent years, and it decreased sharply for the subsequent three years. In 2020, although the planting area of grain in China increased slightly, it only hit 116 768 000 hectares, up by 0.61% year on year. The continuous decrease in grain planting area and grain output over a long period of time has created a big gap between China's grain production and consumption, pushing up the prices of grain and related products significantly. Therefore, the problem of food security has become the first to be solved by the Chinese government. In order to ensure food supply and security, the General Office of the CPC Central Committee and the General Office of the State Council recently issued the Action Plan on Saving Food to focus on promoting conservation and loss reduction in all segments of the whole industrial chain, including food production, storage, transportation, processing and consumption. The government has been committed to shoring up agricultural development and ensuring food security by all means.

So far, China's economy has entered the industry-nurturing-agriculture stage. Regional governments have implemented a series of policies to encourage peasants to grow grain, such as exemption from agricultural tax, grain-growing subsidies, introduction & cultivation of improved varieties, fertilizer subsidies and subsidies for the purchase of large agricultural machinery, which has greatly aroused peasants’ enthusiasm for growing grain. In 2021, the sowing area of summer grain in China was 26 438 000 hectares (396 570 000 mu), an increase of 265 500 hectares (3 982 000 mu) or 1.0% from 2020, snapping the five straight years’ downtrend and reversing the downward trend for five consecutive years. The national grain planting area was stable at more than 1.75 billion mu in 2021. The multiple crop index increased in some areas, as the one-season rice planting was changed to two-season planting. These factors will strengthen the demand for fertilizer. In 2020 and 2021, as supported by various policies of strengthening agricultural production, the agriculture growth became faster and the grain output reached new highs; the national strategy of Rural Revitalization and the policy of Agriculture, Countryside, and Farmer Issues will be tailwinds for fertilizer demand.

With the national food security strategy, Rural Revitalization Strategy and supporting agricultural policies, the strategy of food crop production strategy based on farmland and the strategy of food crop production strategy based on technology in place, the planting area of crops has been expanded, the multiple cropping index has increased and the level of agricultural technology has been improved, boding well for the demand for fertilizer. Since August 2021, although regional governments have strictly implemented the central government’s urea ex-works price restriction policy, the urea prices have been high due to increased demand from fertilizer markets. Nevertheless, distributors and peasants are actively buying fertilizer for autumn sowing and winter vegetables nurturing (greenhouse vegetables). It is expected that prices of most domestic fertilizer products will remain in a consolidation, but prices of some fertilizer products such as phosphorus and potassium fertilizer will be different as the effects of winter storage and national policies will work on the latter products. Historically, the fluctuations of fertilizer prices were closely tied to the change of grain prices. When grain prices rose, the prices of fertilizer increased inevitably; when grain prices fell, the prices of fertilizer decreased. In a long run, grain prices are bound to fall with the bumper harvest of Chinese agriculture, and there is possibility that the prices of fertilizer will continue to fall sometime in the future.

Third, there will be more fertilizer import and export activities in China. Affected by the pandemic and adverse weather, global grain crop prices are increasing, leading to a rise in planting income, and hence demand for fertilizer is significantly strengthening. In the meanwhile, supply of imported fertilizer is tightening because foreign plants are running low or have been shut amid the pandemic. In addition, the growth rate of global nitrogen and phosphorus fertilizer capacity has been low in the past few years, which is another contributor to the limited import supply.

The strengthening global fertilizer demand will promote China's fertilizer export. According to the data of China Customs, both the import and export volume of fertilizer recorded a sharp year-on-year increase in the first half of 2021. In the first half of the year, China exported 16.241 million tons of fertilizer, up by 36.1% year on year. To be specific, the export volume in June was 3.392 million tons, taking a year-on-year increase of 1.175 million tons or 48.3%. The production of major grain, cotton and soybean products has been insufficient to meet demand in the world since 2021 and the inventory has continued to decline. The lower grain stockpiles and the higher prices will lay a good foundation for the strengthening of international demand for fertilizer. Some research institutions predict that the global grain output will increase in 2022, and the demand for fertilizer will also increase compared with 2021. However, the growth of global fertilizer capacity will be slower than that of demand in 2022 as no large fertilizer plants will be put into operation, and operating rates are hampered by high prices of natural gas and freight. The international fertilizer prices will remain high. 

In addition, some European and American fertilizer producers have shut down their units in view of sharpy increased production costs caused by volatile crude oil prices amid the global resource crisis. The supply outage will drive up offers of urea at main ports. In response, some domestic producers will choose to export, which will divert part of domestic fertilizer and tighten China's urea supply. Meanwhile, China is still short of other fertilizer products, such as potash. As for the potash distribution in China, 97% of the proved potash resources are located in Qarham, Qinghai. Qinghai Salt Lake Potash Co., Ltd. is the only large potash fertilizer producer in China, with a capacity of 1.5 million t/a, which is far from meeting the domestic demand.