The fertilizer market hopes for a recovery, but tariff changes pour cold water on this hope

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http://www.nmtech.com.cn/jishuwang/*nwen_hyyw_xx.asp?id=62440&path=45 On the morning of October 12, as autumn was in full swing in Beijing after the National Day holiday, representatives from large domestic nitrogen fertilizer production and distribution companies such as Sinochem, CNPC, and Luxi gathered in the conference room of the Nitrogen Fertilizer Industry Association to share their views on adjustments to the export tariff policies for nitrogen fertilizers in 2011, taking into account the current situation in the domestic urea market. Just two weeks ago, officials from the National Development and Reform Commission stated publicly at the National Nitrogen Fertilizer Marketing Conference held in Hangzhou that the NDRC and the Ministry of Finance would adjust the export tariffs on fertilizers for next year. The proposed adjustments are as follows: Next year, it will be necessary to study and improve the automatic adjustment mechanism for export tariffs during off-peak seasons, in light of changes in the domestic and international fertilizer markets. The timing and range of application of these tariffs for different seasons will be adjusted, so that there are two tariff tiers – one for off-peak seasons when fertilizer use is low, and another for the peak seasons when fertilizer use is high. Lower tariff rates will apply during off-peak seasons, while higher tariff rates will apply during the periods of preparing for spring plowing and the peak seasons of fertilizer use, thereby better ensuring domestic demand for fertilizers. 　　As soon as this news was released, the delegates present paid close attention to it. The export tariff policy on fertilizers plays an important role in controlling fertilizer exports, and it also serves as a key mechanism for stabilizing the sales prices in the domestic nitrogen fertilizer market during peak and off-peak periods. Therefore, although the tariff policy is still in the process of being developed, industry insiders have already begun to speculate anxiously. However, everyone’s opinion is generally the same: no one wants tariff adjustments to be too frequent. A representative sighed after the meeting: It’s fine now; stop causing unnecessary trouble. 　　Focus point 1: “Is it necessary to adjust the export tariffs on urea again?” ” 　　“Is it necessary to adjust the export tariffs on urea again? ”This is the question that all industry insiders have when they hear talks of further tariff adjustments. 　　China’s current export tariff policy for fertilizers aims to stabilize sales prices in the fertilizer market during peak and off-peak periods, ensure an adequate supply of fertilizers domestically, prevent price increases due to shortages, meet farmers’ needs for fertilizers, and safeguard the country’s food security. The current export tariff policy for urea stipulates that peak-season export tariffs of 110% are applied from February to June 2010, as well as from September 16 to October 15 ； From January 2010, from July 1 to September 15, and from October 16 to December 31, off-season export tariffs were applied, with an export tax rate of 7%. According to China’s customs statistics, from January to August this year, the country exported over 2.4 million tons of urea. The China Fertilizer Industry Association estimates that exports in September will reach 800,000–900,000 tons. If exports remain at 2 million tons per month for the remaining months, the total exports for the year will be around 5 million tons, which is equivalent to one month’s worth of domestic production. This figure is in line with the original intention of implementing appropriate export levels during the off-season when tariffs are lower, and restricting exports during the peak season. 　　Liu Shulan, vice president of the China Nitrogen Fertilizer Industry Association, said: Since the regulatory measures are effective, there is no need to adjust the tariffs any further. Stable tariffs help to boost confidence among domestic producers and distributors. In the first half of this year, the domestic nitrogen fertilizer market was sluggish due to abnormal weather conditions; the implementation of export tariffs during the off-season in the second half of the year had a positive effect on the domestic urea market by helping to alleviate pressure on it. If tariffs are adjusted again, domestic producers and distributors are likely to lose confidence once more. It is currently the off-season stockpiling period for domestic distribution companies. Many of these companies report that the price of urea is too high. However, the production cost of urea is currently very high; coal prices continue to rise, and the preferential prices for natural gas have been removed. Even the urea production plants owned by PetroChina are operating at a loss. Under such circumstances, it is necessary to take into account the capacity of the production companies to bear these costs, otherwise it will be the farmers who end up suffering. The top priority is to show everyone the prospects for the spring planting market next year; it cannot be the case, as this spring, that manufacturing companies suffer losses and distribution companies suffer even greater losses. Under the current fertilizer policies in place, the strategic stockpiling is intended to ensure an adequate supply of fertilizers for next year’s spring planting, while tariffs are meant to prevent large-scale exports during the off-season. The combination of these two policies inevitably leads to an increased supply for spring planting. At present, the industry’s production capacity has increased, and it is no longer the case as a few years ago when demand could only be met with limited supplies; in fact, supplies were even tight. Taken together, these three factors result in serious problems in the nitrogen fertilizer market during the spring season. Since the tariff increases at the end of 2008, the domestic nitrogen fertilizer market has remained sluggish, and it has not recovered to this day. Analyzing the international market over the past two years, from 2007 to 2009, prices in the international market were low in the first half of each year and high in the second half, showing a upward trend. This pattern complements China’s fertilizer usage patterns: domestic supply can be concentrated in the first half of the year, while an appropriate amount can be exported in the second half. Therefore, there is no need to adjust tariffs at present. 　　“I’m quite scared now, because the industry has been in a very difficult situation throughout this year. ”Liu Shulan expressed concern over the current adjustments to export tariffs. 　　Reporters learned from the national nitrogen fertilizer marketing conference held two weeks ago that domestic fertilizer distributors are currently alarmed by the high price of urea. Storage companies are required to store urea in accordance with the agreements for storage during the off-season for fertilizers, and then release this urea into the market when it is needed in spring. Combined with the supply provided by manufacturers during spring, the surplus supply could lead to a drop in urea prices – this is a concern shared by all storage companies, as well as a reality they must face. Some even believe that it is an inevitable loss for companies storing urea in such conditions; it’s as if they know there’s a pit ahead but still choose to jump in, showing a true spirit of recklessness. Regarding the current rise in urea prices, officials from the National Development and Reform Commission said that exports are not the only factor at play; energy conservation and emission reduction efforts in some regions have led to a reduction in domestic urea supply, thereby reducing the situation of supply exceeding demand and allowing prices to rise. 　　Someone did the calculations: last year, the total amount of urea used in China throughout the year was 40 million tons, of which 65% was used in the first half of the year, amounting to about 26 million tons. Currently, China produces 130,000 tons of urea per day, with a maximum production of 4.5 million tons per month; thus, 27 million tons are produced in the six months of the first half of the year. It can be said that this amount of production is sufficient to meet China’s demand for urea. Despite the concentrated use of fertilizer in March, April, and May of the first half of the year, the production volume over those five months – January, February, and October of last year – was all intended as a reserve for spring plowing. At a rate of 4 million tons per month, that amounts to 20 million tons over five months. If 3 million tons are exported during these five months, 17 million tons remain. Adding these 17 million tons to the 18 million tons produced in January and February of the first half of the year gives a sufficient supply for next year’s spring plowing. 　　In response to the current calls for revisions to export tariffs on fertilizers, a representative of an enterprise said that these tariff adjustments are not necessarily aimed at nitrogen fertilizers, as the problems in the nitrogen fertilizer market are not severe; rather, they focus more on the export of phosphate ammonium fertilizers. Relevant authorities should avoid affecting nitrogen fertilizers when setting these tariffs. Although phosphatic fertilizer manufacturers are in a better situation this year, nitrogen fertilizer companies still face difficulties; policy adjustments should be made differently, and even those that don’t require adjustment should still be altered. In the end, it will be the interests that suffer. At present, the overall tariff controls on nitrogen fertilizers this year are satisfactory, and exports remain stable, so there is no need to adjust the tariffs. 　　Focus point 2: How will the export tariffs on urea be adjusted? 　　Since it has been clearly stated that tariffs will be adjusted, how should the export tariffs on urea be changed? Reporters gathered various opinions at this nitrogen fertilizer marketing conference, with industry experts offering their suggestions. 　　Wang Changjiang, Deputy General Manager of Hubei Yihua Chemical Co., Ltd.; Huang Xiaobing, General Manager of Huanong Agricultural Inputs Chain Co., Ltd.; Shen Wende, General Manager of the Sales Headquarters of CNOOC Chemical Co., Ltd.; and Jiang Jitao, Deputy General Manager of Shandong Liaocheng Luxi Chemical Co., Ltd., all agreed that it would be best to apply a single tariff rate throughout the year, with that rate remaining around 10%-15%. Since it is unlikely to achieve 7% or even lower rates in the future, the most practical advice is to stabilize export times and tax rates. 　　As soon as this suggestion was put forward, some representatives raised doubts; it is unlikely to maintain the same tax rate throughout the year. **The relevant authorities must restrict the export of fertilizers. Since distinguishing between peak and off-peak periods does not work, the only option is to adjust the tax rates, but companies hope that there will not be too large fluctuations in these tax rates. 　　Chun Lintao, General Manager of the Overseas Business Department at Sinograin Group Holdings Co., Ltd., believes that it is hoped the urea tariff policies for 2011 will remain the same as those in 2010. At present, exports are undoubtedly an essential channel for manufacturing enterprises and the nitrogen fertilizer industry. From January to July, with the market in a very sluggish state, it is not possible to consume such a large volume of production domestically; therefore, exports are necessary, and it is important for enterprises to have multiple sources of revenue. From an industry perspective, although the current market conditions are characterized by high prices, a shortage of supply, and high export volumes, 80% of companies suffer losses. This is because there was a prolonged period during which goods were sold at low prices, and rising coal prices have led to increased costs. From January to July, no relevant policies were introduced to support these companies, and prices only slightly improved; moreover, high tariffs will be reinstated in January next year, which will undoubtedly pose a severe challenge to manufacturing firms. Psychological factors play a particularly important role in this year’s market situation. Although urea prices are currently rising, the operating conditions of these companies will not improve significantly during the period when farmers use fertilizers. Moreover, domestic production capacity is very high, reaching over 4 million tons per month. In addition, the efforts to reduce energy consumption and emissions will come to an end by the end of this year, and many companies will resume production, ensuring that there are no problems with supplying the domestic nitrogen fertilizer market. 　　From the perspective of export trends, export conditions are determined by the comparison and mutual influence between domestic and international markets. With the opportunity to export in the international market now, many manufacturing companies will surely be very enthusiastic about it, as they suffered heavy losses in the first half of the year; after all, companies are driven by the pursuit of profits. By January, even if exports are prohibited, various distribution companies can still carry out exports through bonded systems, and the volume of such exports is considerable; merely the Yantai Free Trade Zone alone can store hundreds of thousands of tons. 　　Journalist’s view: From the interviews with industry insiders mentioned above, it is clear that domestic urea producers and distributors do not want any further adjustments to tariffs, as such changes would inevitably affect the survival of these domestic companies. It is understandable that, as a resource-based product, China must not become the world’s fertilizer factory. However, given the current high production capacity in China’s nitrogen fertilizer industry, exporting an appropriate amount of these fertilizers, without affecting their availability for domestic farmers, can serve as a quick solution to address the issue of oversupply in the country. No one wants to see a complete halt to China’s fertilizer exports. Formulating export tariff policies for fertilizers requires considering not only China’s hundreds of millions of farmers and food security, but also the fertilizer manufacturers; it is necessary to find an appropriate balance among these interests. Especially in a situation of overcapacity, when the market starts to recover and confidence begins to increase, could adjusting the tariffs have a negative impact on these companies? Current nitrogen fertilizer manufacturers are under dual pressure from rising raw material costs and the need to reduce emissions. Adjusting tariffs at this critical time could likely dampen the growing optimism in the nitrogen fertilizer market. When should such adjustments be made? How to adjust it? It is hoped that the relevant authorities will take the overall situation into account and make decisions from a macro perspective.