Severe overcapacity in the fertilizer industry leaves listed companies with a bleak outlook
The annual spring plowing season has once again slowly begun, yet the fertilizer industry, which is closely tied to farming, has been slow to show any sign of “spring.”
Recently, Xinyangfeng released its annual report, which stated that the company's main business, phosphate and compound fertilizer, which accounted for about 96.97% of total revenue in 2014, saw inventory exceed 20% of total assets for two consecutive years in 2013 and 2014; in 2014, the inventory of phosphate and compound fertilizer increased by 34.02% over the same period of the previous year. Xinhua Food, after reviewing the annual reports of listed companies, found that among Xinyangfeng's peers, Stanley and Yuntianhua saw even more astonishing inventory increases.
Behind the high inventory levels of the “big players,” the entire industry is not doing well. Not only is inventory high, but overcapacity, declining market demand, low industry profits, intensifying market competition and blind expansion of production and construction are among the factors constraining the industry's development.
The overcapacity problem stumps the big “fertilizer” players
During the spring plowing season, which is the peak period for fertilizer sales, Long Qiang, a fertilizer distributor in Chengdu, Sichuan, described a completely opposite situation to Xinhua Food. “Selling ‘big fertilizers’ now is basically a loss-making business,” Long Qiang said. “We distributors don't actively push these ‘big fertilizers,’ because for every bag sold we lose the money on that bag.”
The “big fertilizers” Long Qiang referred to are precisely the most important nitrogen, phosphate and potassium fertilizers in the fertilizer industry. According to the latest market survey by the All China Federation of Supply and Marketing Cooperatives, the total fertilizer supply during the 2015 spring plowing period will reach 38.44 million tons, which is not only fully sufficient to meet the fertilizer needs of spring plowing, but the three major fertilizer types of nitrogen, phosphate and potassium also show varying degrees of oversupply. Among them, nitrogen fertilizer supply exceeds demand by 250,000 tons, phosphate fertilizer supply exceeds demand by 880,000 tons, and potassium fertilizer supply exceeds demand by 2.65 million tons.
According to data provided to Xinhua Food by Chen Hongkun, vice president of Shandong Kingenta Ecological Engineering Co., Ltd., in 2013 China already had 18 synthetic ammonia and urea projects put into production, with total production capacity of synthetic ammonia and urea reaching 74.08 million tons and 79.48 million tons respectively, and national nitrogen fertilizer overcapacity exceeding about 30%; in 2014 China's urea output was overall flat compared with the previous year, totaling about 80.7 million tons. At present, China's total phosphate fertilizer production capacity is about 23.6 million tons, while consumption is only 12 million tons; total compound (mixed) fertilizer production capacity is about 200 million tons, yet annual apparent consumption is less than 60 million tons, with an operating rate of less than 30%.
“Especially in 2013 and 2014,” Chen Hongkun, vice president of Kingenta Group, told Xinhua Food, “these two years were the most difficult for the fertilizer industry since the start of the new century.”
Li Dianping, director of the Agricultural Materials Bureau of the All China Federation of Supply and Marketing Cooperatives, said that because China's agricultural production demand for fertilizer remains stable, it is very difficult to absorb the excess fertilizer production capacity, which has led to a gradual decline in fertilizer prices. Data shows that since 2013 up to now, China's fertilizer has experienced three consecutive years of price decline. Xinyangfeng's 2014 annual report predicted that “the overall overcapacity problem in the fertilizer industry will be difficult to alleviate, the elimination of backward production capacity and mergers and reorganizations will intensify, and profit margins will become increasingly thin.”
The increasingly thin profit margins in the fertilizer industry are not empty talk. On April 11, Guizhou Chitianhua released its annual report, with 2014 revenue of about 3.287 billion yuan and net profit of about -575 million yuan. Among the leading enterprises in the fertilizer industry, Chitianhua is not the only one with a net profit loss; Sichuan Meifeng's 2014 revenue was about 4.769 billion yuan, with net profit of about -245 million yuan; Yuntianhua's 2014 revenue was about 54.492 billion yuan, with net profit of about -2.583 billion yuan. In addition, some fertilizer giants saw their profits cut in half, such as Hubei Yihua's 2014 performance forecast, which stated that the company's profit in 2014 fell by 47%-74% compared with the same period of the previous year.
Under the situation of overcapacity, fertilizer is difficult to sell, and inventory levels are the most direct reflection of this. Xinyangfeng's 2014 annual report shows that in 2013 and 2014, the company's inventory as a proportion of total assets exceeded 20% for two consecutive years. In addition, Xinyangfeng's phosphate and compound fertilizer inventory surged in 2014, increasing by 34.02% over the same period of the previous year. In the 2014 annual reports of fertilizer giants Stanley and Yuntianhua, inventory increases reached 52.71% and 103.67% respectively. The sharp increase in inventory further reflects the enormous sales pressure on the entire industry. Industry insiders analyzed that there are roughly three reasons for fertilizer companies holding inventory: first, stockpiling, in order to compensate for insufficient production capacity during peak season and excessive short-term market demand; the national off-season storage policy serves the same purpose, ensuring sufficient supply of products during peak season; second, due to fierce market competition, products are unsold, resulting in a certain amount of inventory; third, affected by policy, some backward enterprises cannot adapt to the situation.