With the prices of corn, soybeans, rapeseed, and canola rising to levels not seen since the 2007 to 2008 food crisis, the Chinese government and its farmers are searching for ways to stabilize domestic food supply. As a strategic national resource in China, phosphate has taken on greater importance as farmers scramble to boost fertilizer application rates and local governments try to control food price inflation.
Though inflation has eased off of last summer’s 6.5 percent to a more manageable 3.6 percent price increase, the recent surge in soybean prices has been a major cause of fears about rising food inflation rates within China
China’s farmers have been overwhelmed by Chinese consumers’ growing demand for everything on the menu, from pork and milk to grains and corn. While international suppliers are eager to satisfy demand in the near term, China is looking for longer-term food independence.
Livestock farmers have taken the well-worn path of adopting foreign technologies and repurposing them for application on their home soil. Borrowing decades of cutting-edge American agricultural research, Chinese farmers have started buying up genetic material and live animals raised by US farmers as breeding stock for Chinese farms.
A similar domestic attitude toward phosphate – a key input for under-fertilized Chinese farm fields – is taking place in earnest as government officials try to kick start production.
In the past four months, phosphate ore prices have climbed by ten percent to US $98.40/tonne on the back of strong demand, Industrial Minerals reported.
Over the past decade, domestic phosphate rock production has increased dramatically in China, jumping from 30 million tonnes (MT) in 2000 to an expected 80 MT in 2011. The quality of phosphate rock processed domestically has also increased during this period, shifting from lower-grade single super phosphate to higher-level diammonium phosphate and monoammonium phosphate.
But with a farming population that remains a cornerstone of the country’s economy, China’s Ministry of Commerce listed phosphate as the third most important national strategic resource and imposed new export quotas at the beginning of 2012.
A phosphate reserve system has also been established across the country’s five main phosphate producing provinces (Hunan, Yunnan, Sichuan, Guizhou, and Hubei). It is intended to safeguard pricing and supply at times when oilseeds are sparking fears of food inflation, the Financial Times reported.
China’s phosphate plan also includes reducing the number of phosphate producers operating in these provinces by shutting down operations under 150,000 tonnes and decreasing access to phosphate mining rights by extending application approval periods to between five and eight years.
Domestically that has meant that smaller producers are being bought out by larger ones, reducing the overall number of companies in Hubei from 146 to 80 following last year’s “Suggestions on Phosphate Exploration Management” report issued by local governments.
But despite the challenges, foreign companies like Vancouver-based Sterling Group Ventures Inc. (OTCQB:SGGV), which recently signed a contract to have a Chinese mining contractor operate its Hunan-based Gaoping phosphate project, are still able to gain access to China’s phosphate industry.
International engagement remains
Despite the strong role the government has chosen to play in developing domestic capacity, there is still a clear role for international markets. In early February of this year, officials from Sinofert Holdings Ltd. (HKG:0297), a unit of China’s largest chemical trader, said the company is interested in purchasing international phosphate and potash mines directly.
“We are looking at assets both inside and outside China,” Senior Vice President Harry Yang said in an interview in February. “So far we haven’t found anything economically workable. We’ll continue to keep our eyes open.”
As the direction of China’s phosphate strategy brings its producers toward greater consolidation in production, it is likely that Chinese fertilizer groups will come into international markets with bigger cheques and a more cohesive strategy for moving forward.
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company or resource mentioned in this article.