Wuxi Yacai Precision Machinery Co., Ltd , https://www.yacaijm.com
Industry commentary: Fertilizer companies will continue to withstand double squeeze
In 2005, many fertilizer companies faced significant challenges due to rising raw material costs and strict price controls. Despite this double pressure, there were still positive factors that helped offset some of the losses. As a result, the industry did not suffer as much as expected, and 2005 was still considered a relatively good year for fertilizer producers. However, this year may bring even greater difficulties. According to recent observations, chemical fertilizer companies are facing a more severe situation with weak demand and increasing input costs, which could be worse than in 2005.
In 2004, both production and consumption of fertilizers in China reached record levels. The output of chemical fertilizers hit 45.78 million tons, while agricultural use reached 46.37 million tons. High domestic demand and strong exports led to a tight market, creating shortages. But things changed in 2005 when the government imposed a 30% export tax on urea, effectively halting exports. Although the tariff was later reduced to 15%, exports remained restricted. In 2005, fertilizer production increased by over 3 million tons, but domestic consumption growth slowed. Inventories also rose, signaling an oversupply in certain segments.
China's new fertilizer capacity this year is expected to exceed 4 million tons, pushing total fertilizer supply beyond 51 million tons. This has led to an oversupply in the nitrogen fertilizer market. Meanwhile, phosphate fertilizer self-sufficiency reached 94.3% in 2004, and with new plants coming online, the country will likely achieve full self-reliance, possibly leading to excess supply. Potash remains the only exception, but overall, the domestic market is no longer facing a shortage.
This shift in supply and demand suggests that even without government intervention, fertilizer prices are unlikely to rise sharply. However, the cost of production for chemical fertilizer companies continues to climb. For example, about 70% of nitrogen fertilizer producers use coal, primarily anthracite lump coal, which now costs over 700 yuan per ton. With each ton of urea requiring 1.5 tons of coal, the cost per ton of urea exceeds 1,400 yuan. Oil-based and gas-based urea production is even more expensive, costing over 1,500 and 1,250 yuan per ton, respectively.
Natural gas prices have also started to rise across the country, with increases of 50–100 yuan per 1,000 cubic meters. Recent coal ordering meetings indicated that the government will no longer intervene in coal pricing, allowing coal and power companies to set prices independently in 2006. This could lead to higher energy costs for fertilizer producers, further squeezing their margins.
Given these challenges, fertilizer companies must prepare well in advance to mitigate the dual pressures of high costs and weak demand. If they fail to adapt, many may struggle in the coming years, marking the end of a period of relative stability.