In-depth analysis: Why are Chinese phosphorus chemical companies entering the new energy field?

Recently, the traditional chemical industry located in the upstream of new energy has been favored by capital, and among them, phosphorus chemical industry may be the first sub-industry to enter the downstream lithium iron phosphate field as a whole.

Phosphate rock at the top of the industrial chain is a world-class strategic resource. Due to its scarcity and non-renewable characteristics, global supply continues to shrink. As the world's largest producer of phosphate rock and the second largest phosphate rock reserve country, China's phosphate rock production has dropped by nearly 40% in 2020 compared with 2016. The gap between phosphate rock supply and demand has significantly narrowed and has entered a tight balance.

While the demand for phosphate rock and monoammonium phosphate in terminal applications such as pesticides and fertilizers has remained at a rigid level all year round, the demand for lithium iron phosphate has grown strongly. The demand for phosphate rock will increase several times or even dozens of times in the future. It is expected that China's demand for phosphate rock for lithium iron phosphate will grow to 3.7 million tons by 2025, with a compound growth rate of more than 60% from 2021 to 2025.

This will also cause the supply and demand structure of phosphate rock to gradually change from a tight balance to a shortage of supply. At that time, the cost pressure of phosphorus sources in lithium iron phosphate will be further increased, and lithium iron phosphate production enterprises with upstream raw material planning will obtain greater profit margins.

Recently, some traditional chemical industry leaders have announced their entry into the field of new energy materials. For example, Hualu Hengsheng (600426) announced that it will develop DMC electrolyte, Dongfang Shenghong (000301) acquired Sierban Petrochemical, Longbai Group (002601) announced that it will deploy lithium iron phosphate, etc.

The main reasons why traditional chemical industry enters the field of new energy materials:

1. New energy materials may be the fastest growing sector in the next 10 years;

2. Subject to the requirements of carbon peaking and carbon neutrality, traditional leading chemical capital must change its development direction.

Changing trends in the supply and demand pattern of phosphorus chemicals in the new energy era

Supply side: The global supply and demand structure of upstream phosphate rock has entered a tight balance state 

The global distribution of phosphate rock is seriously uneven. China has the second largest phosphate rock reserves and the largest output. Phosphate rock is a non-renewable resource and lacks substitutes. This means that with the continued mining of phosphate rock, it is gradually shrinking and rapidly depleting. Therefore, countries have begun to regard phosphate rock as an important strategic resource. It is conceivable that if China continues at this rate of phosphate mining in the future, it will be completely exhausted in less than 40 years.

With the strengthening of control, China's phosphate rock production has entered a downward range since 2016-2017, and the production of major phosphate rock distribution areas in Hubei, Guizhou, Yunnan, and Sichuan has significantly shrunk. As of 2020, the output of phosphate rock in Hubei, Guizhou, Yunnan, and Sichuan was 38.281 million tons, 21.329 million tons, 18.075 million tons, and 8.417 million tons respectively, which decreased by 26.1%, 59.4%, 19.6%, and 40.1% respectively compared with 2016. National phosphate rock production was 88.933 million tons, a year-on-year decrease of 4.71% and a decrease of 38.4% from 2016. It is expected that as China's phosphate rock production continues to decrease in the future, the supply and demand structure of phosphate rock is likely to change to a situation in which supply exceeds demand. The intensifying scarcity of phosphate rock will lead to a continued rise in phosphate rock prices, which will lead to increased pressure on the cost side of downstream phosphorus chemical products and high product prices.

Demand side: The demand for phosphate fertilizers in the agricultural field is stable, and the demand in the new energy field is accelerating. 

Pesticides and fertilizers are the main terminal products downstream of phosphate rock, and the demand remains stable: The terminal products of phosphate rock are mainly chemical fertilizers, pesticides and other agrochemical products. The agricultural boom will have a positive impact on the demand and product price trends of upstream and downstream products in the phosphate fertilizer and phosphorus chemical industry chain.

As of August 20, 2023, the price difference of monoammonium phosphate in China increased by 117.0% compared with the same period last year and increased by 91.7% from the beginning of the year; the price difference of diammonium phosphate increased by 69.6% compared with the same period last year and increased by 51.1% from the beginning of the year.

In the short term, agriculture's demand for monoammonium phosphate, diammonium phosphate and upstream phosphate rock will remain high under high prosperity. In the future, even if the agricultural boom cycle declines, crops, as basic production and living materials, must have a basic guarantee of planting area, which means that its demand for pesticides, fertilizers and upstream raw materials will remain at a stable level.

Lithium iron phosphate batteries have become the Dark Horse in the new energy era, spurring rapid growth in demand for upstream raw materials: Against the background of China's strong encouragement of the development of the new energy industry, the demand for lithium power batteries is rising rapidly. According to different cathode materials, lithium batteries can be mainly divided into two categories - ternary lithium batteries and lithium iron phosphate batteries. Ternary lithium batteries mainly use lithium nickel cobalt manganate or lithium nickel cobalt aluminate as the cathode material, while lithium iron phosphate batteries use lithium iron phosphate as the cathode material.

Phosphate rock is the main raw material in the upstream of the lithium iron phosphate industry chain. To produce 1 ton of lithium iron phosphate, 0.5-0.65 tons of Phosphate rock (pure) and 0.8 tons of monoammonium phosphate are required. The rapid growth in demand for lithium iron phosphate will be transmitted upstream along the industrial chain, driving the demand for phosphate rock in the new energy field. In the actual production process, a 1GWh lithium iron phosphate battery requires 2,500 tons of lithium iron phosphate as the cathode material, and the center estimates that it requires about 1,440 tons of phosphate rock (pure, that is, P2O5 = 100%). Calculated based on relevant data, it is expected that the demand for lithium iron phosphate will reach 1.914 million tons by 2025, corresponding to 1.11 million tons of phosphate rock (pure), accounting for approximately 4.2% of the total demand for phosphate rock. The industry’s compound growth rate from 2021 to 2025 will exceed 60%.

The upstream leaders are pushing towards the midstream, and the industry structure may usher in a major reshuffle.

In recent years, upstream manufacturers of phosphorus chemicals have been subject to policy restrictions and ordered rectifications in the context of China's emphasis on chemical industry safety and green environmental protection. Therefore, since the traditional method of production expansion can no longer support the long-term development of enterprises, upstream leaders are looking for ways to expand to the middle and lower reaches of the industrial chain.

Judging from the current situation, the technical threshold for lithium iron phosphate is not high for upstream leaders with many years of experience in chemical synthesis and process production. Several phosphorus chemical companies with phosphate rock resources have decided to enter the market. Judging from the current production capacity planned by phosphorus chemical companies and other companies in other fields to switch to lithium iron phosphate production across borders, as the demand for lithium iron phosphate continues to grow strongly in the future, there is the possibility of drastic changes in the lithium iron phosphate industry structure.

The subsequent industry reshuffle may be divided into two stages:

1. Chemical leaders with cost advantages (phosphorus sources) enter the track, causing a severe impact on the existing structure. Existing companies without cost advantages such as phosphorus sources directly exit the market.The industry structure is rapidly improving.

2. Companies that all have cost advantages begin to compete with each other on price and technology. Therefore, leading companies in the field of upstream raw materials that are gradually transforming to the downstream may be powerful leaders of industry changes in the future, which will form a situation where the upstream forces the midstream and ultimately leads to a major reshuffle of the downstream new energy materials industry such as lithium iron phosphate. And these upstream companies that successfully enter the new energy track will enjoy dual improvements in profits and valuations in the long term.