China's fertilizer industry is in a state of full-scale crisis, losing 300 yuan on every ton sold
In the program a few days ago, we saw that although the development of new energy sources such as solar power, wind power and clean technology faces various problems, they represent an important direction for countries seeking alternative energy in the future. So today let us focus on the traditional coal chemical industry within traditional energy. Coal is not only a fuel, but also the main raw material for producing chemical fertilizer. Chemical fertilizers include several types: nitrogen fertilizer, phosphate fertilizer, potash fertilizer and compound fertilizer, among which nitrogen fertilizer accounts for about 73% of total fertilizer output and is the type most consumed by Chinese agriculture. However, since the beginning of this year, nitrogen fertilizer and indeed the entire fertilizer industry have encountered unprecedented difficulties, even reaching a situation of industry-wide losses. What exactly is going on? Let us look at the reporter's investigation.
Fertilizer companies lose over 100 million yuan in half a year of production; shutting down would mean even greater losses
In late July, reporters from CCTV Finance's "Economy Half-Hour" came to Jincheng City, Shanxi Province, which is both an important anthracite producing area and a national chemical fertilizer production base. Located in Gaoping City, Jincheng, Jincheng Coal Tianyuan Chemical Co., Ltd. is one of the largest urea producers in the area, with an annual output of nearly 800,000 tons of urea. Zhang Jinjun, who was transferred here as general manager just three months ago, has been feeling great pressure recently.
Zhang Jinjun, general manager of Jincheng Coal Tianyuan Chemical Co., Ltd.: The pressure is enormous. I can't sleep at night.
Zhang Jinjun told reporters that the Jincheng Coal Group transferred him to this factory in the hope that he could turn around the losses the factory has suffered since last year, but under market conditions of persistently low urea prices, Tianyuan Chemical was still operating at a loss in the first half of this year.
Zhang Jinjun: A loss, and a fairly large loss at that.
Reporter: How much of a loss?
Zhang Jinjun: Over 100 million yuan.
Reporter: In just half a year?
Zhang Jinjun: Lost over 100 million yuan in half a year.
Zhang Jinjun did the math with the reporter: at present, producing one ton of urea at Tianyuan Chemical costs about 1,800 yuan per ton in total, including raw materials, labor, finance and management, while the market price of urea at the end of June was 1,580 yuan per ton, equivalent to a loss of 220 yuan for every ton of urea produced. Zhang Jinjun said that although the more they produce the more they lose, the factory is still operating at full capacity, because shutting down would likely mean even greater losses.
Losing 220 yuan on every ton of urea produced, yet forced to keep producing
Zhang Jinjun: At your current load, especially under these circumstances, you really can't cut production further; cutting production raises costs even more, because you can't reduce employees' income, so we still try our best to lower costs, striving to run the equipment at full load so that costs can come down, reducing maintenance expenses, reducing various expenses, and our management has also started to cut back, cutting salaries.
Tianyuan Chemical is a coal chemical enterprise controlled by Shanxi Jincheng Coal Group, and Jincheng Coal Group is a nationally important producer of high-quality anthracite and also the country's largest coal chemical enterprise group, with 18 chemical fertilizer production enterprises nationwide and a urea output of 13.6 million tons in 2013, accounting for 19% of the national urea output. Kang Shuxin, deputy general manager of the Coal Chemical Business Division of Shanxi Jincheng Coal Group Co., Ltd., told reporters that in the past half year, most of the fertilizer production enterprises under Jincheng Coal Group have been operating at a loss.
Kang Shuxin, deputy general manager of the Coal Chemical Business Division of Shanxi Jincheng Coal Group Co., Ltd.: For the operating results from January to June, 4 were profitable, 14 were losing money, with an overall loss of about 830 million yuan.
Not only are the nitrogen fertilizer enterprises under Jincheng Coal Group, which account for nearly one-fifth of the national nitrogen fertilizer output, suffering across-the-board losses; Shanxi Tianji Coal Chemical Group Co., Ltd., located in Changzhi, Shanxi, is likewise facing huge losses.
Chang Xuehua, general manager of Shanxi Tianji Coal Chemical Group Co., Ltd.: I think for our enterprise this is the year of greatest pressure; we have never encountered anything like this before.
The predecessor of Tianji Chemical was the Shanxi Province Chemical Fertilizer Plant, a coal chemical enterprise producing nitrophosphate fertilizer with an annual output of 900,000 tons. For more than two years recently, the factory's operating revenue has been in a rapid downward trend.
Chang Xuehua: The situation the year before last was even better than last year; in the first half of the year before last we made a profit of over 30 million yuan, and last year the profit was around 10 million yuan. This year a loss of 90 million yuan has appeared.
Chang Xuehua told reporters that their fertilizer currently has an ex-factory price of about 1,710 yuan per ton, but the total cost of one ton of their fertilizer is about 2,100 yuan per ton, which means that selling one ton of fertilizer means a loss of over 300 yuan, and they are currently gritting their teeth and persisting in production.
Chang Xuehua: The equipment must run continuously. Once it stops, first, the safety of the equipment cannot be guaranteed. Second, after stopping, the employees' wages still have to be paid, and the depreciation of the equipment still has to be absorbed, so at present we can only grit our teeth and keep running.
Reporter: Not stopping won't do, and stopping won't do either.
Chang Xuehua: Right, exactly.
Shanxi is the country's second-largest urea-producing province and the largest fertilizer-exporting province. Among the province's 35 chemical fertilizer production enterprises, there are 18 urea production enterprises, with an output of 4.05 million tons in 2013, accounting for 12% of the national total. According to statistics from the Shanxi Coal Chemical Industry Association, in the first half of this year Shanxi's urea enterprises suffered severe losses, with the loss-making rate reaching 45.5%.
⟧ CCTV Finance's "Economy Half-Hour" reporters learned from the China Nitrogen Fertilizer Industry Association that it is not only Shanxi Province; the fertilizer industry has seen an overall industry-wide loss situation since the beginning of this year.
Li Shousheng, chairman of the China Nitrogen Fertilizer Industry Association: In the same period last year our nitrogen fertilizer was profitable, but this year our nitrogen fertilizer is losing money across the entire industry.
Reporter: Why has this situation arisen?
Li Shousheng: Because demand is shrinking while capacity is again excessive, this has led to a sharp drop in our fertilizer prices; in many regions the market sales price has already fallen below the production cost price, so the entire industry is in a loss situation. From January to May the entire industry lost 2.36 billion yuan, with benefits down by more than 160% compared with the same period last year, a very large decline.
Statistics from the China Nitrogen Fertilizer Industry Association show that from January to May this year, the national average ex-factory price of urea was 1,568 yuan per ton, down 24% year on year; in May the average price slid to 1,400 yuan per ton; from January to May the entire industry lost 2.36 billion yuan, with 163 loss-making enterprises, while in the same period last year the entire industry made a profit of 3.7 billion yuan, with total profits down 163.7% year on year.
Li Shousheng: Output is also declining, with output down 0.6%, but prices down 24%, so our operating revenue also fell 5.1%; this is an overall decline. The production situation for nitrogen fertilizer is very severe, and the difficulties are still intensifying.
Declining output, declining prices, industry losses: the fertilizer industry within traditional coal chemicals is facing its most severe situation in the last 10 years. So why has such a sudden decline occurred? What exactly is the reason behind it? Let us look at the reporter's investigation next.
Coal prices fall sharply, and urea suffers collateral damage
During the interviews, reporters learned that since the second half of last year, driven by the sharp drop in coal prices, urea product prices have slid all the way down, falling continuously from 2,500 yuan per ton in the second quarter of 2012 to a national average urea price of even 1,400 yuan per ton in May this year, a drop of as much as 44%. The sharp decline in end-user urea prices is unquestionably the most direct cause of the overall losses in the urea industry.
Zhang Jinjun: The entire coal market is declining, and a coal decline will inevitably cause our urea to drop in price along with it. And the magnitude of the price drop is greater than that of coal. Because the entire agricultural materials industry is very sensitive to coal; at the slightest movement in coal, urea will certainly (follow), and even before coal has moved, urea starts falling.
Zhang Jinjun gave CCTV Finance's "Economy Half-Hour" reporter this analogy: for example, if coal drops by 50 yuan, urea may not drop by 50 yuan, but by more than 50 yuan, perhaps 80, perhaps 100. Because these agricultural materials businesses are all doing business; with this thing, when they see a drop of 50, they wonder whether it will drop further, so their enthusiasm for taking goods is not high, and they tend to wait and see. Once they wait and see, the enterprise has already produced, and it can't keep piling up inventory here forever; short-term inventory buildup is fine, but over a long period it has to sell at a low price. So it is obvious with Tianyuan Company: its inventory is five or six thousand tons, and at eight thousand tons the warehouse is full and it can't operate, so it must cut prices to sell. That is the situation.
Fertilizer with "piled-up inventory"
Li Shousheng, chairman of the China Nitrogen Fertilizer Industry Association, told CCTV Finance's "Economy Half-Hour" reporter that since the beginning of this year, changes in the environment of slowing macroeconomic growth in our country will inevitably affect the nitrogen fertilizer market. According to statistics, from January to May this year, apparent consumption of chemical fertilizer fell 7.1%, among which nitrogen fertilizer fell 8.6% and urea fell 9.2%. Li Shousheng believes that the decline in fertilizer market demand is one of the reasons for the intensified difficulties in the fertilizer industry this year, while the more fundamental reason is the severe overcapacity in the fertilizer industry.
Li Shousheng: Our national urea capacity has now reached 81 million tons, but our entire demand, including domestic demand, exports and industrial demand combined, is 65 million tons, so our overall capacity and demand, roughly comparing them, means we have about 15 million tons of surplus.