Since the third quarter, the energy-saving electricity restriction policy has spread to many nitrogen fertilizer companies, the overall operating rate of the industry has declined, and product supply has tightened. Domestic and foreign urea prices rebounded significantly. At the same time, the strong international demand for phosphate fertilizer has driven up prices and stimulated China's exports. Domestic diammonium phosphate production enterprises have less impact from restricted electricity and the operating rate has increased to 90%. As the industry boom has just begun, the industry's export tariff adjustments are on the way, and energy-saving power cuts are likely to end. Investors may be generally concerned that the nitrogen and phosphate fertilizer industry will return to their predicament.
According to Bloomberg and FMB, there are two possible changes in export tariffs: export time in the off-season is shortened to 4 months, urea is from July to October, and phosphate fertilizer is from June to September; during the peak season, export tariffs remain at 110%. At the same time, the Chinese government may increase the off-season export tariff to 10% and set the maximum export price in the off-season, with urea at 2,100 yuan/ton, and phosphate fertilizer at 3,400 yuan/ton; or 2 maintaining the current off-season, 7% export tariff unchanged In the off-season, the export base price was lowered, urea was lowered from 2,300 yuan/ton to 2,100 yuan/ton, and phosphate fertilizer was reduced from 4,000 yuan/ton to 3,400 yuan/ton.
We believe that the actual effect of the tariff increase on China's export restraint may be less than current market expectations. The steady increase in demand for global fertilizers next year and higher China's export tariffs may jointly push up international fertilizer prices. However, after a short-term slight correction, the domestic market may still rise again. The overall average price may be higher than in 2010. In addition, the new tariff policy may further accelerate the consolidation of the industry. The shortening and postponement of the export window period may increase the working capital pressure for domestic production and sales companies to use for inventory. At the same time, with the release of more concentrated exports, there may be tension in export capacity. Therefore, companies with abundant cash flow, short-term channels, and convenient transportation facilities may become beneficiaries.
The cost of cash production may continue to rise, and the fluctuating price range of urea may rise accordingly. Low-cost companies like China Chemicals and Hualu Hengsheng are expected to benefit from it.
Although the nationwide energy-saving curtailment is about to end, the major costs of domestic nitrogen fertilizers, such as coal, natural gas, and electricity, will continue to maintain the trend of rising prices.
The overall cost curve of China's urea industry is still moving upwards. We estimate that, of the domestic urea capacity in 2011, only 25% could maintain a cash production cost of less than 1,600 yuan/ton. Although the release of energy-saving power cuts in the future, and the adjustment of export tariffs or some of them, may again cause oversupply in the domestic market, we believe that the rising trend in cash costs will be the decisive factor in the effective operating rate and product prices of the industry.
Phosphate fertilizer export tariffs may increase, but export-integrated companies will benefit. The export tariffs on phosphate fertilizers may increase or domestic phosphate fertilizer exports may decrease, and the domestic operating rate may decline. Some production companies that do not possess resource advantages and have higher costs may cut production or suspend production. At the same time, due to the predominant supply of phosphorus for export, domestic stocks are extremely low, and the demand for winter storage and fertilizer use in the spring will still support domestic phosphate fertilizer prices, and the downside may be limited.
China's export of phosphate fertilizers will reduce or increase the price of international phosphate ore, and domestic non-agricultural phosphorus chemical production enterprises may benefit. We predict that if China's export of phosphate fertilizer is completely blocked, the international trade in phosphate fertilizer will have a gap of 200 to 3 million tons of P2O5. The international high-cost phosphate fertilizer production capacity will return to the market, increasing the demand for international phosphate rock from 600 to 8 million tons, which may push up the price of international phosphate rock. As the domestic phosphate rock market is affected by 35% high tariffs and 1.5 million tons of export quotas, domestic prices will remain low. Relatively low export tariffs of 0 to 7% of non-agricultural phosphorus chemical downstream products, such as phosphoric acid and phosphates, may show export cost advantages. Domestic companies such as Xingfa Group may benefit from this.
Investment advice: Maintain the recommended ratings of China Chemical and Huaru Hengsheng. With the end of energy conservation and emission reduction and the introduction of nitrogen fertilizer tariff policies, domestic nitrogen fertilizer prices may temporarily decline.
At that time, if the industry's leading stock price is weighed down, it will be a good buying opportunity. Maintain Xingfa Group's prudent recommendation rating. If the increase in the tariff rate of the phosphate fertilizer exceeds the market expectation, and the government has not raised the export tariffs on the phosphorus chemical products at the same time, it will form a substantive advantage for the Xingfa Group.
Risks: The industry has long been faced with the problem of overcapacity, the number of loss-making enterprises remains high, but it is slowly eliminated, and the degree of concentration is difficult to increase. The government continued its policy of preferential gas prices and electricity prices for the nitrogen fertilizer industry; the demand for international and domestic fertilizers declined; the country increased the export tariffs on phosphorus chemical products in the same proportion.