This week China announced that it would set the official value of the Yuan (CNY) lower and it has now declined ~2.8% vs. US Dollars (USD). On the surface this would lower the position of urea and phosphate producers on the global cost curve structure. Fertilizer is traded in USD so it is obvious to say that increasing exports boosts producer cash positions. However, the reintroduction of a 13 percent Chinese VAT tax on September 1st is a headwind to higher export levels as well as producer costs which adds turbulence into evaluating the impact.
For example; current urea prices in China are $270-$275 mt and the VAT would generally add ~$3.50-$5.50/mt in cost; implying that the cost structure would likely stay close to the same for the producer after the devaluation and VAT implication. Potash prices could face headwinds as imports are also subject to the VAT raising costs to farmers. The devaluation adds headwinds into benchmark price negotiations which are widely watched by the market. The real concern then is how producers (both urea and phosphate) and importers (potash) will behave going forward. The move to devalue signals heightened macro-concerns with China and the potential for more devaluations going forward. So while the VAT tax might off-set some downward pressure (nitrogen/phosphate) it still signals heightened risk and uncertainty to these markets.