Integer View from China December 2017 – Potential for profound disruption to China fertilizer industry from environmental regulationsPosted On: 01-12-2017 By: Ali Asaadi
Since 2016, China has released a succession of environment polices: environment audits, “2+26 Cities Air Control Plan”, Environment Tax and Emission Permission License are all strong administrative methods being implemented by the government of China. The primary target is to improve the environmental impact of fertilizer and other heavy industries. A secondary objective is make the fertilizer industry leaner and more competitive, with the result that the domestic fertilizer supply and demand is likely to move more closely in to balance.
Environmental inspections lead to closures
Between January 2016 to September 2017, the Chinese central government implemented four rounds of environmental inspections. During the inspections, almost all producers have to stop production, at least temporarily. In the majority of cases, producers have resumed production after the inspections, but resumption is not possible in some cases, due to identified emissions problems, which require rectification and standardization.
The impact of inspections is in part evident from production data. According to the China Nitrogen Fertilizer Industry Association (CNFFIA), Chinese urea production decreased by 15% in the first eight months of 2017, with the operating rate of Chinese urea capacity in the range of 55-60% (depending on how you measure capacity). Inspections are not the only factor, and likely weak cash economics are a greater influence, but it’s clear that environmental inspections have added further economic and operational pressure. Reduced utilization has in turn contributed to tighter markets in some regions, leading to higher nitrogen prices. Ammonia ex-factory prices in early November 2017 reached RMB 3,000/t (US$448/t) in some provinces, up by 50% year-on-year. Urea ex-work prices increased to RMB 1,750/t (US$260/t) from RMB 1,350/t (US$200/t) in early November 2016, up 30% year-on-year. There has been an additional price boost from adjacent industries – the price of methanol increased by 35% year-on-year to RMB 2,700-2,800/t (US$403-418/t), encouraging some ammonia companies to switch downstream products from urea to more profitable methanol.
According to the China Phosphate Fertilizer Association (CPFA), Chinese phosphate fertilizer production decreased by 1.8% year-on-year in the first eight months of 2017. Again, the explanation is complex, and high production costs and a general lack of competitiveness are key factors, but small phosphate fertilizer producers have been most affected by environmental pressure. Environmental inspections have increased the likelihood that plants will close permanently, particularly where production economics are marginal. For phosphates, total production hasn’t changed by the same order of magnitude as nitrogen, because these small producers are a relatively small share of production volume overall.
“Air Control Plan” contributes to lower fertilizer operation rates
In early 2017, another short-term program on environment protection was issued. Considering that Beijing is the most polluted city in China, the central government published “2+26 Cities Air Control Plan”. The involved areas are “2+26 cities” in Beijng, Tianjin, Hebei, Shanxi, Henan and Shandong provinces, mainly within 800 kilometres distance from Beijing. The air control plan regulates that some industries such as steel and chemicals will be forced to reduce operating rates by 30-50% in heating periods – mainly from 15th November to 15th March. This plan impacts nitrogen production – urea capacity in “2+26 cities” is about 35 million tpy in 2017, representing about 44% of national total capacity. The plan will reduce urea production in these regions by more than 30% comparing to the normal production of previous years. The measure is an important factor explaining CNFIA’s estimate that Chinese urea production will drop to about 55 million tonnes in 2017, down 7 million tonnes or 11.3% comparing with 2016.
By contrast, the impact of the “2+26 Cities Air Control Plan” on China’s phosphate fertilizer production is relatively modest. Chinese phosphate fertilizer capacity is mainly distributed in four provinces: Hubei, Sichuan, Guizhou and Yunnan provinces, close to the country’s phosphate resources in the centre-south. As we mention above, the China Phosphate Fertilizer Association, estimates Chinese phosphate fertilizer production was lower by only 2% the first eight months of 2017 compared to the same time of last year.
Relocation of fertilizer plants in Yangtze River Economic Belt
A further measure will see some fertilizer plants being relocated. The Chinese government is regulating that chemical plants within 10 kilometres of the Yangtze River should be moved in the next several years. The first 47 relocation projects in eleven provinces have been released, including 8 fertilizer projects which are listed in the table below, with completion required before 2020. In addition, some phosphate fertilizer producers, such as Hubei Sanning, Hubei Yihua and Hubei Yangfeng, also need to relocate because they currently located close to the river, though a new position for these phosphate fertilizer producers is yet to be determined at present.
|Fertilizer relocation projects along Yangtze River Economic Belt|
|Anhui||Yinshang Xintai Chemical||150,000 tpy of ammonia|
|Anhui||Sinosalt||1m tpy of NPK|
300,000 tpy of ammonia
300,000 tpy of urea
|Anhui||Haoyuan Chemical||1m tpy of NPK|
|Hunan||Jinmei Jinniu||200,000 tpy of ammonia|
160,000 tpy of ammonium bicarbonate
|Chongqing||Wanlilai Chemical||200,000 tpy of Mannheim SOP|
|Chongqing||Jiangbei Chemical||600,000 tpy of NPK|
|Chongqing||Sanling Chemical||200,000 tpy of ammonia|
250,000 tpy of nitric acid
50,000 tpy of nitrate potassium
|Sichuan||Guangyu Chemical||150,000 tpy of ammonia|
Environment Tax leading to further fertilizer capacity rationalization
The Chinese government is introducing a new environment tax from 1st January 2018, and as the deadline gets nearer, the relevant Chinese authorities – the Ministry of Finance, the Ministry of Taxation and the Ministry of Environment – are speeding up taxpayer investigations.
According to the officials of the Ministry of Finance, the environment tax measure will refer to the pollution fee which has been charged for more than 40 years in China. The pollution fee varies from company by company and year by year based on the emission volume which also is associated with fertilizer and chemicals production. For example, Shandong Hualu Hengsheng paid RMB 5.9 million (US$0.89 million) pollution fee in 2016, up by 38% year-on-year. Sichuan Meifeng paid RMB2.7 million (US$ 0.4 million) of pollution fee, up by 123%.
Environment tax rates will also vary from province by province. The local government has the right to adjust the environment tax rate according to the local environment situation. For example, the tax rate of air pollutants is RMB 1.2 (US$ 0.18) per pollutant equivalent in Fujian, RMB 2.4 (US$ 0.36) in Guizhou and RMB 4.8 (US$ 0.72) in Jiangsu. The tax of water pollutants is RMB 1.4 (US$ 0.21) in Fujian, RMB 2.8 (US$ 0.42) in Guizhou and RMB 5.6 (US$ 0.84) in Jiangsu. The difference in tax rates between provinces can be up to ten times. environment tax will have more impact than the pollution fee.
The environment tax will create an incentive for fertilizer companies to improve pollution control capability, phase out old capacity and set up more efficient facilities. Considering that Chinese fertilizer capacity has developed irrationally for a long time, at the expense of the environment, the majority of producers need to increase inputs on emission control.
Environmental performance is often a function of capacity vintage. In China, about 13 million tpy of urea capacity is about 30-year old and another 10 million tpy of urea capacity about 20 years old (as illustrated in the Figure below). Most old nitrogen fertilizer producers use relatively inefficient coal gasification technologies with high emissions, putting them at greater risk of closure, with a greater and more urgent need to upgrade as soon as possible.
Figure 1 China’s urea capacity by year (million tpy)
Emission Permission License to exert indirect control on production
On 29th September of 2017, China’s Ministry of Environment Protection issued a new regulation Emission Permission License on nitrogen fertilizer. According to the regulation, the annual emission of nitrogen companies will be limited strictly based on emission standards, the company’s historical pollution discharge and local environment conditions. This means that there is the potential for nitrogen companies to be forced to reduce operation rates or shut down completely once they reach their annual emissions limitation. The application and verification of the Emission Permission License will be finished by the end of 2017 for the nitrogen fertilizer industry.
For phosphates, the equivalent legislation will come later, because the present environmental standards for the industry were made 10 years ago, and the government first needs to update the standards. As a result, the Emission Permission License for the phosphate fertilizer industry will be finished by the end of 2019.
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