Issue Date: May 31, 2004
EAST-WEST LINKS IN PHOSPHORUS CHAIN
Over the past 10 years or so, Chinese makers of elemental phosphorus and phosphate chemicals have given producers in Western countries a run for their money. To remain in business, Western producers have had to either set up plants in China or buy from Chinese producers. But in the past year, China's cost advantage has evaporated because of shortages of electricity and coal.
"Phosphorus in China has become just as expensive as phosphorus from the West," says John Scott, vice president of manufacturing for phosphorus, phosphate, and food at Rhodia, a major phosphates producer. Whereas elemental phosphorus delivered in Shanghai cost $900 per ton two years ago, the price has gone up to $2,000 nowadays, he says.
The production of phosphorus requires phosphate ore, coke, and electricity. The phosphorus is obtained by reducing the ore in an electric furnace with the use of coke as reducing agent. The process resembles that of making steel from iron ore, Scott says.
Elemental phosphorus is used as a feedstock for "direct reaction" derivatives such as phosphorus trichloride, a key raw material for the herbicide glyphosate. Elemental phosphorus can also be converted to phosphoric acid and on to various phosphate salts, although that process has been abandoned in the West because it's too expensive.
A few years back, China seemed impossible to beat as a producer of elemental phosphorus and its derivatives. The country had high-grade phosphate rock mines as well as an ample supply of electricity, particularly in its western provinces. Coal, from which coke is obtained, is mined throughout China. Moreover, Chinese producers are content with lower profit margins than are Western producers and are also able to build their plants more cheaply because of differences in wages.
But the confluence of conditions that made China so competitive in phosphorus production has rapidly faded. The phosphate rock mines are still there, but demand for electricity on the country's east coast has grown so fast that rationing has been instituted. Hydroelectric power is particularly short in the dry season from November to May. As a result of the shortage, central authorities have ordered the western provinces to supply power to the east, squeezing phosphorus producers.
COKE SUPPLIES are also getting short. As a result of voracious Chinese demand, the price of coke on world markets this year has gone from less than $100 per ton to more than $400, Scott says. Chinese steel production, which requires large amounts of coke, leapt by 23% in 2003 alone. China's own production of coal has been curtailed in the past few years by the closure of several unsafe mines after deadly accidents.
In the late 1990s, when China seemed unbeatable, Rhodia set up a phosphorus chemicals joint venture in China, as did Dutch phosphates producer Thermphos. As it happens, Rhodia is now selling its European phosphates business to Thermphos. Rhodia's North American business is for sale as well.
In establishing the Chinese venture, Scott says, Rhodia focused output on phosphorus derivatives with a high phosphorus content. For derivatives with a low phosphorus content, it was cheaper to supply customers in North America and Europe by making phosphorus in China and shipping it to local plants for conversion, Scott says. Recently, owing to growing Chinese demand, Rhodia has stepped up Chinese production of the low-phosphorus products as well.
Even though it began sourcing most of its phosphorus from China, Rhodia never severed its relationships with Western suppliers. It was a smart move. Over the past two years, Rhodia's elemental phosphorus venture in Luoping, Yunnan province, has not been able to produce steadily because of power shortages.
In some parts of China, electricity supply has not been a big problem. Producers of phosphorus and phosphate chemicals in and around Yichang, Hubei province, can get power from huge hydroelectric dams on the Yangtze River. The Three Gorges Dam, the construction of which will be completed in 2009, is just outside Yichang. Other dams have been operating for decades.
Hubei Xingfa Chemicals runs its phosphorus facilities in a stunning mountain location about three hours by car from Yichang. The area is rich in phosphate ore. For its electricity, Xingfa has built or acquired numerous small-scale hydroelectric plants, making it mostly independent of the public grid.
Vice General Manager Chen Jizhong says the company is growing at 30% per year and that about 70% of its output is exported. In addition to elemental phosphorus, Xingfa produces sodium tripolyphosphate, sodium hexametaphosphate, sodium hypophosphite, dimethyl carbonate, and phosphorus pentasulfide.
Another Yichang firm, the Hubei Yihua Group, is making use of the area's phosphate rock not to produce elemental phosphorus, but rather to directly make phosphoric acid and downstream phosphate fertilizers. Yihua also makes urea, pentaerythritol, sodium formate, formaldehyde, polyvinyl chloride, and other products.
Yihua was formed in 1978 by the Yichang city government to supply farmers with agricultural chemicals. The firm's first products were ammonia and ammonium carbonate. Yang Xiaoqin, an engineer who is one of the company's senior executives, says Yihua's growth since then has been the result of a symbiotic relationship. The agricultural inputs produced by Yihua have allowed local farmers to get richer, which in turn let them buy more products from Yihua. Yang says Yihua is Asia's largest producer of pentaerythritol, with a capacity of 35,000 metric tons per year. The firm can produce up to 1 million metric tons of urea per year.
Yihua is growing very fast. Yang says the firm expects to achieve sales of $375 million this year compared with $250 million last year and $60 million in 2000. He attributes the rapid expansion largely to the youth of the company's employees, who are 31 on average. The chairman is 36. In addition, although the local government still owns 20% of Yihua, the firm is listed on the Shenzhen stock market.
Yihua has been acquiring poorly managed companies and expanding its own factories in recent years by tapping the stock market and borrowing from banks, Yang says. Moreover, the Yichang area has served the company well, he adds. The phosphate mines have proven to be an important source of raw materials, and the abundant power supply has allowed the firm's plant to operate without interruption.
Scott maintains that one reason Chinese phosphate chemicals makers have been able to grow so rapidly in recent years is that less attention is paid in China to environmental matters. Although Chinese regulations are stringent, they tend not to be enforced very strictly. This certainly appears to be the case for Xingfa's plants, which emit a thick black smoke. Scott says it's most likely nothing more than soot. But such smoke would generally not be tolerated in a Western country.
However, China is tightening its enforcement, Scott says, which will make things harder for local producers of phosphate chemicals. "With the population that China has, it cannot afford to render large chunks of the country uninhabitable," he says. Owing to the lack of coke, problems with electricity, and stricter regulations, he doesn't expect Chinese phosphorus prices to go back down to $900 per ton anytime soon.
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