From Cover, issue no. 340, November 5th 2007
Translated by Rui Bingyou
Despite several high-level, high-momentum attempts at shaking up the industry and intruducing more market competition, two government-backed businesses continue to reign supreme over potassium fertilizer imports. The massive windfalls they reap come at the expense of millions of farmers and the local firms who process it for them.
The chemical fertilizer industry has a lot it wants to settle with Sinochem, China's massive state-owned chemical products producer. Despite being one of the world's 500 largest companies, it is still stubbornly opposed to relinquishing its monopoly over the lucrative potassium fertilizer import industry, which it inherited as a state-owned enterprise under the planned economy.
For China's agricultural industry, potassium-based fertilizers are a staple for survival. Even though China's domestic production of it reached a new high in 2006, China still relies on imports to satisfy 67 percent of domestic demand. High-quality fertilizer with 40 percent or higher content of potassium are exclusively sourced from abroad.
Senior industry insiders who wish to remain anonymous say that Sinochem's subsidiary, Sinofert, reaps a net profit of 1,000 yuan per ton of imported potassium fertilizer. With China importing 9 million tons of it this year, this will cost the 900 million farmers who use it an average of 10 yuan each.
Three years ago, the Ministry of Commerce increased the list of those with the power to import potassium fertilizer to ten. But until today, of those ten, only Sinofert and the China Agricultural Resource Group (which is controlled by the China Supply and Marketing Cooperative) have been able to directly import large quantities of potassium fertilizer.
And during the past three years, the price of each imported ton has increased from under 1,000 yuan to more than 2,350 yuan today.
So have the costs to farmers.
Locked Out of the Market
"In these past three years we have been unable to import a single ton of fertilizer," says Chou Guangchun, president of Liaoning West Special Fertilizer, based in Liaoning province. "Even a huge company like Petrochina is helpless." Liaoning West is one of the ten firms that ostensibly has the right to import potassium-based fertilizer.
Sinochem is directly administered by the State Council's State-owned Assets Supervision and Administration Commission, and has operations in chemical fertilizers, petroleum, finance, and other major sectors. Under the era of the planned economy in China, Sinochem played the role of China's chemical product importer and exporter. Crude oil and potassium fertilizer were sold solely by Sinochem.
Its stranglehold on petroleum imports was broken for the first time in the beginning of the reform and opening up period. Of the 100 million tons of crude oil it imported, Sinopec made up 80 million, with Sinochem taking up most of the rest. But its status as the sole importer of potassium fertilizer was not shaken.
At that time, China's central government was closely following the "three agricultural issues", especially the harsh burdens faced by farmers. Representing businesses that relied on potassium fertilizer imports, China's Phosphate Fertilizer Industry Association suggested to the National Development and Reform Commission that "Large chemical fertilizer producers should have their own power to import potassium fertilizer."
Through intense rounds of negotiations, the National Development and Reform Commission decided that a pilot batch of six new firms should be given the power to import, a list that was eventually expanded to ten.
Wu Xiyan, chairman of the Phosphate Fertilizer Industry Association, says that in that first year prices began to increase, and the market became a sellers market. Joining together was still useless due to their collective small size..
But some firms thought that Sinofert's contracts had been secured by exerting pressure on the foreign exporters who, wary of stirring its wrath, did not sign contracts with the other six firms
In 2005, the six entrusted Zhong A Chemical Fertilizer to serve as their representative in potassium fertilizer price negotiations. This firm had previously been lauded by Deng Xiaoping and was among batch that had earned the right to be an importer of potassium fertilizer. But when it went to directly negotiate prices with foreign suppliers, Sinofert blocked it.
By the end of October, the Association sent a report to the Ministry of Commerce suggesting that it break the monopoly and establish a new system for potassium fertilizer imports. By the end of the year, the report had drawn the attention of vice-premier Wu Yi of the State Council, who wrote a response-- a sternly worded memo calling for the potassium fertilizer imports system to be re-evaluated without delay, and saying that the two firms cannot sacrifice national interest for their own profits, and that privately run businesses enter the trade.
On December 22, Gao Hucheng, vice-minister of the Ministry of Commerce, took charge of the potassium imports coordination council. Although Sinochem and the China Agricultural Resource Group both firmly opposed any revamping of the system, the Ministry of Commerce ultimately established a new guiding principle, that all of the concerned associations would work together on negotiating prices with foreign exporters.
On January 4th of 2006, the Ministry of Commerce held a meeting that once again affirmed vice-premiere Wu Yi's memo regarding reforming the potassium fertilizer trade, and stressing the need to cement the power to import potassium fertilizer for eight firms.
In mediating how much share the firms should have over the imports, the Ministry called for Sinofert and the China Agricultural Resource Group to receive 80 percent, with the remaining 20 percent to be split among the remaining eight firms.
But Sinochem and the Resource Group disagreed that different contracts should be signed. In the end, the Ministry of Commerce had to personally coordinate the issue, and forced the remaining eight firms to sign contracts with the former two firms' overseas subsidiaries. One spokesperson from a chemical fertilizer company from Hebei province said, "They didn't let us directly sign contracts with overseas suppliers…so 100 percent of the trade fell back into the hands of Sinofert and the Resource Group."
That same year, the six firms found a proxy with even greater buying power: Sinopec, who had agreed to represent the firms for free, and who theoretically had buying power even greater than Sinochem and the Resource Group. No one foresaw that Sinopec would unilaterally withdraw from the agreement by June.
By the end of 2006, Wu Xiyan, president of the China Fertilizer Phosphate Association, along with the International Fertilizer Industry Association's chairman, Wu Sihai, jointly delivered a letter to Wen Jiabao, the State Council's premiere, regarding the monopoly. Wen Jiabao responded.
"The result was that the Ministry of Commerce held a meeting of various ministries, the National Development and Reform Commission, the Ministry of Agriculture, and others, but until the beginning of this year they still had been unable to put out a feasible plan," says one participant of the conference.
During this year's twin congresses, Zhou Furen, director of the board at Liaoning West, Ping Yisheng, his counterpart at Shandong Lubei Corporation, along with Zhong A Chemical's president Wu Sihai, three other representatives, and Wu Xiyan visited the foreign trade office of the Ministry of Commerce. According to Zhou Furen's recollection, debate during the meeting was intense and sour. The event became widely spoken of throughout the industry, and Zhou became famous for making "a big fuss at the Ministry".
During the twin congresses, three representatives from the National People's Congress submitted a scheme that ultimately became Suggestion 6265 of the fifth meeting of the 10th National People's Congress, which chiefly called for the opening up of the potassium fertilizer industry. On September 30th, because they were still unsatisfied with the Ministry of Commerce's responses, three representatives of the NPC petitioned the Standing Committee of the NPC, which gave an official response. But sources say that the issue was still unresolved.
Mysterious Prices, Subtle Negotiations
China's potassium fertilizer imports are the highest in the world, and although prices increase every year, the negotiated prices are industry secrets. Virtually no one outside of Sinofert and the Resource Group know what the prices are, including those firms allied together for negotiations purposes.
According to the letter submitted by Zhou Renfu and the three other NPC representatives to the Standing Committee of the NPC, "The alliance has been strong for three years, and except for Sinofert and the Resource Group, all other negotiating parties, including controlling government ministries, have yet to look once at a potassium fertilizer import contract. No one knows the true costs."
"We have no obligation to publish the negotiated prices," says one spokesperson for Sinofert. One producer of fertilizer suggests that "they don't want us to go and negotiate because then we'll know the prices-- their secret."
Potassium fertilizer is a considered a state-managed import. But the tenth line in Article 27 published by the Ministry of Foreign Economics and Trade in 2002, entitled, "Crude Oil, Refined Oil, and Chemical Fertilizer Imports Management Pilot" says, "Within ten days of the completion of each quarter, nationally operated firms working in foreign trade must report on the market environment, purchasing price, sales, and other information to the Ministry of Foreign Economics and Trade and the State Commission for Economics and Trade."
According to information from a Canadian producer and others in the industry, this year saw a ton of potassium fertilizer going for ＄50 or approximately 400 yuan on the international market. This is a far cry from the 2,350 yuan that it is sold for on the domestic market. And international prices are expected to rise in 2008, likely bumping domestic ones even further.
Zhou Furen estimates that if other firms are allowed to enter the market, each ton will be at least 300-400 yuan cheaper.
Sinochem refused to comment on the issue, saying that now is a sensitive time due to ongoing negotiations over prices, and that they do not want to send signals that would disrupt the market.
Meanwhile, the world's largest fertilizer producer, Canadain-based PCS, has a 20 percent stake in Sinochem's Hong Kong holdings company. And Stephen Francis Dowdle, PCS' vice president of potassium fertilizer sales, is also Sinochem's non-executive director of the board.
Recently, more than half of all chemical fertilizers used for agriculture are compound fertilizers, with a third of them being potassium fertilizers, which are the most expensive. Since potassium fertilizer prices have reached 2,350 yuan per ton, many compound fertilizer producers have been suffering losses, and certain smaller firms have ceased production altogether.
Zhou says that if these exorbitant prices continue and factories continue to shut down, there will likely be a shortage in compound fertilizers during the peak agricultural season next year. If distributors seize the chance to raise prices even more, losses to the average farmers will be even more severe.
