Tuesday, June 15, 2010

Grim Fertilizer Industry Situation

An article from the China Cooperative Times appearing on lots of websites today paints a grim picture of the situation in China's fertilizer industry.

The industry is grappling with chronic excess capacity problems that have been especially pronounced since 2007. This year problems are compounded by slow demand due to droughts and other natural disasters in China and weak global demand.

The article moans, "The phenomenon of supply exceeding demand is hard to change in the short run. Everyone knows there is excess capacity but manufacturers keep adding new projects." A similar article that appeared in January says the industry has to face up to four words: "供大于求" ("supply greater than demand").

The article adds, "...and there is no clear increase in world demand, so the excess capacity situation has become more and more serious." Translation: we can't export our way out of this problem.

Prices keep going down and companies are losing money. The worst case is urea, where companies lose 200 yuan per ton. "In the second half of the year there’s not much hope of a price rise, the market will stay at a low point."

The article speaks of "a crisis of confidence," "panic," "depression." "Distribution companies face a serious test, this year could face system-wide industry-wide losses. The market crisis induced panic is hard to heal in the short run. Presently, distributors bosses generally are in a confidence crisis. They could ask themselves, 'Can fertilizer operations hold on?' The industry 'depression' is hard to change."

Some companies are facing a cash flow crisis. "The situation is not good for the fertilizer industry development, and moreover it could give foreign competitors a chance to take advantage."

The situation is said to be good for farmers (presumably because fertilizer prices are going down) but bad for companies.

Since 2006 China has been giving farmers a "comprehensive input subsidy" ostensibly to offset rising energy and fertilizer prices. There has also been a related series of announcements and reforms directed at the system of supply and marketing cooperatives (the anachronistic input supply system holdover from central planning days) over the past year, another sign of trouble in the input supply industry.

The input subsidy program is now set up so that the subsidy automatically increases when input prices rise, but it does not go down when input prices fall. (So now farmers get the subsidy and cheap fertilizer!) The input subsidy now constitutes the major part of farm subsidies in China. In light of this article, one wonders whether the subsidies are really for the farmers, or are they actually a means to prop up fertilizer companies?

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