Fertilizer units in China stick to natural gas despite price hike

03 June 2010 09:17  [Source: ICIS news]

GUANGZHOU (ICIS news)--Fertilizer plants in China will continue to use natural gas as a mainstream feedstock despite recent price hikes due to its cost advantage, industry sources said on Thursday.

On 31 May, the Chinese government announced an increase of yuan (CNY) 0.23 ($0.03) per cubic metre of natural gas from 1 June to better reflect the true value of the clean energy.

The move would bring up the production cost of fertilizer producers - especially urea plants fed by natural gas - by an average of CNY149/tonne, analysts said.

The hike, however, was lower than market expectations and would not pose any significant impacts on those fertilizer producers, they added.

“Those producers’ gross margins stand nearly 50% and the hike of natural gas prices would just reduce that margin by less than 10 percentage points. Their gross margins would remain above 40%, which is relatively high,” Wei Tao, an analyst at Shanghai-based Guotai Junan Securities (GTJA) said.

“China’s natural gas prices have long been undervalued and users had already predicted the rise,” Wei also said, adding using natural gas as a feedstock would remain cheaper than coal.

“The price increase is too small to be of any pressure on us. Our operation performance will still be determined by market conditions. Good sales could digest the price hike,” said a source from Sichuan Meifeng Chemical Industry, a leading fertilizer producer based in southwest China.

Natural gas-based chemical producers said they would not consider switching feedstock as the clean gas remains the most cost-effective choice for them.

Meanwhile, overcapacity of fertilizers is still the biggest pain for the industry in China, market sources said.

“Oversupply [of fertilizers] is a long-term problem for the industry and that has been dampening prices and operation rates for us,” a source from Guizhou-based Chitianhua said.

($1 = CNY6.83)

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By: Fanny Zhang
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