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Urea prices reverse again – what to do about winter storage? Author/Source: China Fertilizer Network Date: 2019-09-25 Clicks: 12 From mid-September to the end of the month, urea prices once again experienced a pattern of rising followed by falling, as expected and somewhat inevitably. The ex-factory prices offered by manufacturers in Shandong’s Lianghe region, Shanxi, Jiangsu, and Anhui saw only modest declines, of 20–40 yuan per ton; however, the actual transaction prices dropped significantly! The purchasing price of urea at Linyi Compound Fertilizer Factory dropped from 1,860–1,900 yuan per ton before the Mid-Autumn Festival to 1,810–1,820 yuan per ton on September 17; it then rose slightly to around 1,830 yuan per ton, before falling back to 1,810–1,820 yuan per ton by September 23. With the urea price keeping changing direction, what should those dealers who want to purchase stock for winter storage do? Tossed! Hehe, just kidding. Getting back to the topic, in this article we will provide a brief analysis of this year’s urea winter storage market from the aspects of procurement, the timing of procurement, and the decision not to carry out winter storage. Suppose we have already purchased urea for winter storage, that is, we bought it when the price seemed to have reached its bottom a couple of times earlier – what should we do then? One approach is to sell a portion of the stock once price increases occur and a certain profit is achieved. Another approach is for distributors who purchase the product at around 1700 yuan per ton in Shandong, around 1650 yuan per ton in Shanxi, and around 1500 yuan per ton in Inner Mongolia to wait before selling or to hold the stock for a longer period; of course, this assumes that storage costs and interest on funds are not taken into consideration. For dealers who are considering stocking up for winter storage, Zhongfei Net’s advice is that once super-low prices appear, or when prices reach the level they expect, they can purchase goods in small quantities or an appropriate amount. So, when is the right time to stock up on urea for winter use? So, when is the next time the price is likely to reach its bottom? First of all, we must admit that the price trend of urea in the second half of this year is completely different from that in the previous two years. It was neither the situation in late August 2017, when prices kept rising all the way until spring, nor the situation in early August 2018, when prices rose continuously until the end of November. In the second half of this year, urea prices first rose in July before falling; from August to September, there were mainly declines, with only three periods of price increases. The schedule for winter stockpiling has been disrupted; it is not possible to follow the approach used in the previous two years, as the supply and demand situation this year is different. On the demand side, it is well known that the poor economic conditions have led to a continuous decline in the demand for urea by domestic industrial plywood factories and power plants. As for direct application of urea in industry, its use has decreased due to the substitution of urea by high-nitrogen compound fertilizers, formulated fertilizers, nitrogen-potassium topdresses, compressed ammonium chloride, sulfuric acid ammonia, and other products. However, whether urea is used directly or as part of various compound fertilizers, it is still needed; therefore, there is strong demand for urea from industrial compound fertilizer manufacturers, along with significant pressure on prices. On the supply side, a factory in Inner Mongolia began operations at the end of 2018; a large factory in Shandong increased its production capacity in mid-2018, while a large factory in Shanxi has been operating at full capacity for longer periods since 2018. In the spring of 2019, urea manufacturers in southwestern Inner Mongolia resumed production earlier than in the previous year. Additionally, due to the high profits associated with urea over these two years, many manufacturers operated at high capacity. All these factors have resulted in China’s daily urea production reaching 150,000 tons or even more for extended periods. Since April this year, China’s daily urea production has remained above 150,000 tons (with the exception of late August). Looking back, the daily production level stayed above 150,000 tons during the spring of 2017 and in July 2016; even earlier, it was above 160,000 tons or as high as 200,000 tons. In short, urea has once again reached a state of slightly oversupply, and is on the verge of experiencing a more pronounced surplus—meaning that exports are needed to alleviate domestic pressure. Secondly, the decline in export volumes and low prices make it even more difficult for our distributors to carry out their winter stockpiling operations. Exports are a double-edged sword. When domestic and international prices are generally somewhat high, exports serve as a bonus; however, when both domestic and international prices are low, exports become a setback. For instance, in the Indian tender that concluded on September 13, the FOB price for Chinese urea was merely $260 per ton. The price for Chinese urea delivered to Yantai Port was as low as 1,750 yuan per ton. What makes matters worse is that the volume of Chinese urea exported is likely to be just 100,000 tons—both the quantity and price represent significant setbacks. After all, if exports are strong, domestic inventory levels in our country will remain moderate, and prices are likely to see a significant increase after the winter storage period. Our distributors had better wait until there is a clear improvement in exports before considering increasing the volume of winter stockpiles. Once again, the optimal time for winter stockpiling isn’t exactly the best time per se; it’s more of a suitable moment to purchase goods. One such time is before National Day in November – urea manufacturers need to take into account orders and logistics related to the period around National Day, so it’s possible to buy a small amount of urea at lower prices. Another suitable time is after the holidays; if industrial demand or export demand remains low, urea prices could reach new lows. After all, by late October, compound fertilizer manufacturers will begin preparing for winter storage by collecting payments and producing fertilizer for that period. In November and December, depending on the weather conditions as well as the availability of coal and natural gas, the operations of those companies that produce urea using coal, or especially natural gas, will be subject to certain restrictions. As a result, the daily production volume of urea is likely to fall below 140,000 tons, or even 130,000 tons, which could lead to an increase in urea prices. Finally, in an overall weak economic environment, it is difficult for urea prices to rise significantly; even if there is a sharp increase, such prices are likely to fluctuate again. As for winter stockpiling, it is sufficient to purchase only a small amount or an appropriate quantity, otherwise significant risks will arise. For those dealers who are not planning to stock up for winter, Zhongfei Net would like to say that it’s fine not to do so. Considering the five-month period from October to February, during which storage costs and interest on funds apply, and in some areas the issue of urea caking also needs to be taken into account, taking a price of 1700–1800 yuan per ton at the factory in Shandong as an example, even if the price rises to 2000 yuan per ton by the time of sales next spring, the profit margin will likely remain low. Moreover, given the current supply and demand situation, it’s difficult for urea prices to rise by more than 200 yuan per ton, or even 100 yuan per ton. Therefore, for us dealers, it’s feasible to stock up in small quantities or for only a short period of time. (Che Yanhong)