Five major factors determine the direction of chemical fertilizer market reform

Recently, voices calling for delaying the market-oriented reform of chemical fertilizers have emerged again in the industry, on the grounds that chemical fertilizer prices have fallen sharply and many chemical fertilizer enterprises are now struggling to operate; if preferential policies are abolished, some enterprises will find survival even harder, and some may even go bankrupt.

The market-oriented reform of chemical fertilizers is an irresistible trend. In July 2005, the Reform and Improvement of the Chemical Fertilizer Price Regulation Mechanism Plan (Draft) issued by the National Development and Reform Commission explicitly proposed adhering to the orientation of market-oriented reform. However, due to the influence of multiple factors, progress in the marketization of chemical fertilizers is still unsatisfactory. At present, the chemical fertilizer industry still enjoys many preferential policies, such as preferential electricity prices, preferential natural gas prices, preferential value-added tax, and preferential railway freight rates.

Recently, voices calling for delaying the market-oriented reform of chemical fertilizers have emerged again in the industry, on the grounds that chemical fertilizer prices have fallen sharply and many chemical fertilizer enterprises are now struggling to operate; if preferential policies are abolished, some enterprises will find survival even harder, and some may even go bankrupt.

In this regard, the author believes that during the "13th Five-Year Plan" period, the market-oriented reform of chemical fertilizers should be upheld unswervingly. Based on an analysis of the current internal and external environment of the chemical fertilizer industry, five major factors determine that the pace of market-oriented reform of chemical fertilizers should be accelerated rather than slowed.

First, the influence of the overall environment. In recent years, one of the greatest characteristics of China's economic work has been streamlining administration and delegating power, seeking efficiency through marketization, leaving all prices that can be formed by the market to the market, with the government not engaging in improper intervention, so that the invisible hand of the market can fully play its role.

Second, promoting the healthy development of the industry. At present, overcapacity in China's nitrogen fertilizer and phosphate fertilizer sectors is very serious, becoming the main reason for the sluggish market. Outdated production capacity must be eliminated to promote the healthy development of the chemical fertilizer industry. Otherwise, not only will enterprises that should die fail to die, but enterprises that should survive will also fail to live well. Some chemical fertilizer enterprises have outdated equipment, backward processes, high energy consumption, and heavy pollution, and should have been eliminated long ago, but because of the support of preferential policies, they are still lingering on.

Third, the policy background has changed. Previously, China's chemical fertilizer industry was small in scale, and output was far from meeting domestic demand, requiring large imports from abroad. To safeguard domestic agricultural production needs, the state gave the chemical fertilizer industry many preferential policies to support its development and increase output. However, with many years of major development, China's annual chemical fertilizer output has reached as much as 70 million tons, which can not only effectively meet domestic demand but also needs to be exported to the international market to absorb excess capacity. If preferential policies continue to be used to encourage production, the contradiction of overcapacity in the chemical fertilizer industry will become even more prominent.

Fourth, preferential policies have caused imbalance within the industry. Those enjoying more preferential policies are mainly some older chemical fertilizer enterprises, while new chemical fertilizer enterprises enjoy far fewer preferential policies, creating an imbalance within the chemical fertilizer industry. New enterprises possess advanced technology and should have an advantage in competition, but because the preferential policies they enjoy differ, they may not necessarily be able to outcompete those old enterprises that lack technological advantages but have "policy advantages."

Fifth, the timing for the marketization of chemical fertilizers is relatively good. In China, difficult reforms are often carried out when prices are falling, which can reduce much resistance. The 2008 fuel tax reform was just like this. The fuel tax reform was called the hardest bone to chew. Government departments had long had the idea of fuel tax reform, but because international oil prices were high, it was never implemented. Later, seizing the opportunity of the sharp decline in international oil prices in the second half of 2008, the state launched the fuel tax reform in a timely manner and established a new oil price formation mechanism dominated by market-based means, which finally came to fruition after many years. Last year's coal resource tax reform was also like this. It had been proposed for many years but was never implemented; in September last year, seizing the opportunity of a sharp drop in coal prices, it was launched in a timely manner. Now the market-oriented reform of chemical fertilizers also faces such an opportunity. Both international and domestic fertilizer prices are very low, so the resistance to market-oriented reform is very small. Even if fertilizer prices rise somewhat after market-oriented reform, they will still be much lower than previous highs, making it easy for farmers to bear.

For the chemical fertilizer industry, market-oriented reform may bring some pain, but prolonged pain is worse than short-term pain. After the pain of reform, it is believed that the chemical fertilizer market will usher in a better tomorrow.