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?
www.integer-research.com
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.
www.integer-research.com
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
www.integer-research.com
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
China’s share of world
MAP exports:
• 2% 2003
• 25% 2015 est.
China’s share of world
DAP production:
• 14% 2003
• 50% 2015
China’s share of world
DAP exports:
• 7% 2003
• 33% 2015 est.
MAP
DAP
Source: Integer
Nitrogen
www.integer-research.com
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
www.integer-research.com
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
www.integer-research.com
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
www.integer-research.com
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
www.integer-research.com
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
www.integer-research.com
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
www.integer-research.com
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
www.integer-research.com
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
www.integer-research.com
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
www.integer-research.com
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)