Phosphorus Industry: Resource Dominance and Reviving Prosperity

Profits in the phosphorus chemical industry chain are largely retained in the phosphate mining segment. The rebound in the performance of phosphorus chemical companies is due, on one hand, to a recovery in the agrochemical market, and on the other hand, to the possession of high-quality phosphate resources, which has led to a rise in phosphate prices and an overall improvement in industry prosperity.

Recently, phosphorus chemical companies have successively released their performance forecasts and reports for the first three quarters of 2024. Hubei Yichao is expected to achieve a net profit of 755 million to 790 million yuan in the first three quarters, a year-on-year increase of 94.04% to 103.04%, and an adjusted net profit of 556 million to 590 million yuan, a year-on-year increase of 69.41% to 80.09%. In the first three quarters of 2024, Yuntianhua achieved a revenue of 46.724 billion yuan, a year-on-year decrease of 12.34%, and a net profit of 4.424 billion yuan, a year-on-year increase of 19.42%; in the third quarter, it achieved a revenue of 14.731 billion yuan, a year-on-year decrease of 18.54%, and a net profit of 1.583 billion yuan, a year-on-year increase of 54.16%. Xingfa Group is expected to achieve a net profit of 1.28 billion to 1.38 billion yuan in the first three quarters of 2024, a year-on-year increase of 37.07% to 47.78%, and an adjusted net profit of 1.235 billion to 1.335 billion yuan, a year-on-year increase of 40.50% to 51.87%.

The rebound in the performance of the aforementioned phosphorus chemical companies is mainly due to the recovery in the agrochemical market. In addition, the industry's overall prosperity has warmed up due to the possession of high-quality phosphate resources and the recovery of phosphate prices.

Performance Rebound

In 2023, Hubei Yichao's revenue was 17.042 billion yuan, a year-on-year decrease of 17.72%, net profit was 453 million yuan, a year-on-year decrease of 79.06%, and adjusted net profit was 478 million yuan, a year-on-year decrease of 72.58%; Yuntianhua's revenue was 69.06 billion yuan, a year-on-year decrease of 8.3%, net profit was 4.522 billion yuan, a year-on-year decrease of 24.9%, and adjusted net profit was 4.508 billion yuan, a year-on-year decrease of 23.54%.

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In 2021 and 2022, benefiting from the continuous rise in phosphate rock prices, the phosphorus chemical industry operated at a high level of prosperity. In 2021 and 2022, Hubei Yichao's net profit increased by 12.39 times and 65.33% year-on-year, respectively, and Yuntianhua's net profit increased by 12.55 times and 37.94% year-on-year, respectively. However, in 2023, the market prices of the main products began to decline year-on-year, leading to a decline in the profitability of the relevant companies. In 2023, the average market prices of Yuntianhua's main products, including diammonium phosphate, compound fertilizer, urea, polyformaldehyde, yellow phosphorus, and feed calcium, were 3,290 yuan/ton, 3,077 yuan/ton, 2,322 yuan/ton, 11,652 yuan/ton, 22,144 yuan/ton, and 3,118 yuan/ton, respectively, with year-on-year changes of 16.90%, -3.54%, -9.83%, -27.77%, -24.61%, and -17.01%, respectively. The decline in product prices had a significant impact on performance. Hubei Yichao's main products, urea, diammonium phosphate, and polyvinyl chloride, achieved revenues of 3.191 billion yuan, 4.566 billion yuan, and 4.518 billion yuan, respectively, a decrease of 9.40%, 8.34%, and 18.57% from 2022, with gross margins of 27.79%, 13.73%, and -8.73%, respectively, a decrease of 7.98, 5.91, and 10.23 percentage points from 2022.

However, the prosperity of the phosphorus chemical industry began to rebound from 2024. Currently, the price of phosphate rock remains high, providing support for the prosperity of the entire industry chain. In August 2024, the average price of 30% grade phosphate rock in China was about 1,017.5 yuan/ton, a year-on-year increase of 14.69%. In terms of supply chain, in July, the supply volume of phosphate rock in China increased by 18.7% year-on-year, and the monthly import volume of phosphate rock increased by 126.5% month-on-month and 5,748.5% year-on-year, showing a significant increase. Correspondingly, the prices of diammonium phosphate and monoammonium phosphate have both increased significantly year-on-year. In August 2024, the average market price of diammonium phosphate in China was about 3,355.3 yuan/ton, a year-on-year increase of 18.4%, and the average market price of monoammonium phosphate was about 3,924.6 yuan/ton, a year-on-year increase of 6.6%.

Significant Value of Phosphate Resources

Phosphorus chemical industry starts with phosphate rock and has a wide range of downstream applications. Depending on the production process, phosphate rock can be directly used for wet processing to produce phosphoric acid and then further processed into various phosphorus chemical products; it can also be processed into yellow phosphorus first and then into phosphoric acid. Looking at the terminal market, the upstream of phosphate fertilizer is wet phosphoric acid, and the downstream is agricultural production, which is the traditional application field of phosphorus chemical industry; the upstream of phosphate salts is thermal phosphoric acid, mostly used in industrial detergents, metal surface treatment, industrial water treatment, construction industry, medicine, plastic plasticizers, etc. In recent years, benefiting from the continuous high prosperity of the new energy industry, the demand for battery material fields such as iron phosphate and lithium iron phosphate has grown rapidly.

According to Zhongtai Securities, profits in the phosphorus chemical industry chain are mostly retained in the phosphate mining segment. Wind shows that in the second quarter of 2024, the gross profit margins of phosphate rock (open-pit mining), phosphate rock (underground mining), diammonium phosphate, monoammonium phosphate, iron phosphate, and glyphosate were approximately 52.5%, 50.5%, 8.6%, 11.7%, -17.4%, and 6.3%, respectively. In the short to medium term, the prosperity of phosphate rock is expected to continue.Phosphorus ore is a strategic non-metallic mineral resource. China's reserves and production of phosphorus ore rank among the top in the world, but the regional distribution is uneven and the grade is relatively low. Currently, there are issues of over-mining and resource waste. Specifically, in 2023, China's phosphorus ore reserve-to-production ratio is only 42, far below the world average of 336, highlighting the problem of over-mining; China's phosphorus ore resources are characterized by a scarcity of rich ores and abundance of poor ores, high mining difficulty, a large number of associated ores, and low grade. Nearly 90.8% of domestic phosphorus ore is of medium to low grade, with an average grade of 16.85%, which is significantly lower than Morocco (33%) and the United States (30%). Moreover, only 22% of the total reserves are technically exploitable and economically valuable. In the early stages, there was often a practice of mining only rich ores and abandoning poor ones, which cannot be reused in the future, leading to severe resource waste.

As a scarce mineral resource with relatively concentrated distribution, phosphorus ore has been included in the national strategic protection of mineral resources. Additionally, influenced by national security supervision, environmental protection restrictions, and protection and management policies in the Yangtze River basin, the backward production capacity in the phosphorus ore mining industry continues to exit, constraining the increase in phosphorus ore. The domestic phosphorus ore mining and selection industry shows basic characteristics of high industrial concentration, high degree of integration between upstream and downstream, and high entry barriers.

Currently, about 60% of phosphorus ore is used for the production of phosphorus fertilizers. Historically, the price trends of phosphorus ore and phosphorus fertilizers are relatively consistent. The core of phosphorus chemical industry prosperity lies in phosphorus fertilizers, and the situation of the phosphorus fertilizer industry can basically represent the phosphorus chemical industry chain. In terms of the phosphorus fertilizer industry, according to the National Development and Reform Commission's "Guidelines for Energy Conservation and Carbon Reduction Transformation and Upgrading in Key Areas of High Energy Consumption Industries (2022 Edition)", by the end of 2020, the production capacity of China's phosphorus ammonium industry that is better than the benchmark level accounts for about 20%, and the production capacity that is below the baseline level accounts for about 55%. The work goal is that by 2025, the proportion of production capacity above the phosphorus ammonium industry's benchmark level will reach 30%, and the production capacity below the baseline level will be below 30%.

In April 2022, six departments including the Ministry of Industry and Information Technology and the National Development and Reform Commission issued the "Guiding Opinions on Promoting High-Quality Development of the Petrochemical Industry during the '14th Five-Year Plan'", pointing out the need to strictly control the additional capacity of phosphorus ammonium and yellow phosphorus, and to accelerate the withdrawal of backward production capacity. Driven by policies, during the "14th Five-Year Plan" period, the supply structure of domestic phosphorus ammonium and other phosphorus chemical products will continue to improve. Kaiyuan Securities believes that the introduction of the plan will help guide the phosphorus chemical industry to accelerate transformation and upgrading, enhance the sustainable security capability and efficient and high-value utilization level of phosphorus resources, and lead the phosphorus chemical industry to achieve high-quality development.

According to the 2022 National Mineral Resources Reserves Statistics Table, in 2022, China's phosphorus ore reserves are mainly distributed in Yunnan, Guizhou, Sichuan, and Hubei, with reserve proportions of 36%, 13%, 18%, and 25%, respectively. Affected by the uneven geographical distribution of phosphorus ore resources, and due to the strong entry and capital barriers in the phosphorus ore industry, the production capacity of phosphorus ore is mainly concentrated in large state-owned enterprises such as Guizhou Phosphorus Chemical, Yuntianhua, Xingfa Group, and Sichuan Longma. However, there are still some small production capacities. According to BaiChuan YingFu data, as of February 2024, the production capacity of phosphorus ore in China with less than 500,000 tons accounts for 14.27%. With the increase in the entry threshold for phosphorus ore and the acceleration of the elimination of backward production capacity, the concentration of the phosphorus ore industry is expected to further increase.

Demand is stable and rising

The demand for phosphorus chemical industry is stable and rising. Phosphorus ore is mainly used for the production of phosphorus fertilizers, yellow phosphorus, phosphates, and other products, among which phosphorus fertilizers are the largest downstream demand for phosphorus ore. In 2021-2022, the rise in agricultural product prosperity drove the increase in fertilizer demand, and under the expectation of new energy demand, the consumption of phosphorus ore showed a more significant increase. Guohai Securities pointed out that affected by multiple factors such as frequent extreme weather, the rise of trade protectionism, and geopolitical turmoil, international grain prices have fluctuated sharply in recent years. China attaches great importance to food security, and the area of grain planting continues to grow, and the demand for phosphorus fertilizers is expected to increase steadily. At present, China's export inspection policy for fertilizers will still be implemented for a longer period, and the production capacity of phosphorus fertilizers is mainly to ensure domestic supply, with significant uncertainty in exports. Benefiting from the rapid development of new energy vehicles, the demand for lithium iron phosphate batteries is strong; currently, a large number of lithium iron projects and supporting purification phosphoric acid projects are under construction. With the commissioning of these projects, it is expected that the demand for phosphorus ore in the new energy field will continue to grow.

Since the second half of 2020, the prices of phosphorus ore, yellow phosphorus, phosphorus ammonium, feed-grade phosphates, and other products in the phosphorus chemical industry chain have fluctuated and risen, and reached historical highs between the second half of 2021 and the first half of 2022. Since then, the prices of most products have fluctuated and fallen to the present, while the price of phosphorus ore remains high and strong. According to Wind, the current prices of phosphorus ore in Hubei, Guizhou, Sichuan, and Yunnan, the four major domestic phosphorus ore producing areas, are 1040 yuan/ton, 1040 yuan/ton, 730 yuan/ton, and 950 yuan/ton, respectively, accounting for 92%, 88%, 100%, and 86% of the 2017 levels.

Large state-owned enterprises such as Yuntianhua and Xingfa Group own most of the domestic phosphorus ore reserves. In 2023, Yuntianhua has an original ore production capacity of 14.5 million tons, a scrubbing ore production capacity of 6.18 million tons, and a flotation production capacity of 7.5 million tons, making it one of the largest phosphorus ore mining and selection enterprises in China. Xingfa Group has about 412 million tons of phosphorus ore reserves with mining rights, and the designed production capacity of phosphorus ore is 5.85 million tons/year. Hubei Yihua's controlling shareholder, Yihua Group, currently has a total production capacity of 3.3 million tons/year for its own phosphorus ore, and the subsequent planned production capacity for phosphorus ore is 1.4 million tons/year; the company indirectly holds shares in Jiangjiadun Mining, which has the right to mine phosphorus ore, with a reserved resource reserve of 130 million tons, and currently has a phosphorus ore production capacity of 1.5 million tons/year in the eastern and western mining sections, and 300,000 tons/year.