Phosphorus chemical sector: Rising demand from both agriculture and new energy

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Recently, the market for products in the phosphorus chemical industry chain has seen another upward trend. According to BaiChuan YingFu’s data, as of December 6, the average spot price for domestic yellow phosphorus at the factory gate was 37,576 yuan per ton, representing a year-on-year increase of 147.6% ； The price of lithium iron phosphate is 90,000 yuan, representing a year-on-year increase of nearly 140%. Industry insiders believe that driven by strong demand in the fertilizer, pesticides, and new energy vehicle sectors, the phosphate chemical industry is expected to remain in a period of high prosperity. ◀Increasing consumption in traditional agriculture ▶ In the traditional agricultural sector, the robust performance of the fertilizer and pesticide industries provides strong support for the demand for phosphorus resources. In our country, the downstream consumption areas for phosphate rock include phosphate fertilizers, yellow phosphorus, phosphates, and other phosphides, accounting for 71%, 7%, 6%, and 16% respectively. Among them, phosphate fertilizers represent the largest end-use sector for phosphate rock. Due to the impact of the pandemic, global food prices have been rising sharply since last year. This has led to an increased willingness among farmers to cultivate crops. Coupled with extreme weather conditions around the world and factors such as excessive money printing, these issues have raised concerns about food security in various countries, resulting in high prices for staple foods and thereby increasing the demand for fertilizers. According to predictions by the International Fertilizer Industry Association (IFA), global phosphate fertilizer consumption is expected to grow at a rate of 7.1% in 2021, significantly exceeding previous average growth rates. Meanwhile, affected by the pandemic and the ban on highly toxic pesticides, global pesticide supply has decreased. The commercialization of genetically modified crops has led to an increased demand for herbicides such as glyphosate. Currently, downstream enterprises such as those using glyphosate are operating well and maintain a steady demand for yellow phosphorus. Looking ahead, some agrochemical companies have scheduled production until March next year; suppliers are constantly busy working on the orders they have, and inventory levels in the industry remain low. It is expected that industries such as glyphosate will maintain high production rates in the coming period, which in turn should drive up prices in the yellow phosphorus market. ◀Strong demand for new energy ▶ In the view of industry experts, the robust growth of the phosphorus chemical industry chain is also attributed to the strong demand for lithium battery materials driven by the rapid development of the global new energy vehicle industry. On December 8, data from the Passenger Vehicle Market Information Association showed that from January to November, 2.807 million new energy passenger vehicles were wholesaled in China, a year-on-year increase of 190.2% ； From January to November, retail sales of new energy vehicles reached 2.514 million units, a year-on-year increase of 178.3%. The rapid development of the new energy vehicle industry has also driven the demand for lithium iron phosphate cathode materials used in batteries. It is understood that to produce 1 ton of lithium iron phosphate, 0.5–0.65 tons of phosphate rock (in pure form) and 0.8 tons of monoammonium phosphate are required. In actual production, for 1 GWh of lithium iron phosphate batteries, 2,500 tons of lithium iron phosphate is required as the cathode material. It is estimated that approximately 1,440 tons of phosphate rock (in pure form, i.e., P₂O₅ = 100%) is needed. Currently, in the costs of lithium iron phosphate raw materials, lithium iron accounts for nearly 40%. For iron phosphate, the cost of the phosphorus source accounts for as much as 52%, while that of the iron source makes up only 5%. The rapid growth in demand for lithium iron phosphate will spread upstream along the industry chain, thereby driving a surge in demand for phosphorus resources. Some institutions predict that by 2025, the global shipments of lithium iron phosphate batteries will reach 927.5 GWh, representing a compound growth rate of around 78% compared to 2020, with demand for lithium iron phosphate approaching 2 million tons. In short, as industries such as new energy vehicles and energy storage develop, the importance of phosphorus resources will gradually increase. This will lead to strong demand for phosphate rocks in the future, a demand that may spread throughout the entire phosphorus chemical industry chain. ◀Companies with advantages in raw materials benefit ▶ Since 2016, due to factors such as regulations on phosphorus-related substances and environmental inspections, China’s phosphate rock production has been declining steadily since 2017. In 2020, China’s phosphate rock production was 88.933 million tons, a 4.7% decline compared to the previous year. Since the beginning of this year, sustained demand from downstream sectors and the normal operation of domestic production have led to a recovery in phosphate rock production. However, inventory levels in the industry remain low, resulting in a supply shortage of products. On the one hand, small phosphate mines have been shut down as part of environmental improvement efforts, and the industry is in a phase of continuous consolidation. On the other hand, our country has designated phosphate mines as strategic mineral resources, **and imposes restricted plans on the development of new phosphate mines. Furthermore, the development cycle for phosphate mines is long; it takes 2 to 4 years from obtaining mining rights to achieving full production capacity, and the annual allocation is also limited. Although some domestic companies have plans to expand their phosphate mining capacity, the new capacity will primarily be brought online two years from now, with only a relatively limited amount being added each year. Internationally, global phosphorus production has seen a significant decline. In 2020, global phosphate rock production was 220 million tons, a 17.1% decline compared to 2017. Given the supply and demand dynamics in the global phosphate rock industry, there will be a persistent shortage of phosphate rock, driving upward trends over the long term. Amid the long-term upward trend in phosphate rock prices, Ma Tai, a researcher at Changjiang Securities, is optimistic about high-quality companies that have an advantage in terms of scale, significant potential for growth, and strong integration capabilities, such as Yuntianhua, Xingfa Group, and Chuanheng Co., Ltd. Relying on phosphorus resources and technological advantages, these companies are also developing new energy materials such as iron phosphate and lithium iron phosphate, thereby opening up prospects for long-term growth. However, some securities experts warn that due to the excessive gains in the phosphorus-related sector this year, attention should be paid to the risk of pullbacks in the future.