Soiled goods

How China’s fertilizer market has struggled


When the agricultural scientist Franklin Hiram King visited China at the turn of the twentieth century he was amazed the country had been able to till the land for 40-odd centuries without depleting the soil. By contrast, his native America was facing problems after just a few generations. The answer, he discovered, was faecal matter.

In the 1950s the Chinese economy remained heavily reliant on agriculture and many families still collected their own waste in earthenware pots that were buried in earth up to the rim (to prevent the odour from spreading). This would later be gathered by a fenfu, or “night soil” collector, and transported to rural communes.

The trade reached its peak when Shi Chuanxiang, a career fenfu, was named a “model producer”. In 1959 Shi famously met Liu Shaoqi in the Great Hall of the People. “Throughout his life his hand has been shovelling human faeces. It is now being grabbed by the Chinese president,” a Party newspaper marvelled at the time.

However, just a decade later, Shi was no longer viewed as a national hero but “scum” for his association with the disgraced and purged “capitalist roader” Liu. China’s most famous night soil collector died in 1975 after numerous beatings during the Cultural Revolution, which rendered him incontinent.

His death coincided with a population surge, which fed demand for fertilizer to enhance crop yields. Today, China uses seven times the amount of chemical fertilizer per mu than the EU does and six times as much as the US. The most typical fertilizer, urea, is a form of dry nitrogen spread directly over the fields.

Its overuse has contaminated lakes and rivers and its production – using anthracite coal – has polluted the skies. Rising demand saw an explosive growth in domestic production – output surged in Shandong province, the main source of fertilizer production, from 50,000 tonnes per year in 1999 to about 7 million tonnes within the space of a decade.

By 2015, China was exporting 13.8 million tonnes of urea a year, making it the world’s largest producer. But high export levels were not enough to forestall domestic overcapacity, which pushed prices to a low of around Rmb2,500 ($362.44) per tonne in the summer of 2016. As a result, more than half of China’s nitrogen fertilizer producers reported losses during 2016, according to the National Bureau of Statistics.

Yet, fertilizer is one of the sectors where the government has been able to reduce capacity. The commodity consultancy CRU Group recently told the Wall Street Journal that China has removed about 12.6 million tonnes of production nationwide since 2013.

Efforts really picked up steam in 2016 thanks to a crackdown led by the government, which sent a 260-strong delegation across six provinces to make spot checks and close inefficient polluters. This has helped prices rebound to about Rmb3,500 a tonne and kept utilisation down to 58.1% as of the end of March compared to 70% in June 2015. Exports were also down 57.9% year-on-year to 1.24 million tonnes in the first quarter.

However, the share prices of leading Chinese firms have not fared so well recently. Hong Kong-listed Sinofert, China BlueChem and XLX Fertilizer have all lost about a quarter of their value since mid-February, following a six-month rebound which had seen their shares go up in response to fertilizer price rises.

Analysts suggest investors are taking profits on fears that prices will come down as idled production restarts again. However, they believe this is unlikely given the government’s determination to impose further capacity cuts on fertilizer producers in the run-up to the winter of 2017.

One factor which may be weighing on investors, is America. While US leader Donald Trump has made frequent pledges to restore the country’s steel industry, it has been in fertilizer that local producers have regained more of their mojo versus Chinese competitors.

Thanks to the shale gas revolution, domestic producers have been able to make fertilizer at roughly $130 per metric tonne compared to $180 to $200 in China, which relies on coal as the energy input for 75% of production. China’s global market share ended 2016 at 36% compared to 43% in 2015. In 2017 it looks set to fall further still, likely at the expense of the Americans.

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