By Shi Xuxu, OilChem China

Three characteristics in the change of production capacity in recent years

In the recent five-year operation cycle, the price of domestic compound fertilizers experienced the highest fluctuation in history under the influence of pandemic, geopolitical conflicts, etc. Within the five years, the price difference of 45% S (15-15-15) fertilizer reached as high as RMB2 173 per ton. During the fluctuation, China's compound fertilizer industry has also experienced obvious pains of integration (see Figure 1).

Figure 1 Comparison of average price of 45% S (15-15-15) compound fertilizer from   2018 to 2023

In terms of supply capacity, the change of compound fertilizer production capacity presents the following characteristics:

Firstly, increased capacity of compound fertilizer by high tower granulation. Although the production capacity of China's compound fertilizer has a huge base, and a batch of backward production capacity was eliminated in 2017-2018, there will still be many newly added production capacity with high tower granulation process across China from 2019 to 2024, most of which will be concentrated in Hebei, Jilin, Liaoning, and Jiangxi, Henan, Gansu, Ningxia and other provinces.

Secondly, increased concentration of production capacity. In the early stage, the compound fertilizer industry has a relatively low entry threshold, and there were many scattered small enterprises with homogeneous products. With the implementation of various policies and under the general policy of "reducing volume and increasing efficiency", higher requirements are put forward for the technical level of the industry, and enterprises lacking upstream resource advantages have poor anti-risk capabilities. Therefore, a number of enterprises gradually withdraw from the market, so the market concentration gradually increased (see Figure 2). However, during this period, the industry had relatively large supply flexibility and certain aspects such as low prices may disrupt the market. In the later stage of industry development, as the profits of leading enterprises rise from the bottom and they will take advantage of the trend and make reshuffles, the market share will be accelerating to concentrate to leading enterprises.

Figure 2 Trend and forecast of annual average capacity utilization rate of compound  fertilizer in China

Thirdly, relatively low capacity utilization rate. Due to the fact that the terminal demand has not changed much in recent years, and the overcapacity of compound fertilizers is serious, enterprises set production according to sales. From the perspective of the annual operation trend, the factory operation only maintains at 30% to 50% and this situation may not change much in the short term.

Inevitable price war in the short term

Looking forward to the later period, the compound fertilizer industry will still have new production capacity put into production from 2023 to 2024 (see Table 1). It can be seen that the compound fertilizer industry is fully competitive and the integration is still continuing, which in the long-term, are conducive to the development of the industry. However, in the short-term, the price war among enterprises may be unavoidable, which is one of the reasons why the added value of compound fertilizer profits is difficult to recover. The comparison of the average annual profit structure of the compound fertilizer industry chain from 2018 to 2022 is shown in Figure 3.

Figure 3 Comparison of the average annual profit structure of the compound fertilizer industry chain from 2018 to 2022

The industry has repair fuel for recovery

First of all, from the perspective of downstream demand, the No. 1 Central Document repeatedly called for enhanced efforts to stabilize production and ensure the supply of food, and also gave clear instructions on increasing farmers' growing income, keeping subsidies for grain- growing farmers stable to increase farmers' enthusiasm for planting, which showed a strong commitment to food security. At the same time, the downstream terminal customers have improving ability to accept compound fertilizers, so the terminal demand will not shrink when the price fluctuates within a reasonable range.

Secondly, the main raw materials will return to the fundamental supply and demand in 2023. There is no possibility of wide fluctuations in historical years despite external factors. After the price is adjusted rationally, the fluctuation will be gradually narrowed, which is conducive to locking the cost of compound fertilizers, locking the price difference between compound fertilizers and straight fertilizers, and ensuring the cost performance of terminal use of compound fertilizers.

Considering the above factors, the price of compound fertilizer still has the flexibility to move up and down, but the recovery of the industry also has the power to repair. At present, the industry insiders also need to be sensitive to the changes of various factors and make timely adjustments.