Fertilizer capacity reduction: Who will be affected?

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Fertilizer capacity reduction: Who will be affected? Author/Source: Agri-Materials Guide Date: 2016-08-02 Clicks: 19 This year, fertilizer prices have reached new lows, and severe overcapacity is now a consensus within the industry. Today, the author would like to focus on three aspects: whose production capacity should be reduced, how to reduce it, and the outcomes of such reduction. 　　Question 1: Whose capacity will be taken away? 　　This issue needs to be viewed both on a global scale and at the domestic level. 　　Globally, capacity reduction can be considered from three dimensions: capacity share, industrial importance, and price advantage. Take steel as an example: China accounts for 50% of global production. If China does not reduce its production capacity, then the changes in supply and demand caused by reductions in production capacity in other countries will not be significant ； As one of the most important basic industries, no country will rely entirely on imports; therefore, each such country will maintain a certain level of production capacity (fixed capacity) ； Although Chinese steel once gained a price advantage through losses and exported in large quantities, it ultimately had to return to the path of reducing its production capacity. 　　Another example is China’s proactive efforts to reduce production capacity in sectors such as cotton and corn; the characteristic of these sectors is that they do not have a significant impact on **strategic security, and they lack global price competitiveness. Based on these dimensions, the author believes that the global reduction of fertilizer production has the following characteristics: nitrogen fertilizers must see production cuts in China, phosphorus fertilizers require joint efforts by the whole world and China to reduce production, while potassium fertilizers should see production cuts abroad. 　　Dealers generally worry that during the process of capacity reduction, they may have paid for goods that they will not receive, and thus lose their entire investment. Therefore, to whom to shift production capacity domestically is an extremely sensitive issue. 　　Question 2: What are the means to reduce overcapacity? 　　The author summarized three capacity reduction models: negotiated capacity reduction, competitive capacity reduction, and administrative capacity reduction. 　　Agreed capacity reduction is only applicable in oligopolistic markets, such as OPEC in the past and those for potash fertilizers; however, as market concentration decreases, the possibility of agreed capacity reduction also **decreases. This is evident in the fact that OPEC failed to reach production cut agreements even when oil prices were at their lowest, as well as in Ural Potash’s withdrawal from the BPC sales alliance. 　　Competition to reduce overcapacity relies on price mechanisms; a typical example is the sharp drop in oil prices, which led to a significant decline in U.S. shale oil production, and some high-cost oil fields in China were also shut down, eventually causing oil prices to stop falling and start rising again. 　　A typical example of administrative measures to reduce overcapacity is China’s coal industry, where clear targets were set for capacity reduction, and effective measures were taken (such as limits on production volume, timing, and approvals), with noticeable results: from January to June, coal production declined by 9.7% on a year-on-year basis, and in June it dropped by a significant 16.6% compared to the previous year. Coal prices stopped falling and started to rise, and the entire industry managed to turn from losses to profits. 　　A decline of around 10% in the coal industry’s output actually led to the industry turning a profit, which suggests that the reason for losses in the fertilizer industry might be producing more than is necessary. 　　Question 3: What are the consequences of reducing production capacity? 　　A portion is shut down on a short-term basis, becoming potential capacity, which turns into actual capacity when prices rise ； Another part will be shut down permanently. 　　In summary, reducing production by 20% or even 10% can change the dynamics of the fertilizer market. If competition is used to cut production, it will result in losses for everyone involved (the steel and coal industries have been competing for years without any clear winner). It is hoped that the fertilizer industry can find better ways to address excess production capacity. (Yu Lei)