chinese fertilizer industry - gpca fertilizer · pdf file · 2016-09-08the chinese...

The Chinese fertilizer industryCurrent situation and outlook

Prepared by:

Oliver Hatfield

Director Fertilizers

Integer Research Ltd, London

For the GPCA Fertilizer Convention, 6-8 September 2016

www.integer-research.com

Overview

• Why are we talking about China?

• Background

• Look at current nitrogen and phosphates situation in turn

• Scale of demand, capacity, production and exports

• Evolution of volumes and costs

• Conclusions

• This presentation is based largely on the

research and analysis of my colleague Lynn

Wang in our Beijing office

Background – why are we talking about

China?


China is the biggest and most influential fertilizer producer and

consumer in the world

• Demand

• Total fertilizer consumption in 2015 was about 60 million tonnes accounting for almost one

third of global fertilizer use.

• Basic cereals are the largest consumers of fertilizer at the N+P+K level with a share of

44%

• Fruit and vegetables follow cereals at 30% of consumption

• Oil crops, mostly rapeseed and soyabean, use around 8%

• Sugar crops use 2%, cotton around 3%, pulses 1%.

• Demand has grown rapidly but inefficiently

• In March 2015, the Chinese Ministry of Agriculture (MOA) announced that China will

launch a zero growth campaign for fertilizer consumption by 2020. According to the

programme, China will reduce or control nitrogen and phosphate fertilizer consumption,

stabilize potash consumption and increase secondary and trace element demand.

• Supply

• Urea

• China has rapidly built up its nitrogen supply base. This has uniquely utilized its

abundant resources of coal

• Phosphate

• China has extensive resources of phosphate rock which includes extensive lower

grade reserves. It has been innovative in developing and monetizing these reserves.


China’s nitrogen urea sector in a global context

5.9 4.7 7.0 6.9 8.34.03.43.9

1.6

1.6

2.7

46.9

41.8

33.6

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

52.1

59.952.7

2012

51.6

2010

55.0

20132007 2009

44.0 46.9

200620042003 2008

37.9

20152014

13.6

2011

47.7

2005

Chinese urea volume development (million tonnes)

ExportsDomestic deliveries

China’s share of

world urea

production:

• 31% 2003

• 40% 2015

China’s share of

world urea exports:

• 9% 2003

• 29% 2015

Source: Integer


China’s phosphate business in a global context

3.2 4.0 5.3 6.5 7.2 7.0 7.9 9.2

2.3

1.9

0.1

0

5

10

15

2008

8.4

1.0

2006

8.00.57.0

200920072005

0.9

5.50.5

9.1

0.24.2

2003 2004

13.3

2014

0.6

2011

13.4

12.5

2010

0.9

0.2

11.7

10.7

11.50.7

11.5

10.8

2013

12.73.2

2012

Chinese MAP and DAP volume development (million tonnes)

4.0 4.0 3.9 3.8 4.92.7 3.6 4.3 5.24.9 7.3

8.47.7

9.4

2.12.0

0.8

0

5

10

15

20

10.7

11.7

2009 2011 20122008

6.9

2010

10.4

2006

13.5

8.2

2007

14.7

11.80.8 10.6

2013

15.6

0.7

4.46.0

0.90.8

2005

3.5 5.1

2003 2004 2014

15.4

Exports

Domestic deliveries

China’s share of world

MAP production:

• 23% 2003

• 50% 2015


MAP exports:

• 2% 2003

• 25% 2015 est.


DAP production:

• 14% 2003

• 50% 2015


DAP exports:

• 7% 2003

• 33% 2015 est.

MAP

DAP

Source: Integer

Nitrogen


Chinese urea export declined to 4.3 million tonnes in Jan-May of 2016

compared to 6.1 million tonnes in the same period of 2015 – a margin

squeeze is constraining exports

Thousand tonnes

Monthly and quarterly Chinese urea exports

0

2

1

3

4

5

Q1

2015

4.43

Q1

2016

2.96

-33%

1.96

0.82

Q1

2012

Q1

2013

0.60

Q1

2014

0.12

Q1

2011

Million tonnes

0

500

1,000

1,500

2,000

2,500

Sep DecNov

2013

Oct

2011

2012

2014

2015

2016

Feb Mar May Jun Jul AugAprJan

Urea prices were high enough in the last few years (and the international market was short enough of product)

to absorb much of the increase in China’s growing supply surplus; but this is changing.

Many Chinese producers

cannot live with current

export urea prices,

exports are down in 2016

Source: Integer


The weakest Chinese urea producers are withdrawing product

from the international market

Source: Integer; note: vertical axis deliberately redacted

Urea export cost to nearest port by plant, H1 2016

US$/tonne• Many Chinese urea

producers cannot make

money with urea prices

below US$200 per tonne.

• Chinese urea capacity is

highly diverse in terms of

ownership, scale, location,

age, and fuel/feedstock.

• Costs are not the only

driver as local market

prices deviate by +/-$10 per

tonne according to location.

• The weakest producers

tend to based on:

– Gas, or

– Older/poorly located

anthracite plants


Chinese urea capacity is expected to stabilize in the range of 85-

90 million tpy during the next five years

0

-10

80

40

60

70

50

30

20

10

90 85.5

86.9

-1.4

2019

3.9

87.2

2014 2018 2020

88.389.5

2016

87.1

0.1

-1.4

83.3

83.0

0.3

86.988.4

2017

2.4

89.5

87.2

2015

-1.1

83.3

87.3

Capacity net growth Capacity

Chinese urea capacity outlook

Million tpy

• New plants are still being added, but the rate of additions has slowed

substantially.

• Weaker plants are closing.

• We expect total Chinese urea capacity will peak in 2017 and then

decline slightly.

• Chinese urea capacity

reached 87 million tpy in

2015, up 5% year-on-

year.

• The growth in capacity

has been stimulated by

relatively abundant coal

resources and fiscal

stimulus which has

made capital available

for urea and other

capital intensive

projects.

• Capacity has grown in

excess of domestic and

international

requirements. In 2015

around 15 million tpy of

urea capacity was idle

Source: Integer


Conclusions and outlook on Chinese urea supply

• Feedstock prices outlook

o Coal prices are expected to remain weak in the next five years because of overcapacity and

in view of the Chinese economic downturn. However, we note that the Chinese government

appears to be getting more serious about rationalizing the coal over-supply.

o Gas prices for fertilizer producers will remain stable as China is short of gas supplies and its

demand is expected to rise in the future. Gas based urea plants will remain uncompetitive.

• Export availability

o Main variables: coal prices, RMB/USD exchange rate, international urea S/D; domestic

demand

o Assumptions: coal and f.ex. unchanged; domestic demand growth modest; international

market doesn’t need more urea =

o Chinese urea exporters will remain swing supply, volumes at ~10 million tonnes.

• Chinese 13th Five Year Plan on nitrogen fertilizer

o The market share of bituminous coal based urea capacity will increase to 40% of Chinese

total urea capacity in 2020 comparing to 25% in 2015.

o Anthracite coal based urea capacity share will decrease to 41% comparing to 50% in 2015

o Gas based urea capacity will decrease to 17% comparing to 22% in 2015. The rest 2% of

total urea capacity will be based on coking gas.

o Chinese urea operation rate was about 80% in 2015, and is target to reach 85% in 2020. But

this seems high without closures.

o China is targeting ‘value-added’ urea and UAN consumption

Phosphates


Chinese DAP and MAP exports declined significantly in the first five

month of 2016, affected by weak international demand and low prices

• In the first five months of the year, China exported about 1.4 million tonnes of DAP, down 37% y-o-y.

• China exported 622,000 tonnes of MAP in Jan-May of 2016, down 64% y-o-y.

Source: China Customs, Integer

Million tonnes, product

0.0

0.2

0.4

0.6

1.4

0.8

1.0

1.2

SepAug Oct DecNovMarJan Feb JulApr May Jun

2016

2015

0

50

100

150

200

250

300

350

400

450

500

550

600

650

DecNovOctSepFeb Apr JunMay JulMarJan Aug

2016

2015

Thousand tonnes, product

Chinese DAP export Chinese MAP export


Only a few DAP producers were able to fetch significant margins

in export markets in H1 2016

Source: Integer ; note: vertical axis deliberately redacted

1813 161512 17142 30 1 74 8 119 1065

DAP export cost to nearest port by plant, H1 2016US$/tonne of

Freight, handle cost & export tariff

Production cost• Chinese phosphate

producers have become the

key swing supplier.

• The fundamentals of Chinese

phosphate production costs

are even more diverse than

nitrogen.

• Producers have different

degrees of integration with

rock, Sulphur/sulphuric acid,

and ammonia.

• Location is also a factor.

• Low cost producers can live

with current prices, but many

cannot


Chinese ammoniated phosphate capacity expanded very rapidly – at 15%

CAGR during 2000-2015, but we do not expect to see significant changes

to capacity in the next five years.

• We expect to see capacity stabilizing at

about 16.8 million tpy in 2020

– New ammoniated phosphate

fertilizer capacity additions will slow

down.

– Some low analysis phosphate

fertilizer capacity is expected to

close due to poor economics.

• New projects will more or less offset

closures, so overall we do not expect to

see significant changes to total Chinese

ammoniated phosphate capacity.8.7 9.1 8.9 9.0

7.88.0 7.6 7.8

0

2

4

6

8

10

12

14

16

1816.816.5

2017

17.116.5

2014 2015 2020

DAP

MAP

Ammoniated phosphate capacity outlook

Million tpy, P2O5

Source: Integer


Conclusions and outlook on Chinese phosphate supply

• China’s phosphate fertilizer capacity expanded quickly in recent decades, but the pace of growth in the future is expected to slow as fewer new plants are added. A combination of the factors, such as declining state support, weaker producer margins, low utilization and spare capacity, and stagnant future growth prospects, underline the relatively static supply outlook.

• As Chinese phosphate fertilizer consumption gradually declines, we expect to see low grade phosphate fertilizer capacity and production shrink as market share is taken by high analysis ammoniated phosphate fertilizers.

• There is significant speculation that China’s phosphate reserves are significantly declining and that this is likely to negatively affect the country’s ability to maintain production. We can find little evidence that declining reserves will influence production in the short to medium term at least.

• Export volume:

– Again, key assumption is the exchange rate, along with international prices of phosphate but also sulphur.

– Export volumes will remain highly sensitive to international prices, with significant swing capacity.

– The international market is unlikely to need more DAP and MAP than China can supply.

Conclusions


Summary

• China has quickly become the world’s leading producer, consumer and exporter of nitrogen and

phosphate products

• Growth has moved in line with the country’s rising economic strength

• But, both supply and demand growth are slowing:

– There is now a significant supply surplus leading to exports and idle capacity

• Future industry development depends on general Chinese government economic policy toward spare

capacity

• Rationalise supply, or

• Export

– Exchange rate is critical

– Energy prices are important

– Availability and cost of capital are of decreasing importance, new capacity is less relevant

• China appears to have abundant resources of phosphate and coal

– This will not be a supply constraint in the next 5 years.

• The environment is important, but only so much:

– Some coal based nitrogen capacity is closing, but opening somewhere else, it is migrating

• We expect to see a gradual and slow withdrawal from the export market


Demand is a key point to watch: there tends to be a strong focus on

Chinese supply, but demand will become increasingly influential.

Extrapolation is a useless demand forecasting tool.

Source: Integer, LMC

K (Million tonnes)

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

2010 2015 2020 2025 2030

20

22

24

26

28

30

32

34

36

38

2010 2015 2020 2025 2030

8

9

10

11

12

13

14

15

2010 2015 2020 2025 2030

Fertilizer efficient

Base case

N (Million tonnes) P (Million tonnes)

chinese fertilizer industry - gpca fertilizer · pdf file · 2016-09-08the chinese...

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