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 the end of DAP’s status as a fertilizer that did not benefit from VAT relief—something we had previously noted in the first half of 2007. At that time, we believed that the industry should not be heavily regulated due to its strategic importance. The introduction of this VAT policy came against a backdrop of rising domestic and global DAP prices. Since the start of 2007, domestic DAP prices have surged by 70.8%, while U.S. DAP FOB prices have increased by $680 per ton, representing a staggering 165% rise over the same period. These price increases were driven by factors such as higher raw material costs, supply chain disruptions, and growing demand from agricultural sectors. The VAT exemption is expected to provide significant benefits to the DAP industry and major listed companies. According to our estimates, the policy could boost industry profits by approximately 625 million yuan. For key players like Six Nations Chemicals and Hubei Yihua, this could translate into an increase in earnings per share (EPS) of about 0.249 yuan and 0.093 yuan, respectively. However, despite these positive effects, we believe that the government’s decision to exempt DAP from VAT is primarily aimed at supporting agriculture and stabilizing fertilizer prices. As a result, there remains a risk that DAP prices could be subject to regulation once the industry benefits from such preferential policies. This regulatory uncertainty could negatively impact the overall industry environment and investor confidence. In the broader context, policy risks continue to be one of the most significant challenges facing the fertilizer sector. Investors and industry participants must remain vigilant, as changes in government policies can have far-reaching implications for market stability and profitability.

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