China Fertilizer Industry Outlook: Corporate Divergence Intensifies

As an important agricultural production material, demand in the fertilizer industry has remained relatively stable, but due to large-scale capacity expansion in earlier periods, combined with government controls on exports, the problem of overcapacity in the industry has become increasingly prominent, and this was especially evident in 2014. From January to September 2014, China's fertilizer industry saw output and prices fall by 2.1% and 8.8% year on year respectively; the simultaneous decline in volume and price led to an overall sluggish performance in China's fertilizer industry, and business conditions generally deteriorated. In the first three quarters, the industry's revenue growth rate fell by 2.23 percentage points to 5.53%, and total profit fell by 24.73% year on year, with the urea and phosphate fertilizer industries performing the worst, as their total profits fell by 263.88% and 17.59% year on year respectively.

⟦NL> To alleviate the above situation, channeling and restricting the industry's excess capacity has become a consensus between the government and enterprises. In terms of policy, it has basically been determined that a uniform tax rate or tax amount will be implemented throughout the year during the 2015 tariff cancellation window period, and restoring the collection of value-added tax to promote the survival of the fittest in the industry through cost markups has also been put on the agenda and is expected to be implemented in the short term. Looking ahead to 2015, driven by the relaxation of export policies, output and sales in the urea and phosphate fertilizer industries are both expected to achieve growth, but the downward or low-level movement of prices for major raw materials such as coal, phosphate rock, synthetic ammonia and sulfur is still unlikely to provide strong cost support for fertilizer product prices. Urea and phosphate fertilizer prices have room to rise driven by growth in output and sales, but the expected increase is limited, and the profitability of nitrogen and phosphate fertilizer enterprises will improve somewhat; domestic price trends in the potash fertilizer industry will still follow changes in international fertilizer prices, while the flooding accident at the Uralkali potash mine may affect world potash fertilizer supply and production costs and stimulate potash fertilizer price increases. It is expected that China's potash fertilizer major contract negotiation price will rise accordingly in 2015, thereby driving up domestic potash fertilizer prices, and the profitability of potash fertilizer enterprises will improve significantly; in the compound fertilizer industry, because there are numerous small enterprises, it will be difficult to raise industry concentration rapidly in the short term. At the same time, with the aforementioned increases in straight fertilizer prices in 2015, cost pressure on compound fertilizer production will intensify, and price increases are expected to move in line with costs, while the operating conditions of the entire industry will remain stable or improve slightly.

⟦NL> In terms of industry divergence, credit quality differences among the various fertilizer sub-sectors will still exist in the future. The credit quality of the potash fertilizer and compound fertilizer industries will remain better than that of the nitrogen fertilizer and phosphate fertilizer industries. At the same time, divergence among enterprises within the sub-sectors will become further pronounced. Large compound fertilizer enterprises enjoy relatively strong competitive advantages in scale, marketing channels and technological research and development, and will increasingly outperform small and medium-sized compound fertilizer enterprises; among urea enterprises, those using bituminous coal as a raw material have a greater cost advantage, and their credit quality will be higher than that of urea enterprises using natural gas or anthracite as a raw material.

⟦NL> In summary, China Bond Credit Rating believes that the overall operating conditions of the fertilizer industry will improve slightly over the coming period, and maintains a "poor" industry evaluation and a "stable" industry outlook for the fertilizer industry's credit quality.

⟦NL>