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In recent years, China’s fertilizer industry has maintained a steady growth trend, showing strong performance in both production and sales. In 2006, the national production of nitrogen, phosphorus, and potassium fertilizers (in terms of pure content) was 55.9279 million tons, representing an 8.0% increase compared to 2005 ； From January to November 2007, the national production of nitrogen, phosphorus, and potassium fertilizers (in terms of pure content) was 52.4858 million tons, representing a 13.1% increase compared to the same period in 2006. As the production capacity in the fertilizer sub-sector is gradually released, both the output and revenue of this sub-sector have maintained rapid growth. In 2006, the fertilizer industry achieved sales revenue of 277.49 billion yuan, a year-on-year increase of 18.4%, and recorded total profits of 18.31 billion yuan, representing a year-on-year increase of 4.06%. From January to August 2007, sales revenue amounted to 219.27 billion yuan, representing a year-on-year increase of 26.44%, while the total profit reached 13.97 billion yuan, with a year-on-year increase of 30.78%. After rapid growth in 2004 and 2005, the growth rate of the fertilizer industry slowed down. But it still maintains a high growth rate. According to statistics, from January to August 2007, the total production of chemical fertilizers across the country (on a pure basis, the same below) was 37.6653 million tons, representing a year-on-year increase of 11.75%. From January to August 2007, the total production of nitrogen fertilizers among chemical fertilizers was 27.7003 million tons, representing a year-on-year increase of 10.65% ； Among them, the cumulative production of urea, a high-concentration nitrogen fertilizer, was 16.314 million tons, representing a year-on-year increase of 11.81%. From January to August 2007, the cumulative production of phosphate fertilizers was 8.3099 million tons, representing a year-on-year increase of 12.78%. From January to August 2007, the cumulative production of potash fertilizer was 1.6552 million tons, representing a year-on-year increase of 26.93% ； From January to August 2007, a total of 9.4684 million tons of *ao acid an fertilizer were produced, representing a year-on-year increase of 23.78%. 2. Basic situation of the nitrogen fertilizer (urea) industry The fertilizer industry is mainly divided into four sub-sectors: nitrogen fertilizer manufacturing, phosphate fertilizer manufacturing, potash fertilizer manufacturing, and compound fertilizer manufacturing. In terms of product structure, fertilizer production in China is dominated by nitrogen fertilizers, whose share is much higher than the international average, while the share of potassium fertilizers is far below the international level. On a global average, nitrogen fertilizers account for 60% of total chemical fertilizers, phosphorus fertilizers account for 23%, and potassium fertilizers account for 17%. In terms of fertilizer production in our country, nitrogen fertilizers account for a much higher proportion than the international average; they make up around 73% of the total fertilizer production, phosphorus fertilizers account for about 22%, and potassium fertilizers account for roughly 5%. Nitrogen fertilizer is the most widely used type of chemical fertilizer in Chinese agriculture. The main types of nitrogen fertilizers in China include urea, **, ammonium carbonate, ammonium sulfate, etc.; among these, urea is the most common type, accounting for over 60% of China’s total nitrogen fertilizer consumption. In most **developed** countries around the world, urea constitutes almost the entire amount of nitrogen fertilizer used. The advantage of urea over other nitrogen fertilizers is its high nitrogen content; it does not leave acid residues in the soil, and its long-term use does not cause the soil to deteriorate or clump together. Urea has a nitrogen content of 46.65%, while ammonium carbonate, ammonium sulfate, and ** have nitrogen contents of 29.17%, 21.23%, and 17.5% respectively. Their use leads to soil hardening and acidification, thereby affecting soil quality. Among all nitrogen fertilizers, urea accounts for 60.7% of the total nitrogen fertilizer production; other nitrogen fertilizer products such as ammonium carbonate, **, ammonium chloride, and compound fertilizers account for 39.3%. There are nearly 600 nitrogen fertilizer manufacturers in our country, yet the entire nitrogen fertilizer sector is characterized by a large number of firms, small production scales, and weak competitiveness. At present, only about 30% of China’s nitrogen fertilizer production capacity possesses international competitiveness; there is an urgent need to enhance the competitiveness of some large and medium-sized enterprises through structural adjustments, in order to reduce the cost of producing their products to international advanced levels. 3. Overcapacity in urea production in our country is an inevitable reality. Looking at the domestic situation, urea production in 2006 was 38.69 million tons (in pure terms), representing a year-on-year increase of 13.3%. From January to August 2007, urea production amounted to 16.314 million tons (in pure terms), representing a 11.8% increase compared to the previous year; this growth rate was significantly higher than the world average. New production capacity is still increasing significantly, leading to growing pressure from overcapacity. For example, between 2007 and 2008, the number of urea production projects under construction or planned in China ranged from 6 to 9.1 million tons. Notable projects included those by Jilin Pesticides and Fertilizers Company in Hulunbuir with a capacity of 1 million tons, Jilin Branch of CNPC with 1.04 million tons, CNPC’s Tarim project with 800,000 tons, Ningxia Jiemefengyou Chemical Company with 800,000 tons, Ordos with 1.04 million tons, and Sichuan Chemical Industry with 800,000 tons. According to incomplete statistics, an additional 3.65 million tons of urea production capacity was added in 2007, and the period from 2007 to 2008 marked a peak in the commissioning of new urea production projects in China. In 2009, 2.4 million tons of new projects were announced; it is expected that the pace of capacity expansion will slow down compared to 2008, and the increase in new urea production projects in 2010 will be lower than that in 2009. The urea industry is highly polluting; in particular, some small fertilizer manufacturers cause severe pollution and high energy consumption ； Furthermore, with China’s increasing efforts to reduce energy consumption and emissions, industry consolidation is inevitable. At present, China has over 200 urea production facilities; the industry’s concentration is low, and there is already a situation of supply exceeding demand in the market. The urea sector is considered an industry with high pollution and high energy consumption, especially among smaller fertilizer manufacturers, whose pollution levels and energy usage are even more severe. With China’s increasing efforts to reduce emissions and energy consumption, the urea sector is likely to see accelerated mergers and acquisitions as well as higher industry concentration, allowing larger, more competitive enterprises to seize opportunities for faster development. Currently, urea production processes are generally divided into gas-based, coal-based, and oil-based types. With the continuous rise in international oil prices in recent years, oil-based urea production enterprises in our country have largely ceased operations; currently, urea manufacturers in our country rely mainly on gas-based and coal-based feedstocks. Internationally, the production of nitrogen fertilizers relies primarily on natural gas as a raw material, accounting for about 85% of the world’s total nitrogen fertilizer output. In China’s nitrogen fertilizer industry, influenced by the country’s energy structure characterized by an abundance of coal, a shortage of oil, and limited gas resources, coal is the primary raw material, accounting for nearly 70% of the total usage. Enterprises that use natural gas as a raw material for producing nitrogen fertilizers account for about 30% of the total production. It should be noted that in recent years, the costs of energy sources such as coal and natural gas, as well as other raw materials required for fertilizer production, have been rising year by year. In particular, it has been stated that natural gas prices will increase by 10% each year in the coming years; on November 10, 2007, the price of natural gas at the production site rose by 50%, a much higher increase than previous ones. Although the price of natural gas used for fertilizer production did not rise this time, most fertilizer manufacturers in China that rely on natural gas for production have limited access to it due to tight domestic supplies. As a result, these companies either have to suspend production and extend maintenance periods or use natural gas intended for industrial purposes. This has also led to a significant increase in production costs for urea manufacturers that use natural gas at market prices. At present, the production cost for urea plants that use coal as a raw material is on average 1,300 yuan per ton. In contrast, due to recent increases in natural gas prices, the production cost for those plants using natural gas is around 1,100 yuan per ton. However, since coal accounts for 30–40% of the production costs for coal-based urea plants, while natural gas accounts for 80% of the costs for plants using natural gas, the price of natural gas is expected to rise faster than that of coal in the future. Therefore, in the long term, leading companies that use coal for urea production will have a competitive advantage. However, in order to avoid the increase in production costs resulting from rising natural gas prices, leading companies in this sector have turned to investing in urea production facilities that use coal as a raw material, or to acquiring companies that produce urea from coal. For example, Yuntianhua plans to invest 612 million yuan in the expansion of Jinxin Chemical’s operations in Inner Mongolia; after this investment, Yuntianhua will hold a 51% stake in that company’s project to produce 500,000 tons of ammonia and 800,000 tons of urea. Yuntianhua also owns a Shell gasification plant with a capacity of 500,000 tons per year at the Tianan project. As a result, its fertilizer business will shift from relying primarily on natural gas to using both coal and gas as raw materials, thereby addressing the challenges posed by rising natural gas prices and supply shortages to the development of its fertilizer business. Unlike urea producers that rely on natural gas, coal-based companies, while expanding their production capacity, are investing in or acquiring coal companies in order to extend their industrial chains and reduce their own production costs. For example, the joint venture established by Guizhou Yihua, a subsidiary of Hubei Yihua Holding, and Guizhou Xinghua (with Guizhou Yihua holding 60% of the shares), has obtained a coal mine license and began mining in June 2007. In the second half of 2007, Guizhou Yihua acquired 60% of the shares in Qianxinan Prefecture’s Xin Yi Mining Company as well as 100% of the shares in Guizhou Ruixin Coal Industry ； Liuhua Co., Ltd. acquired 90% of the equity in Guizhou Xinyi Mining for 84.7346 million yuan. This is because the leading coal-based companies, as well as those that are gradually shifting to a coal-based business model or acquiring smaller and medium-sized fertilizer companies in this sector, will be the ones to succeed in the future industry consolidation.