By Frank Hersey, Mandy Kovacs
Industrial minerals experts are predicting a significant
reduction in fertiliser imports into China after the government
introduces a 13% VAT levy on both China-produced and imported
chemical fertilisers from 1 September 2015.
China’s ministry of finance has said that the
following fertilisers will attract the tax: potassium nitrate,
potassium chloride, potassium sulphate, fertilisers with
nitrogen, phosphorus and potassium (NPK), diammonium phosphate
(DAP), as well as fertilisers with phosphorus and
potassium.
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| The Chinese fertiliser
VAT tax is likely to have the biggest impact on potash,
as China still imports much of its domestic requirements
(Source: Susanne Davidson). |
The levy is a reintroduction of 13% VAT, which was removed in
1994. An existing VAT "charge then refund" policy on potash
will also be scrapped. No VAT will be added to organic
fertiliser products, also reducing demand for chemical
fertiliser.
The finance ministry announcement said the VAT hike was
designed to "optimise the agricultural production investment
structure and to promote sustainable development in
agriculture".
Gavin Ju, consultant for mining, metals and fertiliser
consultancy CRU in Beijing, told IM: "In terms
of imports, compound fertilisers are likely to see demand for
imports fall because of the increase in prices."
While he predicted that the impact on nitrogenous and phosphate
based fertilisers could be small, he added: "Where the impact
will be felt most is actually on potash fertiliser." He also
pointed out that China is an exporter of nitrogenous and
phosphate fertilisers.
An additional Chinese language note released by the finance
ministry said the initial introduction of "preferential VAT
policies" for fertilisers in 1994 was part of its efforts to
"guarantee the supply of fertiliser, stabilise agricultural
prices and support agricultural production".
It stressed, however, that China’s agricultural
industry and tax collection were radically different 21 years
ago, saying "preferential VAT policies on fertiliser were
launched under a backdrop of demand outstripping supply, the
state implementing price controls and an incomplete chain of
VAT deductions".
It continued: "Due to changing circumstances, the drawbacks of
such policies have become ever more apparent", referring to
greater market freedom and the liberalisation of prices
resulting in an excess supply and overuse of
fertiliser.
The ministry note added: "Calls to cancel the favourable VAT
policies on fertiliser were increasingly loud, and some
fertiliser manufacturers have also suggested reintroducing the
levies."
Lynn Wang, China research manager at London-based Integer
Research, agreed that the Chinese fertiliser market has been
transformed over the past 20 years, with overcapacity in the
production of certain fertilisers and reliance on imports of
others.
"Levying VAT has a different influence on different
fertilisers. For nitrogen and phosphate fertilisers, which are
in serious oversupply in China, VAT will only affect costs
marginally as VAT can be deducted from the input tax. Input
materials or feedstocks, such as coal, phosphate rock and
sulphur, are charged 13-17% of VAT," she explained.
Chinese potash production is increasing from around 10m tonnes
in 2014 and is expected to grow to nearly 12m tonnes in 2019,
according to the International Fertiliser Industry Association
(IFA). But China still needs to import potash as domestic
production is not sufficient to cover requirements. Imports in
2014 were 8m tonnes.
China’s largest trading partner for all types of
fertiliser in 2013 was Russia, which exported approximately
$963m worth of chemical fertilisers to China, according to
international trade data. However, this is down from $1.5bn in
2012. Specifically, Russian exports of mineral or chemical
potassic fertilisers (which includes potash) accounted for
$732m, or approximately 2.2bn kilograms (2.2m tonnes), in
2013.
In its
half year results yesterday, Moscow-listed potash
producer Uralkali said that while the effects of the 13%
Chinese VAT remain to be seen and will depend on how much the
market absorbed the change, it would "not be a big strategic
drama" for the company.
The same international trade data showed that another one of
China’s major fertiliser trading partners, Canada,
exported $385m worth of fertilisers to the country in 2013. It
also exported $382m, or approximately 1bn kg (1m tonnes), of
mineral or chemical potassic fertilisers to China in the same
year.
According to reports in the Chinese media, following the
announcement, a meeting was held by various industry
associations, the finance ministry’s national tax
policy department, and China Customs, where officials clarified
that any existing stock of fertiliser held before 1 September
will also have the VAT levied in full when sold. Moreover, from
1 September there will be a 13% export VAT levy, although these
developments have not been confirmed independently by the
ministry of finance.