Integer View from China 25 August 2017 - Environmental audit pushes phosphate production costs up; Integer second value added summit - Integer
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Integer View from China 25 August 2017 – Environmental audit pushes phosphate production costs up; Integer second value added summit

Posted On: 25-08-2017 By: Grahame Turnbull

Lynn Wang, Integer’s Research Manager in China analyses the industry’s most unpredictable and complicated market in Integer’s ‘View from China’

Chinese environmental audit pushes phosphate production costs up, but of little influence on production in short term

The Chinese government’s policy to tackle its environmental problems with an ‘iron fist’, has inevitably had significant impact on the country’s fertilizer industry. In this view from China, we consider the impact of the country’s rounds of environmental inspections on the phosphates sector.

The government of China’s environmental inspections are implemented under the country’s Ministry of Environmental Protection (MEP), and over the last few years this has incorporated a sequence of rounds of inspections moving from province to province. The Chinese phosphate fertilizer capacity is mainly distributed in four provinces: Hubei, Sichuan, Guizhou and Yunnan, close to the country’s phosphate resources in the centre-south. Hubei has the largest phosphate fertilizer capacity, representing about 28% of the Chinese total, followed by Yunnan and Guizhou with 26% and 23% respectively. According to the Chinese Ministry of Environmental Protection (MEP), the fourth-round central government environment audit started in early August 2017 and eight provinces will be inspected, including one phosphate-intensive province, Sichuan, along with Jilin, Zhejiang, Shandong, Hainan, Tibet, Qinghai and Xinjiang. The other provinces and regions, including the other phosphate provinces, have been inspected during three previous rounds of environment audits.

Wastewater discharges and phosphogypsum disposal are typically the main environmental problems for phosphates producers. To mitigate the impact of inspections, phosphate fertilizer producers have reduced operating rates or even shut down temporarily in order to avoid or limit any protentional problems during the period of inspection. This has been a common response to inspections across other Chinese industries. In general, if problems are found, the inspectors fine companies or require any issues to be rectified within a defined timeframe. Both outcomes are understood to have contributed to higher cash costs for most phosphate producers.

The economic impact is also scale-related. Some big phosphate fertilizer producers, such as Yuntianhuan, Guizhou Kailin and Wengfu, are committing significant funds to environmental treatment. We understand that Yuntianhua invested RMB 97 million (U$15.6 million) on environment treatment in 2016, an increase of 12.8% year-on-year. Kailin invested RMB 65 million (US$10 million) to upgrade emission control facilities in 2016. However, some small-scale phosphate fertilizer producers without emission control systems installed are facing bigger problems and fines.

In 2016, phosphate fertilizer producers in Hubei province experienced a strict environment audit. Many phosphate producers were reported to have temporarily stopped production. In some areas, the local government even required producers to decrease operating rates by between 20-50% of their nameplate capacity according to the severity of recorded air pollution. The impact on production however would appear to have been negligible. According to the China National Bureau of Statistics, Hubei phosphate fertilizer production in 2016 actually increased by 3.7% year-on-year. This would seem to illustrate that the impacts of environment audits on phosphate companies depend not only inspection but also successful enforcement.

Environment audits are apparently accelerating the closure of outdated capacity. For example, in Hubei province, Chunxiang Chemical had to close a 30,000 tpy of MAP facility which had operated until the central governmental audit. Kailin also closed two 60,000 tpy of DAP production lines, a 120,000 tpy of DAP and a 100,000 tpy NPK production line in 2016. However, as we reported in our previous China View, closures are often countered by the government encouraging offset expansion investments. Kailin will construct a 100,000 tpy of water soluble DAP and a new 150,000 tpy of water soluble NPK facilities, to offset closures.

According to our investigation, about 1.8 million tpy of DAP capacity and 2.5 million tpy of MAP capacity has been idle since 2015 in China. The great majority of these companies are small scale – less than 300,000 tpy. Most are in areas located some distance from raw material phosphate rock mines, such as Inner Mongolia, Gansu, Qinghai, Guangxi and Shandong. The idle plants are effectively swing capacity due to high production costs and a general lack of competitiveness. The environmental inspections increase the likelihood that that these plants will close permanently in the near future because, but a pre-condition of closure is marginal economics.

The strength of different political and economic interests remain an important influence. The new Minister of the MEP, Mr. Ganjie Li, intended to take a tougher line on environmental governance, requiring that companies which cannot upgrade to meet emission standards in a short time should close by the end of September of 2017. However, the influence of the MEP only extends so far, and the department doesn’t have the capability to force companies to shut down directly. That power lies with local government, whose assessment must also take in to account the impact on economic growth and social stability which are often given greater weight. A realistic example is that in Guizhou province, where the local government agreed to new large phosphate chemical projects despite examples of serious phosphorus pollution.

In conclusion, during the past twenty years, it is clear that China has achieved rapid economic growth with some significant environmental sacrifice. The Chinese government, through the MEP, is ramping up implementation of measures to address environmental problems and improve environmental protection. According to a recent report from Xinhua, during 1H 2017 the MEP dealt with 17,169 environmental violations, issuing fines in 503 cases amounting to US$90 million, up 130% on the same period 1H 2016. However, this amount still seems relatively modest for an economy of China’s scale. Besides the frequent environment audits, the MEP plans to issue 800-1000 new environment standards before the end of 2020, revising existing environment laws which are regarded as old with substantial shortcomings. The MEP will also impose “environmental Protection Tax Law” from January 1st 2018. The new law will set the standards of environmental tax for all companies, instead of charging different rates in different provinces. All of these measures will affect companies’ costs in the long term, but so far we can find little evidence of substantial short-term influence on production volumes from the country’s phosphate industry, which is the crucial metric influencing international phosphate prices.

Integer launch second summit for value added fertilizer industry

Building on the success of Integer’s Value Added Fertilizer Summit Asia 2017 (VAFSA 2017), we are pleased to announce that VAFSA 2018 will take place in Singapore, 6-7 Feb 2018.

VAFSA 2018 will examine the growing opportunities in the region’s speciality and advanced fertilizer market and discuss the optimum strategies and technologies to improve fertilizer productivity, quality and ultimately profit margins.

View the VAFSA 2018 programme here >>

VAFSA 2017 summit report, delegate list and demographics
An exciting mix of industry thought leaders, fertilizer producers, technology suppliers, buyers, traders, key government officials and more attended VAFSA 2017. Delegate, sponsor and speaker feedback for the 2017 summit was extremely positive, and we are already incorporating this feedback into our planning for VAFSA 2018.

View the VAFSA 2017 Summit report (includes delegate list and demographics) >>

What’s new for VAFSA 2018

  • Exclusive insights delivered by senior government speakers on Asia’s fertilizer policies and regulations
  • Comprehensive market demand and outlook analysis for four core value-added fertilizer sectors
  • Two new topic additions (Ca/Mg/S nutrients and bio-fertilizers) and new full day track (the emerging biostimulant market)
  • 20% of conference sessions dedicated to focused, interactive discussions with industry leaders and partners
  • Six hours of networking events and activities for sharing your knowledge and building long-lasting relationships

VAFSA 2018 Discount offer
Integer is offering a $600 early registration discount for this summit. But please hurry – this discount expires on August 31 2017. For more information or to register please click here.