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| China's Nitrogen Fertilizer Industry 2008 Outlook |
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In recent years, China's fertilizer industry has been growing steadily, showing a boom in both production and sales. Fertilizer sales in China achieved US$37 billion in 2006, up 18.4% from 2005. And between January and August of 2007, fertilizer sales went up 26.44% on pcp (previous comparable period) to $29 billion. Although growth had somehow slowed down compared to its previous peak in 2004 and 2005, the industry is still maintaining a high growth momentum.
According to statistics, from January to August in 2007, China produced 38 million tons of fertilizer (on a pure basis, same below), up 11.75% on pcp. Among the fertilizer types, 27.7 million tons of nitrogen fertilizer had been produced, up 10.65% on pcp, while output of high-purity nitrogen fertilizers reached 16 million tons, up 11.81% on pcp, growing faster than the world average rate.
China's nitrogen fertilizer industry
Fertilizer products mainly consist of four types, nitrogen fertilizer, phosphorus fertilizer, potash fertilizer and compound fertilizer. The Chinese fertilizer industry is dominated by the nitrogen type, whose market share in China is much higher than that in global market. Currently 73% of the output in China are nitrogen fertilizer (60% globally), while phosphorous and potash fertilizers have 22% (23% globally) and 5% (17% globally) market shares in China respectively.
Nitrogen fertilizer is also the most consumed type in China's agriculture. Nitrogen fertilizer can be divided into urea, ammonium nitrate, ammonium bicarbonate and ammonium sulfate. Urea is the most common product with 60% share of the Chinese nitrogen fertilizer market, and urea is also the dominant nitrogen fertilizer in developed countries. Compared to other nitrogen fertilizers, urea typically has higher nitrogen content, and it does not leave soil-deteriorating acid residues. |
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China currently has more than 600 nitrogen fertilizer producers. But the sector is characterised by fragmented players, small production scales and lack of competitiveness. There are only about 30% of nitrogen products in China are internationally competitive, so it is imperative for medium and large producers to improve their competitiveness via structural changes, in order to lower their costs to international best practices.
Surplus inevitable for urea
New urea production capacity is still increasing in China, putting further pressure on the overcapacity situation. The period between 2007 and 2008 will be a peak time for urea capacity expansion, with urea facility projects of 6 - 9 million tons being built and planned. It is expected that capacity expansion will slow down after 2008, with announced projects of 2.4 million tons for 2009 and even lower for 2010.
At present, there are about 200 urea production facilities in China. The industry is relatively less concentrated, and currently exhibiting a surplus situation. Furthermore, urea manufacturing is a high-polluting and high energy consuming process, especially for those small fertilizer companies, and the Chinese government is making efforts to conserve energy and reduce emission. Therefore, the urea sector is expected to accelerate its consolidation and increase industry concentration, and those larger companies should be presented with opportunities to further their developments.
Urea production feedstock can be gas, coal and oil. As oil price has been increasing in recent years, oil-fed urea production is basically dried up in China, leaving gas and coal feedstock the major types in the industry. While natural gas is the major feedstock internationally, China has been using coal as feedstock for 70% of its urea production, due to the country's particular energy structure of coal-rich but gas-poor.
But in recent years, prices of coal, natural gas and other raw materials for fertilizer production are also going up, especially that he Chinese government indicated last year that domestic natural gas prices will be going up 10% p.a. in the next few year. This has lead to escalating production costs for gas-fed urea producers in China. Currently, unit production cost for coal-fed urea producers is about $170/ton, while it is about $150/ton for gas-fed producers. But coal feedstock is only about 30-40% of total costs for urea producers, while gas feedstock is about 80%. Coupled with the relatively fast rising gas price, larger coal-fed urea producers in China should possess better competitive advantage in the long term.
Industry consolidation
To hedge the escalating gas feedstock price, gas-fed urea companies in China are now rushing to invest in coal-fed production facilities, or take over existing coal-fed urea producers. For example, the Yunnan Province-based Yuntianhua Group, one of the leading chemical companies in China, has been acquiring coal-based assets in Inner Mongolia, so that it can relieve from the development constraint brought about by the rising gas price and reduced gas supply. Similar to gas-fed urea companies, existing coal-fed urea producers, such as Guizhou Yihua Chemical Co and Liuzhou Chemical Industry Co, are also busy with extending coal supply sources, so that they can reduce their production costs.
Therefore, those large coal-fed urea producers, as well as those gas-fed urea producers which are investing in smaller coal-fed companies, shall be the winners in the upcoming consolidation of China's fertilizer industry.
Source: www.aweb.com.cn
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