The obstruction of fertilizer exports will not lead to a substantial drop in prices

Yesterday, the General Administration of Customs announced that it will increase the export tariffs on urea and phosphate fertilizers from December 1st to December 31st, 2010, from the original off-season tax rate of 7% to the 110% tax rate for export restrictions during the peak season. This tariff adjustment complies with the policy of “Controlling Chemical Fertilizer Exports and Adjusting Chemical Fertilizer Export Tariffs” in the stable price measures proposed by the State Council on November 20.

comment:

The tariff increase for chemical fertilizers in December 2010 is in line with our previous expectations. However, the government has only adjusted for the December single month, and the subsequent policy variables still exist.

Earlier we estimated that in the worst case, the government may limit exports until June and July next year. But even so, we expect that the domestic urea and phosphate fertilizer prices will not fall sharply. Main reasons: (1) According to previous years data, the limited export volume accounts for a small proportion of the total domestic consumption, the potential urea supply in the domestic market has increased by less than 10%, and the phosphate fertilizer is between 10% and 15%; (2) currently Domestic stocks are at a low level, especially in Northeast China and other regions where urea stocks are severe, while national diammonium stocks only account for about 1/4 of winter storage demand; (c) Demand for winter storage and spring plowing will also support domestic prices. Low inventory will force dealers to purchase into the market, in order to meet the winter storage market about 3.5-400 million tons of diammonium demand, it is estimated that the factory maintains a high operating rate of 2-3 months to meet demand; (D) the domestic cash production cost curve upward shift The trend has not changed. Since foreign prices are higher than domestic prices, exporters actually stimulated the start of some high-cost domestic production. The sharp decline in domestic prices will inevitably repress this part of the production capacity. High-cost urea and diammonium production capacity will account for about 60% of the total production capacity. And 10%; (e) Prohibition of exports for a longer period of time will likely force companies with insufficient working capital to reduce their operating rates. We expect urea may fall from about RMB 2,000/ton to around RMB 1800/ton (a decrease of about 10%), and the price of DAP will fall from RMB 3,100/ton to about RMB 2,900/ton (about 6%).

Investment Advice:

We believe that this month's adjustment of tariffs shows that the government intends to focus on ensuring domestic supply rather than suppressing prices. As the pressure on the upward shift in the industry's cost curve increases, the pressure to suppress prices may be counterproductive, instead suppressing production. The particularity of the chemical fertilizer industry may force the government to maintain a “preservation pressure and pressure protection” mentality. The essence is “priority domestic, cheap supply; a small amount of exports, high-income income.” Based on this understanding, if the domestic "Wu Chuan" starts smoothly, it is unlikely that the government will issue subsequent strict policies. The possibility that the export window will open shortly in the first half of next year still exists.