China's accession to the World Trade Organization (WTO) included a commitment to open its fertilizer wholesale and retail market to foreign investors by December 11, 2006. This move is part of broader efforts to modernize and liberalize the chemical fertilizer sector. Within the same year, reforms to the fertilizer distribution system were expected to be introduced, aiming to accelerate the full marketization of the industry.
Currently, fertilizer prices in China are still under government-guided pricing, although the level of marketization has significantly improved over recent years. From a macroeconomic perspective, the conditions for fully deregulating fertilizer prices and allowing the market to determine them are now largely in place. In June 2005, the National Development and Reform Commission (NDRC) released a draft proposal titled "Measures to Reform and Improve the Regulatory Mechanism of Fertilizer Prices," seeking public feedback on the proposed changes. With support from policymakers, businesses, and industry associations, progress in reforming the fertilizer distribution system has been encouraging.
The key aspects of the upcoming fertilizer distribution system reforms include:
1. Removing price caps on urea at the factory level by the end of the year.
2. Lifting controls on the spread rate of fertilizers and increasing prices accordingly.
3. Recording the price of potash fertilizer more transparently.
Second, preferential policies on fertilizer production will be gradually phased out:
- The three-tier preferential tariff for fertilizer production will be canceled.
- Preferential tariffs on fertilizer imports will be removed, though railway construction fees will remain exempt.
- Energy price reforms will be implemented, eliminating the dual-track pricing system. The preferential natural gas price for fertilizer production will also be abolished.
- Export tax policies for fertilizers will stay unchanged, with continued VAT exemptions for urea production.
Third, once fertilizer prices are fully liberalized, the government will manage supply through the establishment of off-season reserves and the use of import/export taxes to ensure balance between supply and demand while stabilizing prices.
Fourth, a direct subsidy system for farmers will be introduced to support agricultural production.
Fifth, increased government investment will promote a scientific fertilization system, reducing excessive fertilizer use and protecting the environment.
Sixth, the reform of the fertilizer distribution system will help establish a more standardized and efficient market order.
According to the NDRC, several challenges remain in the fertilizer industry's distribution system. Many circulation companies lack strong competitiveness and need to innovate continuously. The overall environment for fertilizer circulation remains poor, with local protectionism, unnecessary inspections, and artificial restrictions hindering smooth operations. Additionally, many enterprises have not adequately prepared for the entry of foreign investors by the end of the year.
With the successful implementation of the new fertilizer distribution reforms, China's fertilizer industry is moving toward full marketization. While this brings greater competition, it also paves the way for a more dynamic and efficient fertilizer market that can better serve both producers and farmers.
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