LONDON, May 4, 2018 /PRNewswire/ --
Having expanded rapidly into phosphate and nitrogen fertilizer export markets during the past decade, Chinese fertilizer producers are now responsible for almost 30% of global combined DAP/MAP/TSP shipments.
More recently, the central government's introduction of tougher environmental policies has brought new challenges of supply disruption and higher production costs. With 29% of the world's DAP capacity and 36% of the world's urea capacity, adaption to this new business environment will prove critical to global price developments across most fertilizer markets.
China enters a new era of environmental regulation
A fundamental shift in Chinese environmental regulations has occurred over the past two years. Most chemical and heavy industries have faced reform and there is a clear drive by the central government to better regulate emissions and reduce environmental footprints. President Xi's speech at the 19th Chinese Communist Party Conference in October 2017 and his introduction of 'Xi's Thought', the highest form of party doctrine, demonstrates the party's commitment to environmental reform. Regional governments must continue to deliver economic growth, but no longer at the expense of the environment. The central government has also introduced environmental targets by which regional governments will be monitored, including emission reduction and the minimisation of water pollution. While regional governments retain their independence in setting taxes and implementing central government policy, Beijing is ramping up the pressure to ensure these regulations are being abided by.
Though President Xi's speech was a watershed for official policy, the crackdown on fertilizer producers (and heavy polluters) started in June 2016, with a grand tour by central government environmental inspectors around China. The inspections lasted over one and a half years and resulted in the temporary closure of many mines and industrial chemical plants, fines, and most tellingly, the reprimand of local officials. The nitrogen industry has already experienced accelerated capacity closures in 2017 due to these inspections.
Policy continued to develop over 2017 and the beginning of 2018. A new environmental tax, implemented from the start of 2018, will raise producers' operational expenditure, albeit modestly. Furthermore, the "Guidance to Enhance Industry Green Developments in The Yangtze River Economic Belt" document focuses on cleaning up the Yangtze river basin. It could result in significant capital expenditure requirements for many small and mid-tier fertilizer producers, with many likely to be forced to relocate by 2020. The question remains, who will pay for these relocation costs, and just how much capital will be required?
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