Monday, November 18, 2013

Phosphorus enterprises have mixed feelings on Off-Season Reserves for 2013/2014

The national call for bids for the Commercial Reserves of Chemical Fertilizers during the Off-Season (Off-Season Reserves) was closed at the end of Oct., and the local call for birds is open. However, enterprises are hesitant to participate, according to CCM’s Phosphorus Industry China Monthly Report 1311.

In order to stabilize fertilizer prices between peak season and off-season, China implemented the off-season commercial storage system of fertilizers in 2004. On Sept. 6, 2013, the National Development and Reform Commission (NDRC) and the Ministry of Finance of the People's Republic of China (MOF) started the Off-Season Reserves bidding process for 2013/2014, with a pre-qualification of the enterprises. According to the NDRC, the reserves will total 18 million tonnes for 2013/2014 (17.3 million tonnes of Off-Season Reserves and 0.7 million tonnes of phosphate fertilizer special Off-Season Reserves), of which 3.7 to 5.2 million tonnes are estimated to be of phosphate fertilizers. The figure includes the phosphate fertilizer special Off-Season Reserves, which comprise mainly high concentration fertilizers such as DAP. The effect of Off-Season Reserves on DAP was especially significant compared with the effects on other kinds of fertilizers, because the phosphate fertilizer Off-Season Reserves account for about 30% of the annual phosphate fertilizer consumption.

Most of the Off-Season Reserves are allocated to provinces in Northeast and Central China.

Some enterprises are quite willing to take part in the Off-season Reserves, for multiple reasons.

The first advantage are the abundant low-interest loans offered to participants by the Chinese government for six months (from Oct. 2013 to March. 2014), coupled with the low price of phosphate fertilizers in the end of Oct. Considering the current difficulties in getting low-interest loans and some enterprises' estimation of a slight decline in phosphate fertilizer prices, taking part in the Off-Season Reserves will possibly bring high profits.

The second is the support of the increasing prices of downstream agricultural products in recent years. In 2004, China first implemented the Price Floor Policy for Key Grain Varieties (for example, wheat and rice). In 2014, the price floor for wheat will be raised by around 2 cents/kg, to USD0.385/kg. Following the uptrend of past years, the rice price floor will also be raised.

The third is the low inventory of distributors. Given the continuously decreasing prices of phosphate fertilizers in 2013, fertilizer distributors maintained their inventory at low levels. This is an incentive for fertilizer manufacturers to develop Off-Season Reserves, since the demand for the first high season of 2014 (beginning in March) will be higher than the demand for the same period in 2013, when distributors' warehouses were fuller.

There is, however, a number of phosphate fertilizer producers unwilling to develop Off-Season Reserves due to continually decreasing prices. Between improving their relationship with local governments in order to enjoy privileges, and not participating in the Off-season Reserves to avoid large potential losses, some manufacturers, especially small ones, are likely to choose the latter.

Given the absolute surplus of phosphate fertilizers, the fluctuation of prices between off-season and high season will not be substantial. In addition, in an industry already crippled by overcapacity, the Off-Season Reserves end up providing a respite to manufacturers still operating obsolete production lines. This can only be damaging to the fertilizer business as a whole, since it aggravates the surplus and hinders the overall technological development of the industry. Some specialists have suggested replacing the Off-Season Reserves with more effective governmental subsidy mechanisms.

Upon the whole, most of the eligible manufacturers are quite eager to undertake the 2013/2014 Off-Season Reserves.

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