Three ways to alleviate the overcapacity in nitrogen fertilizer production

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On September 30, the Ministry of Industry and Information Technology, together with nine other ministries, issued the \"Notice on the State Council’s Approval of Several Measures to Curb Overcapacity in Certain Industries,\" which imposes strict restrictions on overcapacity or redundant construction in six industries, including coal chemicals and polysilicon. Structural adjustments in the industry will be promoted through measures such as holding local authorities accountable. In this regard, the author believes that this is both a negative and a positive factor for the nitrogen fertilizer industry. The negative aspect is that some less competitive companies will be eliminated ； The positive aspect is that, after raising standards and eliminating outdated production capacity, the entire industry is able to develop in a healthy and orderly manner. According to projections by authoritative agencies, by the end of this year, China’s urea production capacity will reach 63 million tons, exceeding actual demand by about 10 million tons. Clearly, under macroeconomic conditions of restricted exports and weak domestic demand, these 10 million tons of excess production capacity are sufficient to distort the market supply-demand balance and crush many small and medium-sized nitrogen fertilizer companies. Therefore, it is highly necessary and timely for the relevant authorities to introduce corresponding measures to curb this situation, which will prevent greater losses in this industry in the future. In my view, in order to implement the aforementioned Notice, the current excess capacity in nitrogen fertilizer production should be addressed through the following three approaches. We must be resolute in phasing out outdated production capacity. Those backward small and medium-sized nitrogen fertilizer enterprises with limited production capacity, a coal consumption rate far above the industry average, and unchanged technical levels for many years must be resolutely phased out. On this issue, it is necessary to regulate corporate consolidation activities; on the one hand, leading companies should not be able to save weaker companies simply by making capital injections ； On the other hand, when some coal companies acquire and restructure backward nitrogen fertilizer enterprises, they should not rely solely on their resource advantages; instead, they need to take into account various factors such as cross-industry aspects, markets, technology, and management. Otherwise, it is possible that the previously underperforming enterprises will still be preserved, failing to address the issue of overcapacity fundamentally. Actively reform the existing lean inventory system. The current policy of maintaining low inventory levels focuses on distribution enterprises and retains too many practices from the planned economy era. However, today’s distribution companies have entered the market and become self-sustaining entities, with profit-making as their goal as well. Therefore, in their operations, they must take into account market risk factors such as funds, market conditions, and losses; as a result, there is a significant gap between their performance when carrying out stock-accumulation tasks and the expectations of management. Therefore, it is more practical for light storage to be carried out jointly by production enterprises and distribution enterprises. This model has at least two major advantages: first, it ensures stable production by nitrogen fertilizer manufacturers throughout the year, guarantees sales during peak periods, and prevents price fluctuations ； Secondly, it ensures that distribution companies always have goods in stock, and allows them to make full use of their existing storage capacity, thereby avoiding waste of existing warehousing resources in society. Adopt a stable tariff policy. The current tariff policy imposes a 10% export tariff from November 1 of each year to January 31 of the following year, while a 110% tariff is applied during other periods. To alleviate the issue of overcapacity in domestic nitrogen fertilizer production, a 10% off-season tariff policy should be implemented on an experimental basis throughout the year, or zero tariffs should be applied, allowing domestic nitrogen fertilizers to follow global market prices. This would help to reduce some of the excess capacity and ease pressure on the domestic market.