FocusHigh Chinese urea exports may lead to more scrutiny

25 January 2013 15:10  [Source: ICIS news]

LONDON (ICIS)--Chinese customs data released this week showed a stark increase in urea exports in 2012, particularly in the latter months of the year, leading to expectations that government authorities may look to scrutinise its export policies further for this year, market sources said on Friday

The intensified scrutiny may lead to the potential imposition of tighter restrictions on exported materials, sources added.

According to China customs, urea exports totalled 6.95m tonnes in 2012, up 95% from the 3.56m tonnes exported in 2011.

But sources say that the most noticeable development was that exports in November-December totalled 3.1m tonnes, compared to 1.16m tonnes in the same period of 2011. This is significant as exports in November and December come after the closing of the low export tax window.

Currently China operates an export tax policy whereby urea exports during the domestic off-season 1 July-31 October are subject to a reduced export tax, while exports outside of this period are subject to an almost prohibitively high export tax in a bid to make sure there is sufficient urea in the domestic market for the peak season.

A tax of 7% was applied for exports during the July-October period in 2012, while a tax rate of 110% was applied during the peak season. For 2013, the low tax rate has been reduced to 2% and to 77% during the peak season.

Although the high tax rate is meant to apply to exports November-June, in practice there is a means through which producers and traders can export at the lower tax rate during this period.

If product is moved to bonded warehouses prior to 31 October - when the low tax rate expires - then the lower tariff is still applicable. This allows sellers to move quantities to the bonded warehouses for export at a later date, but without incurring the peak-season tax rate, effectively bypassing the policy.

The volumes are limited by storage capacity and are subject to storage costs, but capacity is high and the storage costs are minimal compared to the benefit of being able to continue to export at the lower tax rate.

So the 3.1m tonnes of urea exported in November-December 2012 all came from bonded warehouses, and was shipped after the closing of the low export tax window on 31 October.

Sources comment that this has come to the attention of the Chinese authorities and there are concerns that the system by which tonnes can be moved to the bonded warehouses has been too lenient.

“This has alerted the authorities that there is too much flexibility with the bonded warehouse system,” said one trader.

There are now market expectations that bonded warehouse business may come under much stricter scrutiny this year and measures may be introduced to limit the volumes allowed to move to bonded warehouses after the closure of the low export tax window, or potentially lead to a complete change in the system.

There had been expectations that 2013 could see more urea exports as the export policy had been eased slightly, with the low export tax decreasing to 2% from 7% in 2012.

However, sources comment that if the Chinese authorities do put the bonded warehouse system under closer watch, then potentially the volumes available for export in 2013 could be lower than last year.

By: Rebecca Clarke
+44 20 8652 3214

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