NPK compound fertilizer used in developed countries is typically about 50% of fertilizer consumption, and China has been steadily increasing its NPK usage. However, much of the NPK compound fertilizers used in China is of much lower quality than those used in developed countries, thereby negating some of the more beneficial purposes of NPK compound fertilizer use.

China has approximately 4 times the population of the US (1.3 billion vs 315 million), a limited water supply, and a cultivated land area of only 75% of the US (130 million hectares vs 174 million hectares), yet has managed to produce an agricultural output that exceeds the US value by almost 20%, and exports many agricultural products. The growing urban population and increasing incomes have spurred the demand for higher-value food products, including prepared foods and meat, even amongst the rural population. The increased food consumption not only in value but volume will continue as incomes grow across the entire population, and the agricultural industry must keep up with demand.

China has managed to achieve this level of agricultural production through intensive cultivation practices, including the use of large quantities of fertilizer, and double and triple cropping. To increase rural production and incomes as a major priority for the country, the Chinese government must encourage and help the farmers use better farming methods and technology, improved fertilizer use and irrigation, high-yield crop seeds, and education. The promotion and usage of value-added fertilizer was a key issue identified by the government.

There are four key drivers for the increased consumption and production of value-added fertilizers in China:

Value-added Fertilizer

Value-added fertilizers are a segment of the overall fertilizer market. Compared to conventional fertilizers, value-added fertilizers have properties which improve fertilization effectiveness and efficiency. The types of value-added fertilizer relevant to Hanfeng Evergreen Inc. include slow-release and compound fertilizers.

In 1998 there were approximately 1,350 fertilizer plants in China, with 1,230 small plants producing an average of 20,000 tonnes or less per annum. In recent years there has been a trend towards larger and more efficient fertilizer production in China as the largely state-owned industry is consolidating, and a number of Sino-foreign joint ventures are in operation. While some of these plants produce NPK fertilizers, Hanfeng believes there is not any significant production of slow-release fertilizers in China.

A number of international producers of slow-release fertilizers have distributors in China, but import volumes are relatively low due to the high sale prices necessitated by their high production and transportation costs. The compound NPK fertilizer industry in China is large and growing. However, compound fertilizer use in China is about 25% of total fertilizer use, whereas in developed countries, the figure is approximately 50%. A significant portion of compound fertilizer use in the US is in the urban greening market such as golf courses and parks. Agricultural uses are increasing and major North American producers are increasing their production. In Japan, compound NPK fertilizer use is focused primarily in the agricultural sector.

China is already the world's largest consumer of fertilizer, mostly in the agricultural sector, and that sector's consumption of value-added fertilizer and compound NPK fertilizer is expected to grow significantly. The government has identified its increased use as one of their targets to achieve their goals of increasing rural farm production and income while decreasing water pollution.

There is also an increasing need for compound fertilizers in the urban greening market to keep high quality grass and ornamental trees healthy and to grow flowers and other horticulture plants in greenhouses. This is primarily a professional market, as most lawns and gardens in China are large commercial or government developments and parks. In this market, there is demand for slow-release compound fertilizers, such as the products produced at Hanfeng's blending plant. Slow-release compound fertilizers can be produced by physically blending slow-release granules with non slow-release granules or by coating a NPK homogenous granule.

As the Chinese middle-class and retired population has increasing disposable income, a consumer market for home plants and gardens is emerging. Hanfeng expects the consumer market for compound fertilizer in China to be a niche market, but given the size of China's population this niche could be significant.

Hanfeng Evergreen Inc. started importing high quality fertilizers from North America several years ago, and has a focused plan of becoming the leading domestic supplier of value-added fertilizers in China. This was started by the establishment of China's first non-government value-added fertilizer R&D centre, along with a slow-release NPK fertilizer blending plant using sulfur coated urea (“SCU”) supplied by Nu-Gro, a leading North American manufacturer of high quality fertilizer, in April 2004.

Hanfeng has further cemented their leadership position in the industry by co-hosting symposiums and seminars with the government on impacts of slow-release and value-added fertilizers on China's agricultural industry.

Hanfeng had opened China's first commercial capacity high quality SCU fertilizer plant on March 31, 2006 in Jiangsu province and is now operating a 100,000 tonnes per annum NPK fertilizer plant in Heilongjiang which began production on April 1, 2006. The Heilongjiang NPK plant was acquired along with proprietary urease inhibitor slow-release technology and UF technology, both under patent protection. Hanfeng constructed another 200,000 tonnes per annum NPK Prill Tower fertilizer plant later on the same Heilongjiang site.

Hanfeng's team of researchers and sales staff have been aggressively marketing value-added fertilizer use by conducting extensive field tests and educational seminars directly with the farmers and local distributors in Heilongjiang, Jilin, Liaoning, Jiangsu and Shanghai, to enthusiastic response. Hanfeng's production capacity of value-added fertilizer is dwarfed by the growing market for value-added fertilizers as China's policymakers and farmers embark on their modernization journey to improve farm income, crop yields, raw material efficiencies, and the environment.

Compound NPK Fertilizer

Compound fertilizer provides a mix of nutrients that can be tailored to a specific plant's nutritional needs, taking into account soil and climatic conditions. Compound fertilizers contain at least two of the three main plant nutrients: nitrogen (N), phosphate (P) and potassium (K), which together is often referred to as NPK fertilizer.

Plants require all three of these main nutrients to grow. Compound fertilizers produced through a physical mixing of granule types (N, P, K) are called blended fertilizers, while those produced through chemical processes combining the various nutrients into a single granule, allowing for more uniform application, are called homogeneous fertilizers.

Compound fertilizers may be treated to make them slow-release, either in blended or homogenous forms. As a result, slow-release fertilizers may be single nutrient, such as SCU (sulfur coated urea, urea being a source of nitrogen), or compound.

NPK compound fertilizer use in developed countries is typically about 50% of fertilizer consumption, and China has been steadily increasing its NPK usage, with China's 2003 consumption figures showing that compound NPK use was 25%.

However, despite the growing adoption by farmers of compound NPK fertilizer use, much of the domestic NPK production is of low quality, and the government has been increasingly focusing its attention and policies towards improving fertilizer quality as well as other agricultural inputs such as better land management practices, changing the crop mix and introducing higher-yield crops and seeds. The intentions of the 11th Five Year Plan, announced by the government in late 2005 specify the government's support for increasing the domestic quality and quantity of value-added fertilizer production and consumption, including high quality NPK and slow release fertilizers by pursuing opportunities with international fertilizer companies with expertise in value-added fertilizers. The use of higher quality fertilizers such as compound NPK and slow release fertilizers not only increase crop yield and efficient use of raw materials, but it also decreases run-off and water pollution, thereby addressing multiple goals of the Chinese government.

Slow-Release Fertilizer

Slow-release fertilizers are fertilizers that release nutrients to plants over time, in contrast to water soluble, non slow-release fertilizers which typically result in a large amount of the nutrient being lost to leaching and evaporation. With non slow-release fertilizers, plants receive less than optimal nutrition, with a peak level of nutrients available at the time of application, and decreasing amounts over the growth cycle.

The main advantages of slow-release fertilizers are improved efficiency (fewer applications and less fertilizer required) and improved crop yields and quality (as the fertilizer is released over time when nutrients are required). In addition, slow-release fertilizers result in reduced environmental damage from leaching of nutrients into water and gas emissions relative to water soluble, non slow-release fertilizers. Because of continuing environmental concerns about nitrate pollution of ground and surface water, the controlled release rates and non-leaching properties of slow-release fertilizers are important environmental considerations. The main disadvantage of slow-release fertilizers is their higher cost, as compared to non slow-release fertilizers.