Rising natural gas prices: Could urea prices rise again?

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Rising natural gas prices: Could urea prices rise again? Author/Source: China Fertilizer Network Date: 2020-11-02 Clicks: 4 The announcement regarding the adjustment of natural gas prices was finally released yesterday. Starting from November 1st, during the peak season this winter and next spring, in accordance with the “Notice on Adjusting the Plans for Signing Natural Gas Purchase and Sale Contracts for 2020–2021” (Southwest Sales Department [2020] No. 53), the following rules apply: For urban gas customers, the selling price of non-residential **guideline-priced resources (Type 1) will be 20% higher than the benchmark gate station price. For market-based priced resources (Types 2 and peak-shaving gas) during November 2020 and February–March 2021, the price will be 30% higher than the benchmark gate station price; whereas during December 2020 and January 2021, it will be 47% higher than the benchmark gate station price. Under the contract, non-residents account for 76% of the resources with guided prices (Equilibrium 1), while market-based price resources (Equilibrium 2) account for 24%. II. Other non-residential customers: The adjustment rate shall be applied in accordance with the comprehensive upward adjustment rate for urban gas supply in categories 1 and 2. That is, from November 2020 to February and March 2021, the prices were applied at a rate 22.4% higher than the benchmark gate price; while in December 2020 and January 2021, the prices were applied at a rate 26.5% higher than the benchmark gate price. III. Starting from November 1, in the CNG industry, the volume of gas supplied outside the contract scope will be charged at an additional price, and it will no longer be at the same price as that specified in the contract. In simple terms, the rising prices of raw materials for urea manufacturers in the southwest region are a factor at play. Additionally, the supply of low-cost urea from regions such as Inner Mongolia, Xinjiang, and Shanxi has decreased due to factors like exports; as a result, such low-cost urea is gradually disappearing from the market. Demand in Xinjiang is increasing, there is a large amount of urea ready for export from Inner Mongolia, and production restrictions in Shanxi have led to a significant reduction in the amount of urea available for supply to Xinjiang. At present, the selling prices of urea by most manufacturers in Sichuan are above 1650 yuan per ton. As a result, urea prices in the southwest region are likely to continue to rise. As for whether urea prices across the country will also increase, it’s not certain when considering the overall market situation, and this is reflected in the following aspects: First, China has a relatively large domestic production base. Although natural gas prices have risen this year, the supply volume has not decreased; in fact, some enterprises have restarted their production facilities that were added this year. Based on the current supply situation, the daily supply of urea this winter is likely to remain above 150,000 tons. While there are some positive aspects related to the tenders in India, China’s monthly urea production exceeds 4.5 million tons. Based on past market demands, unless there is additional long-term demand, urea prices are likely to show signs of decline in the future. 　　Secondly, the domestic market has not yet entered its peak season. From after National Day to the present, the overall price of urea has seen a certain increase. However, excluding the impact of labeling requirements, there has not been a significant rise in actual demand in the domestic market. The operating rates of plate manufacturing plants have increased slightly, but there has been no notable increase in demand in the compound fertilizer market or the agricultural sector. In previous years, demand in the agricultural sector would start to rise around November; but given the currently high price of urea, downstream buyers are more cautious in their purchasing decisions. Compound fertilizer manufacturers, having orders placed at lower prices earlier on, are also less inclined to make purchases, which has helped to limit the increase in urea prices. 　　Taking all of the above into account, driven by rising natural gas prices and the demand from export markets, urea prices are likely to continue rising. However, this upward trend is not expected to last long; if India does not issue further tenders, resistance from end-users to higher prices will gradually increase, and prices may show signs of falling at that point. 　　(Wu Wenchao)