Proposal for Fertilizer Investment Research Quarterly Report

Publication Date	June 2009
Publisher	BSNABC
Product Type	Report
Pages
ISBN Number	not applicable
Product Code	BOA00057

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Summary

1. The prosperity index of the fertilizer industry was 47.3 in 2008, falling to 33.8 in Q4, hitting the bottom of 29.4 in Q1 2009, and 30.7 is expected for the whole year of 2009 and a rally to 39 in 2010.

2. Factors Conducive to Development of the Fertilizer Industry (Opportunities):

The Government raised comprehensive subsidy from 63.8 billion yuan in 2008 to 71.6 billion yuan in 2009for agricultural raw materials in order to support agricultural development;
Fertilizer price fell significantly from same period last year, and the substantial growth of the ratio between grain and fertilizer is conducive to mobilize farmers to purchase more fertilizer;
As the largest producer of coal in the world, China has abundant supply of coal and natural gas, and global surplus of sulphur provides affluent raw material for domestic fertilizer production.

3. Negative Factors to the Development of the Fertilizer Industry (Threats):

The growth of grain production in 2008 was faster than previous estimate, and the slowing down of the growth of grain production in 2009 would result to slowing down of the growth of fertilizer demand;
The growth of fertilizer production is faster than the growth of consumption, hence there is threat from climbing stock;
Threat of insufficient raw material supply due to reduction of production of pyrite and phosphorus ore;
Threat of resource waste and abandoning of outdated capacity due to surplus production capacity of fertilizer;
Decline of growth of fertilizer sales revenue from same period last year;
Falling of gross profit margin due to decline of fertilizer price and slowing down of growth of total profit.

4. Potash fertilizer among the fertilizers enjoys the best prosperity index, and as the domestic largest producer of potash fertilizer, Qinghai Salt Lake Potash Co., Ltd. witnesses around 70% of gross profit and enjoys a bright prospect.

Content

BOABC Focal Viewpoints
I. Prosperity Index of Fertilizer Industry

1. Prosperity Index of Fertilizer Industry: bottom hitting in Q1 of 2009, stabilization and rally expected in Q2

2. Research on Fertilizer Demand
Drivers of Fertilizer Demand: acreage, ratio between grain and fertilizer, and fertilizer export
Grain Production Level: 5.4% growth of grain production in 2008, and production in 2009 is projected to be similar as in 2008
Ratio between Grain and Fertilizer: the rising of the ratio in Q1 of 2009 was conducive to mobilize farmers to buy more fertilizer
Fertilizer export: export in Q1 2009 fell sharply from Q1 2008 except for DAP

3. Research on Fertilizer Supply
Drivers of fertilizer supply: abundance of raw material supply, stock and import volume
Abundant supply of coal and natural gas, 5.7% growth and 7.5% growth respectively
in Q1 2009
Sulphur Production: 2.4 million tons production in 2009 is expected, the rate of dependence on import to fall to 78%
Pyrite Production: 0.6% less production in Q1 2009 than Q1 2008, the falling rate slowed down
Phosphorus Ore Production: 2.9% growth in Q1 2009 than Q1 2008, a rally was seen
Ratio between stock and consumption: stock pressure still big
Still surplus production capacity of nitrogen fertilizer, the ratio between stock and consumption in 2009 to rise to 30.7%
Serious surplus of production capacity of phosphate fertilizer, the ratio between stock and consumption to rise to 23.6% in 2009
Still serious shortage of production capacity of potash fertilizer, the ratio between stock and consumption to fall to 11.1% in 2009 due to restraint of import
Compound and mixed fertilizers, the ratio between stock and consumption to rise to 24.9% n 2009
Fertilizer Import: import in Q1 2009 fell noticeably from Q1 2008

4. Growth of Fertilizer Production
Nitrogen Fertilizer Production: bottom hitting in Q4 2008, 9.4% growth in Q1 2009 than
Q1 2008
Phosphate Fertilizer Production: bottom hitting in Q4 2008, 14.7% growth in Q1 2009 than
Q1 2008
Potash Fertilizer: 11.7% growth in Q1 2009 than Q1 2008
Compound and mixed fertilizer production: minor growth in Q1 2009 over Q1 2008

5. Sales Revenue and Growth of Domestic Scaled Fertilizer Producers
Sales Revenue: sales revenue in Q1 2009 was the same as in Q1 2008
Growth of sales revenue: drastic growth of potash fertilizer in 2008 and back to normal

6. Gross Profit Rate of Fertilizer: continual decline in Q1 2009
Fertilizer Price: bottom hitting in Q1 2009, and rally expected in Q2

7. Total Profit and Growth of Fertilizer

8. Prospect of Fertilizer Industry
Positive growth of fertilizer consumption volume in 2009 is expected
Affluent production capacity of both nitrogen fertilizer and phosphorus fertilizer, but potash fertilizer would depend on import for a long time

II. Fertilizer Industrial Chain
Analysis of input and output of fertilizer
Each ton of urea consumes 0.6 ton of liquid ammonia on average
Each ton of MAP consumes 1.4 tons of sulphuric acid, 1.8 tons of phosphorus ore and 0.14 ton of liquid ammonia on average
Each ton of DAP consumes 1.5 tons of sulphuric acid, 1.8 tons of phosphorus ore and 0.24 ton of liquid ammonia on average
Supply of synthetic ammonia raw material: abundant coal supply but fast price upsurge, preferential policy on natural gas not appropriately implemented
Supply of sulphuric acid raw material: surplus of sulphuric acid production and surplus around the globe
Phosphoric acid supply: production capacity still surplus in 2009
Potassium ore supply: scarcity of potassium ore, external dependence is as high as 60%-70%
Fertilizer processing: production cost of processing companies close to raw material supply is remarkably lower than those not in raw material producing areas
Fertilizer sales link: the operational skeleton shift towards diversification and multiple operational modes from the agricultural raw material supply-sales system
Crucial factors for success of a fertilizer company are ability in obtaining low-cost energy and minerals and ability in cost control

III. Analysis of Fertilizer Market Competition
194 billion yuan of sales revenue of scaled nitrogen fertilizer producers in 2008, of which urea accounted for around 57%
Urea consumption structure: over 83% of urea was consumed by farming
58.3 billion yuan of sales revenue of phosphorus fertilizer in 2008
14.7 billion yuan of sales revenue of potash fertilizer in 2008
165.9 billion yuan of sales revenue of compound and mixed fertilizer in 2008

IV. Import & Export of Fertilizer from 2006-2009
Status of fertilizer export: fertilizer export makes up less than 10% of production, export fell sharply in Q1 2009
73% decline of urea export in Q1 2009
57% decline of concentrated superphoshpate export in Q1 2009
60% growth of DAP Export in Q1 2009
40% decline of MAP export in Q1 2009
98% decline of NPK export in Q1 2009
Status of fertilizer import: domestic demand shrank in Q1 2009, and fertilizer import on a downward trend
27% decline of potassium chloride import in Q1 2009 from Q1 2008
62% decline of potassium sulphate import in Q1 2009 from Q1 2008
Positive growth of DAP in Q1 2009 thanks to non import in Q1 2008
100% growth of NPK import in Q1 2009 than Q1 2008

V. Qinghai Salt Lake Potash Co., Ltd.: Domestic Leading Player in Potash Fertilizer MOP
Potash price kept at high level pursuant to scarcity
XINJIANG GUANNONG FRUITS AND ANTLERS CO., LTD.: benefited from State Investment Xinjiang Luobupo Potassium Salt Co., Ltd., and efficiency of potash fertilizer to be fully exploited in 2009
Relevant listed fertilizer companies

VI. Interpretation of Fertilizer Policy
The National Grain Development Plan (2008-2020) Ensures Stable Growth of Domestic Fertilizer Demand
Comprehensive subsidy of agricultural raw material shall link up with fertilizer price in 2009
Preferential Treatment of Fertilizer Raw Material and Energy Prices
Limited Impact from Relaxation of Fertilizer Price Control on Market
Slightly Lower Customs Tariffs on Fertilizer Export from July 1st, 2009
Fertilizer Reserve Raised to 1,600 Tons during Off Season Further Released Company
Pressure

Annex 1: List of Charts
Annex 2: Introduction to Fertilizer Products
Annex 3: Status of Pyrite Resource
Annex 4: Status of Phosphorus Ore Resource
Annex 5: Status of Potassium Ore Resource
Annex 6: Equilibrium of Fertilizer Supply and Demand
Annex 7: List of Top 100 Domestic Fertilizer Producers
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