Cost of a barrel of oil has breached the US$120 mark and analysts are expecting oil prices to reach US$200 by the end of the year. This would further increase the prices of commodities such as wheat and rice, as farmers need oil to process their harvests. However, other than oil, another main ingredient used by farmers is indispensable for a good harvest. This main ingredient is fertiliser and China XLX Fertiliser (China XLX) is the only Singapore-listed company that specializes in its production. In an interview with China XLX chairman Liu Xingxu, Shares Investment (Singapore) found out more about the fertiliser industry.

HIGH DEMAND FOR FERTILISERS
China XLX is the 6th largest coal-based producer of urea in PRC. Headquartered in Xinxiang, Henan Province, China XLX’s manufacturing plants are equipped with advance technology in achieving optimal production efficiency, thus earning it the 4th lowest cost coal-based producer of urea in the PRC. China XLX is also the 6th largest methanol producer in terms of production capacity in PRC.

In the world, 60% of fertilisers used are nitrogen-based, with the most common being urea. According to the China Nitrogen Fertiliser Industry Association, 71% of urea used is located in Asia. There is a need to maximize the world’s land for crop planting as only 7% of the world is arable to feed 20% of the world’s population and fertilisers contribute about 50% of crop yield. Most fertiliser companies in PRC are coal–based as there is government restriction on expansion of gas fertiliser due to the country’s lack of natural gases.

COST-SAVING TECHNOLOGY
China XLX’s three main products are urea, methanol and compound fertiliser, which is a combination of both urea and methanol. Cost efficiency is the most critical factor for China XLX’s success. Advanced coal chemical technology and having its own power generators allow China XLX to use 10% less coal and 20% less electricity in production. China XLX’s annual operating days is 350 days per year while urea industry average is 330 days per year.

China XLX relies on its generation plants for 70% of its electricity needs and this translates to a significant amount of savings. Compound fertilisers return the highest profit margin and China XLX plans to increase its compound fertiliser production line each year.

CONCERN OVER RISING PRICES
Farmers purchased heavily subsidized oil and fertilisers to keep the PRC economy growing. Liu commented that he is glad that the PRC government increased the urea export tax to prevent urea prices from rising in the domestic market. A substantial increase in urea prices would prevent farmers from buying fertilisers given the economies of scale as profit margins are squeezed by high oil and fertiliser prices. The management is concerned that the PRC government will raise domestic fertiliser prices in tandem with the world if global fertiliser prices continue to escalate further. Although this would increase China XLX’s overall profit, the fertiliser market may be distorted in the long run as farmers may refuse to buy fertilisers.

BEAMING RESULTS
China XLX’s 1Q08 profit rose 42.4% due to increased capacity in its 2nd plant, doubling urea and tripling methanol production capacity. An interesting point to note in the fertiliser industry in PRC is that clients pay 30 days upfront for the fertiliser before delivery and China XLX forecasts future demand based on the purchases. China XLX is slated for further growth with its cost-saving techniques and robust demand for compound fertilisers.