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Policy risk remains the main risk in the fertilizer industry
Since January 1, 2008, the domestic production of Diammonium Phosphate (DAP) has been granted a preferential Value-Added Tax (VAT) exemption. This marked a significant shift, as DAP had previously not benefited from any VAT advantages, a fact that we had already noted in the first half of 2007. At that time, we believed that the industry did not require regulation due to its stable market position and performance.
The decision to introduce the VAT exemption was driven by rising domestic and international DAP prices. In particular, the domestic price of DAP surged by 70.8% compared to the beginning of 2007. Meanwhile, the U.S. DAP FOB price increased by $680 per ton, representing a staggering 165% rise since the start of that year. These sharp increases put pressure on both producers and farmers, prompting the government to take action.
The VAT exemption is beneficial for the DAP industry and major listed companies. According to our estimates, the policy could boost the overall profitability of the DAP sector by approximately 625 million yuan. For key players such as Six Nations Chemical and Hubei Yihua, this would translate into an increase in earnings per share (EPS) by about 0.249 yuan and 0.093 yuan respectively. This financial relief is expected to improve their operational efficiency and competitiveness.
However, we believe that while the VAT exemption is intended to support agricultural development and stabilize fertilizer prices, it also brings potential risks. As the industry benefits from these preferential policies, there is a growing concern that the government may impose price controls on DAP in the future. Such measures could disrupt the current favorable environment and negatively impact the industry’s growth prospects.
Policy uncertainty remains one of the most significant risks facing the fertilizer sector. The interplay between government intervention and market dynamics continues to shape the industry’s trajectory. Investors and stakeholders must remain vigilant and prepared for potential regulatory changes that could affect long-term profitability and stability.
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