The imbalance between urea supply and demand becomes apparent – can the upward trend continue?

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The imbalance between urea supply and demand becomes apparent – can the upward trend continue? Author/Source: Futures Daily Date: 2019-09-11 Clicks: 6 Since urea was introduced to the market on August 9, its futures prices experienced initial fluctuations with limits on drops and rises; thereafter, they remained stable. Towards the end of August, urea prices started to rise. Currently, as it is the off-season for agricultural demand, the urea market has stabilized after being affected by news regarding tenders in Ethiopia and Bangladesh. As of the close on September 6, the price of the main urea contract UR2001 was 1,820 yuan per ton, with an open interest of around 93,000 contracts. What will be the trend of urea prices in the future? Can the recovery of urea levels from a downward trend continue? 　　On the raw material side: coal prices show divergence, and pressure from LNG remains. As for the raw materials used in urea production, coal prices exhibit some variation. As of August 30, the ex-pit price of anthracite in Yangcheng, Jincheng was 585 yuan per ton, down by 60 yuan per ton compared to the end of July ； The ex-pit price of bituminous coal lumps in Shenmu, Shaanxi was 550 yuan per ton, roughly the same as at the end of July; however, until the end of August, the price of such coal lumps in Shenmu remained at 545 yuan per ton ； The ex-mine price of lignite in Hulunbuir, Inner Mongolia is 318 yuan per ton, remaining unchanged from the end of July; however, before the end of August, the price of lignite in Hulunbuir, Inner Mongolia was 313 yuan per ton ； The market price of thermal coal was 580 yuan per ton, remaining unchanged from the end of July, and thermal coal prices stayed stable throughout August. The current macroeconomy, especially the industrial sector, is in a downturn, and demand from downstream industries does not provide sufficient support for coal prices. However, with the National Day approaching, safety regulations on the coal supply side have become stricter, so coal prices are likely to remain stable in the short term. 　　Regarding natural gas, LNG prices continue to decline. As of September 5, the national index for China’s LNG ex-plant prices was 3,209 yuan per ton, a month-on-month decrease of 84 yuan per ton ； The ex-plant LNG price index in Xinjiang is 3,017 yuan per ton, down by 341 yuan per ton on a monthly basis ； The LNG ex-plant price index in Inner Mongolia is 3,000 yuan per ton, showing a month-on-month decline of 254 yuan per ton. At present, market demand is relatively weak; domestic factories are adjusting prices based on their own inventory levels and local demand. In the future, as more LNG receiving stations come online, LNG prices are likely to continue to decline under pressure. 　　Supply side: High operating rates for urea production, with output remaining stable at high levels. Currently, the operating rates for urea production are experiencing slight fluctuations, but overall they remain at high levels. As of September 4, the operating rate of domestic urea manufacturers was 63.52%, up 1.09% on a week-on-week basis. Among them, the operating rate of urea manufacturers in Shandong is 53.76% ； The operating rate of urea manufacturers in Jiangsu is 70.98% ； The operating rate of urea manufacturers in Anhui is 64.14% ； The operating rate of urea manufacturers in Hebei is 69.76% ； The operating rate of urea manufacturers in Shanxi is 78.72% ； The operating rate of urea manufacturers in Inner Mongolia is 71.66% ； The operating rate of urea manufacturers in Xinjiang is 61.07%. As of September 4, the daily domestic urea production was 147,000 tons, an increase of 3,000 tons on a week-on-week basis. Among them, Shandong’s daily production is 180,000 tons ； Jiangsu’s daily production is 6,850 tons ； Anhui’s daily production is 6,350 tons ； Hebei’s daily production is 8,000 tons ； Shanxi’s daily production is 22,000 tons ； Inner Mongolia’s daily production is 20,000 tons ； Xinjiang’s daily production is 14,000 tons. Urea production may decline slightly in the later period, as the 70th anniversary of National Day approaches and environmental regulations in the Beijing-Tianjin-Hebei region become stricter, especially in Shanxi Province. It should be noted, however, that environmental protection is beneficial for the supply side, but it also has an impact on industrial production on the demand side; therefore, its supporting effect on urea prices is limited. 　　On the demand side: Demand in industry and agriculture remains weak; exports may improve in the future. The downstream demand for urea is mainly divided into agricultural demand and industrial demand. In recent years, agricultural demand has been declining while industrial demand has been increasing. Currently, agricultural demand accounts for about 60% of the total demand, whereas industrial demand accounts for around 40%. We are currently in the off-season for agricultural needs, with low demand for urea in most parts of the country. In the industrial sector, production levels at compound fertilizer manufacturers and melamine producers have seen slight fluctuations. Ahead of the peak demand period known as \"Golden September and Silver October,\" compound fertilizer manufacturers are stepping up production to avoid the impact of environmental regulations imposed in connection with the 70th anniversary of the National Day. As of September 5, the operating rate of compound fertilizer manufacturers was 46.29%, up 2.1 percentage points from the beginning of August ； The operating rate of melamine manufacturers was 51.12%, up 1.77 percentage points from the beginning of August. Starting from mid-to-late September, the regions with two planting seasons per year begin sowing for the next season. The sale of compound fertilizers as base fertilizers also drives demand for topdressing and supplementary fertilizers; it is expected that demand for urea may increase slightly. However, as the price of ammonium chloride continues to fall, it is possible that compound fertilizer manufacturers might choose to use ammonium chloride instead of urea in their production. It should also be noted that environmental regulations restricting production have an impact on both the upstream and downstream sectors of the urea industry; a decline in industrial demand will be the biggest factor hindering a recovery in urea prices. 　　On the export side, urea exports this year have seen a significant increase compared to last year. Data shows that from January to July 2019, China exported a total of 2.0348 million tons of urea, representing a year-on-year increase of 151.8% ； From January to July, China’s cumulative urea exports amounted to $619.12 million, a year-on-year increase of 141.5%. In July, China exported 267,000 tons of urea, with an average export price of $290.86 per ton, resulting in export earnings of $77.6612 million. Reports suggest that India may issue further tenders in September, and buyers from Europe, the United States, and other regions will also return to the market. Additionally, Ethiopia’s annual tender for 600,000 tons of urea, as well as Bangladesh’s tenders for 100,000 tons each of urea in both large and small granules, are all positive factors for the market. Currently, international urea prices are on the rise; whether exports will have an impact on urea prices will depend on whether China’s offshore urea prices can be maintained. 　　Outlook for the future market 　Overall, due to the approaching 70th anniversary of National Day, stricter environmental and safety regulations are being applied to coal mines as raw material sources; as a result, coal prices are likely to stop falling and stabilize. On the other hand, natural gas prices may continue to drop, as it is in a period of low demand and there is a significant increase in the volume of gas received at storage stations. Therefore, the support provided by raw materials for urea production is somewhat insufficient. In the middle and late September, there is a slight peak in demand for urea for agricultural use in some areas. In regions where farming is carried out twice a year, seed sowing takes place after the autumn harvest; the sale of compound fertilizers as base fertilizers also contributes to an increase in demand for topdressing and supplementary fertilizers. However, as the price of ammonium chloride continues to fall, it is possible that compound fertilizer manufacturers might choose to use ammonium chloride instead of urea in their production processes. 　　On the international front, Ethiopia and Bangladesh have already launched bids for urea, and international urea prices show signs of stabilizing after a decline. The market expects India to initiate its bidding process in September; at that time, it will be important to pay attention to the timing of purchases as well as the volume purchased. 　　It should be noted that although industrial demand is about to enter the peak period of \"Golden September and Silver October,\" production at urea manufacturers is restricted due to the production cuts and shutdowns caused by the National Day military parade, and the companies that rely on urea as a raw material are also significantly affected. As a result, the decline in industrial demand will be the biggest factor hindering a rebound in urea prices. Given the current situation, there is still pressure on the urea UR2001 contract to continue rising; it is recommended to closely monitor the operational status of various sectors in the urea industry in the coming period. (Wei Yaru)