With production restrictions in place, is it possible for urea to turn things around?

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With production restrictions in place, is it possible for urea to turn things around? Author/Source: China Fertilizer Network Date: 2019-09-03 Clicks: 8 September has arrived, and the much-anticipated \"Golden September and Silver October\" period has become a topic of discussion among industry professionals. However, given the current situation in the fertilizer market, it is uncertain whether this period will indeed occur, which is a cause for concern. Currently, the three main types of fertilizer raw materials remain weak in the market, and compound fertilizers are also affected by this situation. There is a mutual dependency between raw material fertilizers and finished fertilizers, making it difficult to achieve optimal results in either area. Next, let’s talk about urea, which is one of these raw material fertilizers. The domestic urea market has seen a brief recovery, but this slight rebound has not been enough to arouse interest among downstream users. Most domestic manufacturers remain pessimistic about the long-term trend of urea prices. After numerous arbitrary price changes, downstream users have become even more cautious, and large agricultural suppliers continue to adopt a strategy of purchasing only what they need. Feedback from wholesale markets indicates slow sales of agricultural urea; in many places, prices are only quoted without any actual transactions taking place, and selling it together with compound fertilizers yields no profit. Currently, the purchase price of urea by compound fertilizer manufacturers in Linyi, Shandong Province has risen slightly to 1810–1820 yuan per ton ； In some areas of Jiangsu, the wholesale price in the market is around 1,850 yuan per ton, while the price at the factory for lower-quality products is as low as 1,760–1,780 yuan per ton ； The wholesale price in Yunnan region is around 1,970–2,010 yuan per ton ； The prevailing ex-plant price of urea in Xinjiang is around 1,300 yuan per ton. Setting aside the issue of whether the price of urea in Xinjiang is high or low, everyone understands its effectiveness. For detailed prices in other regions, please visit the member area of China Fertilizer Network. However, urea manufacturers whose operations were restricted due to environmental inspections and the military parade during National Day have brought some activity to the market. With production limits in place, is it really possible for urea prices to recover? Next, let’s take a closer look to see if there’s any potential. First, supply has decreased while demand has not increased. Due to environmental regulations restricting production, routine maintenance by enterprises, and the fact that some companies shift their production focus to liquid ammonia in order to reduce the pressure associated with urea shipments, the overall operational rate of the urea industry has dropped significantly. According to statistics from China Fertilizer Network, this rate is around 58.5%, with a daily production volume of approximately 146,800 tons ； Furthermore, with the highly anticipated National Day military parade approaching, the production of fertilizer or chemical companies in those areas will inevitably be restricted; as a result, the operating capacity of urea production plants is likely to decrease at that time ； Again, it comes down to the conversion between liquid ammonia and other substances. The price of liquid ammonia remains high, with moderate increases in certain regions; for example, the reference price for liquid ammonia at the factory level, based on spot transactions, is around 2820–3050 yuan per ton in Shandong Province, while in Sichuan and Chongqing provinces this figure has risen to around 2400–2550 yuan per ton. This situation encourages urea manufacturers to consider shifting their production focus back to liquid ammonia, thereby reducing the selling pressures they face. Looking back at the demand, it was indeed unsatisfactory: sales were poor during the off-season in agriculture, and large agricultural suppliers were cautious with their purchases, stocking up only as needed. With the mindset of buying when prices rise and not when they fall, they believed that urea prices had not yet reached their lowest point, so they had no interest in stockpiling, let alone doing so during the off-season ； In the industrial sector, first, plywood manufacturers operated at a low level due to strict environmental regulations; subsequently, compound fertilizer companies faced weak sales and low prices. Moreover, environmental constraints also limited their production capacity – this is evident in the low operational levels of compound fertilizer manufacturers in Linyi at present. Additionally, the National Day military parade that will take place later has an impact on these compound fertilizer companies as well. Second, the replacement of low-nitrogen fertilizers remains a concern. For already struggling compound fertilizer manufacturers, reducing costs is of great importance. The price of urea remains relatively stable, but it is still high compared to ammonium chloride; as the price of ammonium chloride continues to fall, it has become a preferred raw material for some compound fertilizer producers, who use it as a substitute for urea. Thirdly, there are positive developments in the international market. Firstly, Ethiopia has issued an annual tender for the purchase of 600,000 tons of urea, while Bangladesh has issued tenders for the purchase of 100,000 tons each of urea in both large and small particle forms – enough to spark activity in China’s domestic market. Secondly, international urea prices are generally on the rise, which provides momentum for China’s domestic market as well. In summary: The positive developments in the international market indeed provide support, and the fact that some companies are shifting their production to liquid ammonia also serves as a source of support ； But this can only be a short-term benefit; after all, due to environmental protection measures and the production restrictions imposed for the National Day parade, not only are urea manufacturers affected, but also the downstream enterprises face significant constraints. Demand will thus remain the biggest factor hindering a rebound in urea prices ； It is expected that despite these production restrictions, there will still be little interest on the part of downstream users and large traders to place orders; any short-term increase in prices by the factories will not be sustainable, and a complete turnaround is unlikely. Instead, some regions might secretly reduce prices in order to attract orders. (Tan Junying)