New Chinese fertiliser VAT to have limited industry impact

By IM Staff
Published: Thursday, 27 August 2015

The 13% VAT levy on potash and phosphate fertilisers from 1 September is being introduced by the Chinese government to optimise fertiliser investment in the country and promote sustainable agricultural developments. While demand for potash, of which China is a major importer, is likely to feel the effects of the charge, the impact on nitrogen and phosphate fertilisers is expected to be limited as both are in oversupply in China.

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. 

China flag_Susanne Davidson via flckr 
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.