INSIGHT: Global implications for China fertilizer export tax changes

01 December 2010 17:14  [Source: ICIS news]

By Rebecca Clarke

LONDON (ICIS)--Details emerged last week of expected changes to the Chinese export tax regime  for urea and phosphates for 2011. Although designed to secure domestic supplies these are likely to have wider implications for the global fertilizer market given China’s position as a major source of supply for both products.

Thus far, the Chinese government has only confirmed that it is introducing a 110% export tax on both products from 1-31 December, when previously only a 7% tax applied to exports for the month. However, a new tax regime is also widely expected to come into force for 2011 which would effectively ban exports of urea and phosphates for eight months of the year.

The Chinese government has been restricting fertilizer exports via taxes for the past few years in a bid to secure domestic supply and prevent price rises, so news that it will continue to do so comes as no surprise. However, what is new this time round is that the windows in which the high tax will apply have been extended.

Given that China is a large exporter of both urea and phosphate fertilizers, further restrictions on exports are likely to have strong implications on the wider fertilizer market.

In terms of urea, the extended absence of Chinese urea from the international market could prove significant, as China is a major global supplier, with the ability to export over 1m tonnes/month.

A 110% peak season is expected to run from 1 November through to 30 June, while the off-season, when a 7% tax will apply, will run from 1 July until 31 October. Under the old system, the off-season periods for urea were January, 1 July to 15 September and 16 October to 31 December.

In addition to extending the high export tax window, a base price (maximum price) of yuan (CNY) 2,100/tonne ($315/tonne) FOB (free on board) for urea is expected to be set. A separate tax rate will apply to all export sales made above this price during the low season, payable on the differential between the base price and the actual price.

Traders expect that the absence of Chinese urea in the market will be felt most acutely during December and January, when urea would have been exportable under the old system.

China exported around 385,000 tonnes of urea in October 2010, up from 290,000 tonnes in October 2009. January-October 2010 exports totalled 4.1m tonnes, up sharply from the 2.3m tonnes exported in the same period of 2009.

On the phosphates front, the new tax regime would considerably reduce the amount of diammonium phosphate (DAP)/monoammonium phosphate (MAP) China will be able to export next year.

According to the expected plans, a tax rate of 110% would apply throughout the year apart from the June-September period when a 7% tax rate will apply. Under the old system, the off-season periods for DAP/MAP were January, June to August and 16 October to 31 December.

A base export price would also be applicable during the low season which for DAP will be CNY3,400/tonne FOB and for MAP CNY2,900/tonne FOB. As with urea, a separate tax would apply to all export sales made above these prices during the low season, payable on the differential between the base price and the actual price.

One trader active in the region, commenting on the imposition of the 110% export tax for December, said: “The Chinese export tax will undoubtedly mean DAP exports to India will be substantially cut. At least 100,000-150,000 tonnes of DAP now might not ship to India under contract.

“However, some producers are undoubtedly taking advantage of the situation: not performing on lower priced DAP contracts in order to sell at higher international prices on the spot market.”

Further forward, it is too early to estimate whether China’s export performance during June-September 2010 will be repeatable in 2011. In June this year, China exported 400,000 tonnes of DAP, in July nearly 750,000 tonnes, in August 768,000 tonnes and in September 524,000 tonnes. This equates to nearly 2.5m tonnes.

Even if this is repeatable, given that China exported 3.1m tonnes in total over January-October 2010, it would take out at least 600,000 tonnes of DAP from the supply side.

The extended peak export tax window for both products will also mean that exports will be concentrated into a shorter timeframe which will put considerable logistical restraints on port infrastructure. The new low seasons coincide with China’s rainy season which will put additional pressure on logistics, thus having the potential to cut export possibilities further.

At the same time, one long tax window instead of several smaller ones also lessens the time and flexibility producers have enjoyed thus far in putting product in place in bonded warehouses at the ports.

Meanwhile, the export tax on phosphates could also have a knock on effect on the feedstock sulphur market. The market has been quiet as a result as players assess the possible consequences of the expected new tax regime.

China is the largest import market for sulphur and there is some nervousness that any curtailments in phosphate exports will have an adverse impact on sulphur demand, which could see China withdraw from the market and prices fall.

Imports totalled 906,893 tonnes in October, down 186,905 tonnes from September’s 1.093m tonnes. Imports January-October totalled 8.786m tonnes, compared to 10.4m tonnes in the same period of 2009.

However, there is also the view that although Chinese phosphates producers will not be exporting, they will still need sulphur for production for the domestic market.

“Most people are still optimistic about the spring fertilizer season,” one market observer said.

“We expect fertilizer producers to build their stocks for the season beginning in mid December. Traders who still have stocks in their hands do not want prices to fall, and hence there is a general consensus between Chinese traders that they will try to maintain the current levels.”

($1 = CNY6.67)

For more on phosphates and urea visit ICIS pricing fertilizers
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By: Rebecca Clarke
+44 20 8652 3214

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