Date
20 September 2017
Natural gas prices are lower in the world market than in China which means prices in the mainland have plenty of room to fall. Photo: Xinhua
Natural gas prices are lower in the world market than in China which means prices in the mainland have plenty of room to fall. Photo: Xinhua

Why China’s plan to cap fertilizer consumption bears watching

This time each year, the market shifts its attention to China’s agriculture sector with the release of the No. 1 Central Document.

The document includes a blueprint for agricultural development, usually with groundbreaking product or technology.

The focus this time is expected to be on natural gas as an alternative to highly polluting fossil fuel in making fertilizers.

That could trigger an industry shake-up.

Coal-based fertilizer manufacturers are set to be replaced by those that use natural gas.

At present, 70 percent of Chinese fertilizer producers use coal as raw material while the rest, such as Ko Yo Chemical Group, use natural gas.

Natural gas accounts for 80 percent of Ko Yo Group’s fertilizer costs.

Falling natural gas prices are set to boost the company’s profitability.

Natural gas prices are lower in the world market than in China which means prices in the mainland have plenty of room to falll.

The National Development and Reform Commission slashed non-resident city-gate natural gas prices by 0.7 yuan on Nov. 20.

As a result, Shanghai’s city-gate prices fell 24.3 percent to 2.18 yuan (33 US cents) per cubic meter. Average prices in each province slipped 28.3 percent to 1.81 yuan per cubic meter.

The cuts gave market forces a bigger role in the non-resident natural gas market.

Meanwhile, the Chinese yuan continues to face downward pressure after losing ground to the US dollar, making Chinese fertilizer imports more expensive.

That’s good news for domestic manufacturers.

In addition, Chinese authorities have stepped up efforts to reduce coal consumption.

Coal-based fertilizer manufacturing, an energy-consuming and highly polluting process, will be affected.

By contrast, the natural gas chemical sector will hit peak season soon.

Still, many investors are worried about the prospects for the fertilizer industry this year.

Agricultural companies are ramping up plans to upgrade their technology and improve their core competitiveness.

China’s economy is likely to grow 6.5 percent this year.

But with Beijing determined to undertake supply-side reform in the chemical industry, the sector as a whole is expected to experience ups and downs.

That opens up an opportunity for the fertilizer and pesticide sectors to carry out their own restructuring even as China tries to cap growth in fertilizer and pesticide consumption by 2020 .

Fertilizer makers should strive to open new markets as the government steps up industry reform.

China’s “One Belt, One Road” project, which aims to establish an economic corridor from Asia to the Middle East and Europe, offers them an opportunity to develop overseas markets.

This article appeared in the Hong Kong Economic Journal on Jan. 25.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

JZ/DY/RA

Senior investment banker

EJI Weekly Newsletter

Please click here to unsubscribe