Will rising freight costs change the fertilizer industry?

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Will rising freight costs change the fertilizer industry? Author/Source: Date: 2016-10-11 Clicks: 6 Fertilizers are commodities; in recent years, railway freight rates have been adjusted repeatedly, and recently efforts have been made to curb the illegal overloading of trucks on roads, which means that freight costs for fertilizers will rise further. On the one hand, fertilizer prices are continuing to drop, while on the other hand, transportation costs are rising steadily. Against this backdrop, what impact will logistics have on the fertilizer industry? 　　Party A: The short term is not sufficient to sustain market conditions. The regulations issued by the Ministry of Transport and the Ministry of Public Security regarding the operation of vehicles exceeding weight limits on highways have been in effect since September 21. The new regulations reduce the limits for overloading across all categories; for example, the overload limit for 6-axle truck trains, which have the highest load capacity, has been lowered from 55 tons to 49 tons, while the overload limit for 4-axle freight vehicles has been reduced from 40 tons to 31 tons. At the same time, clear specifications were set for the length, width, and height of the vehicles and their cargo: the total height must not exceed 4 meters, the total width must not exceed 2.55 meters, and the total length must not exceed 18.1 meters. It is stipulated that a fine of up to 30,000 yuan can be imposed in cases where the weight exceeds 49 tons… These new regulations are also referred to as the \"strictest measures ever taken to control overweight vehicles.\" 　　Compared to rail transport, road transport is faster, more flexible, and more timely; within a radius of 500 kilometers, most fertilizers are transported by road. It is well known in the industry that overloading and exceeding weight limits when transporting fertilizers by truck is a common practice. With the implementation of the new regulations, the amount that can be transported per truck has been restricted, which indirectly leads to higher shipping costs. A representative from a company in Shandong said that, when transporting goods from the local area to Henan, each vehicle could carry 40 tons of cargo; the cost per ton was around 100 yuan, resulting in a total transportation cost of 4,000 yuan. Under the new regulations, the maximum load capacity for local vehicles is 31 tons; with the total freight cost remaining unchanged, the price per ton of fertilizer will rise to around 130 yuan. Experts have conducted more detailed calculations, showing that fertilizer shipping costs will increase by 35%, amounting to about 35 yuan per ton. 　　On the surface, the increase in freight costs resulting from these measures to curb overloading is significant; theoretically, this should provide some support for fertilizer prices. However, overall, its impact on market conditions is limited. Currently, demand in the downstream segment of the fertilizer market is weak; farmers are not eager to stock up on fertilizers. To avoid risks, distributors and retailers prefer a approach that involves purchasing and selling as needed. 　　In an environment of weak market demand, the increased shipping costs ultimately have to be borne by the upstream companies. This can happen in two ways: either the factory price of fertilizers remains unchanged, but distributors are given subsidies for the shipping costs ； Second, the distributor bears the shipping costs, while the company appropriately reduces the ex-factory price. Of course, the second approach carries certain risks for manufacturing companies; most companies are more likely to use rebates or other promotional incentives to help distributors offset the increased shipping costs. 　　In short, the most crucial factor determining the current market conditions is still the supply and demand balance; the increased costs resulting from rising freight rates are far from sufficient to sustain a stable or upward trend in the market. 　　Party B: The layout of the fertilizer market will continue to change in the long term. In recent years, there has been a trend toward consolidation of fertilizer production capacity, with very large-scale fertilizer production bases emerging in certain provinces or regions. For example, the production capacity for phosphate fertilizers is mainly concentrated in Hubei and the southwestern region, while the production capacity for nitrogen fertilizers tends to be located in areas with coal resources. The regions where these enterprises are situated cannot handle such large volumes of production, so a large amount of these products has to be sent to the main grain-producing areas. Especially in those large-scale compound fertilizer production facilities, raw materials need to be imported from other places, while the processed compound fertilizers have to be exported, resulting in a situation where both ends are located outside the facility. 　　With rising freight costs, a layout such as that in the fertilizer industry will gradually undermine the market competitive advantages of these production capacities. Therefore, to offset rising transportation costs, the trend of large enterprises establishing factories in other locations is becoming increasingly evident these days. For example, in Fuyu County, Jilin alone, there are reports of three large enterprises—Xinyangfeng, Hong Sifang, and Stanley—having established factories there. Ruxin Yangfeng plans to invest locally to establish a wholly-owned subsidiary, and will fund the construction of a new plant capable of producing 800,000 tons of new type of compound fertilizers per year, with a total investment of around 400 million yuan ； The 600,000-ton per year new compound fertilizer project at Stanley Fuyu was completed on September 10 this year, with production expected to begin in April 2017; the facility will be able to produce 250,000 tons of compound fertilizer per year. Once completed, these projects will enable effective outreach to the northern markets. The most immediate benefit is a reduction in the transportation distance for products, thereby enhancing the core competitiveness of large-scale enterprises. 　　In the long run, all preferential policies in the fertilizer industry, including freight costs, will be phased out one by one, making the pressure to reduce costs increasingly urgent for companies. For fertilizer companies with a national presence, reasonably allocating production capacity in suitable locations across the country is an essential way to enhance their competitiveness. It is foreseeable that the regional characteristics of fertilizer consumption will become more pronounced in the future, and small and medium-sized fertilizer enterprises within these regions will face challenges. (Agricultural Inputs Review)