Since January 1, 2008, the domestic Diammonium Phosphate (DAP) production sector has been granted a preferential VAT exemption policy. This marked a turning point, as DAP was no longer considered a fertilizer that had historically not benefited from VAT relief—this situation had persisted until the first half of 2007. The decision to introduce this policy was largely driven by the need to support the agricultural sector and stabilize fertilizer prices amid rising costs.
The background behind the VAT exemption was the significant increase in both domestic and international DAP prices. By the end of 2007, domestic DAP prices had surged by 70.8% compared to the start of the year. Meanwhile, the U.S. DAP FOB price rose by $680 per ton, representing a staggering 165% increase over the same period. These sharp price increases placed considerable pressure on farmers and agricultural producers, prompting the government to take action.
The VAT exemption proved beneficial for the DAP industry and major listed companies. According to our estimates, the policy could boost the industry's profits by approximately 625 million yuan. For key players such as Six Nations Chemical and Hubei Yihua, this would translate into an increase in earnings per share (EPS) of about 0.249 yuan and 0.093 yuan, respectively.
However, we believe that while the VAT exemption is intended to support agriculture and keep fertilizer prices stable, it also introduces potential risks. As the industry benefits from preferential policies, there is a growing possibility that the government may impose price controls on DAP in the future. Such measures could negatively impact the overall industry environment and profitability.
Policy uncertainty remains one of the most critical risks facing the fertilizer sector. While short-term benefits are evident, long-term stability depends on how these policies evolve and how the market responds to regulatory changes. Investors and industry participants must remain vigilant and adapt to the shifting landscape.
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