Supply and demand for urea are tightening, leading to an increase in both volume and price

Thread Content

　　 　　The rise of bioenergy worldwide will increase the demand for urea, a key fertilizer. Agricultural product prices will continue to rise, and the agricultural market is showing positive trends. The demand for urea in agricultural production will keep increasing. Coupled with factors such as rising production and transportation costs, it will be difficult to change the high level of international urea prices in the short term. 　　Domestic urea exports are correlated with the price difference between international and domestic urea prices; meanwhile, domestic urea prices rise driven by international urea prices. The average export price in December 2007 reached 287 dollars per ton. The cost difference between domestic and imported urea, as well as international demand for urea, are key factors driving exports. 　　In 2008, urea production, exports, and prices are expected to reach new highs, with overall supply likely to be somewhat tight throughout the year. In 2007, urea production capacity reached 55 million tons; this figure is expected to rise to 60 million tons by the end of 2008. In 2007, 5.252 million tons of urea were exported, accounting for 21.1% of total production. According to statistical analysis, domestic urea supply will be tight during the spring planting season. Under the current tariff policies and given the significant increase in urea production costs, domestic companies will consider exporting when export prices are higher than domestic prices. As export volumes increase, domestic urea supply will remain tight. 　　UnionPay Credit Analysis: Supply and demand dynamics give rise to the industry’s export advantages
I. Current development status of the industry in China
1. Tight supply and demand for urea production capacity
In 2006, global urea production capacity reached 152.3 million tons, an increase of 4% compared to the previous year. Nearly 80% of this increase occurred in East Asia, primarily in China, with a net increase of around 8 million tons. Secondly, West Asia saw an increase of 2 million tons, while Africa saw an increase of 600,000 tons. It is estimated that global urea production capacity will be around 157 million tons in 2007, rising to 192 million tons by 2011, an increase of about 35.3 million tons. Data analysis shows that global urea production and demand were in short supply in 2007 and 2008, with the situation only beginning to ease after 2009. 　　2. Good export performance In the third quarter of 2007, China exported 2.353 million tons of urea, a figure that represented a 2.6-fold increase compared to the previous year; the value of these exports was 660 million US dollars, an increase of 3.1 times. The average export price was 281.8 US dollars per ton, up by 14.2%, with export prices first declining before rising again. 　　3. Wide distribution of enterprises 　At present, urea production enterprises in China are spread across a wide range of regions. By the year 2000, there were production enterprises in all provinces and municipalities except Qinghai Province and the Tibet Autonomous Region, which was sufficient to meet the needs of agricultural production. 　　The improvement in the urea market in recent years has boosted the enthusiasm of urea manufacturers to build new facilities or expand existing ones. In 2006, an additional 4 million tons of production capacity was added domestically, and the surplus supply of urea in the country has become evident, a situation that is likely to persist. The production capacity of projects under construction in 2007 was 4.9 million tons, while projects planned for construction from 2008 to 2010 would have a capacity of 11.1 million tons. 　　4. Developing new products to improve fertilizer efficiency At present, urea production in China has entered a new phase of development; domestic production can not only meet agricultural needs but also supply a certain amount for export. Introducing new varieties and improving the efficiency of fertilizer use have become current focuses. 　　In terms of production, efforts are being made to increase the output of large-grained urea, gradually raise the proportion of coated urea, and actively develop new types of compound fertilizers to meet the needs of agricultural development. Manufacturing enterprises should, in light of the current low efficiency of fertilizer use, actively develop new products to improve fertilizer efficiency. According to available data, when urea is applied topically, its utilization efficiency as a fertilizer in the same growing season is only 28%. If applied deeply or mixed with organic fertilizers, the utilization rate can be increased to 38%. Large-grained urea, when applied at greater depths, can increase fertilizer efficiency by 10%. 　　II. Development opportunities for the industry 　　1. Export advantages are evident 　　China’s urea prices are relatively low, giving it strong international competitiveness. In December 2007, the average export price was 287 dollars per ton, while the international average price during the same period was 408.7 dollars; the difference between the two was 121.7 dollars. During that same period, urea exports reached their monthly peak of 1.518 million tons. At the end of December, the offshore price of urea in China was 345 dollars per ton, while it was 410 dollars per ton internationally. After the tariff adjustments in January, the offshore price of urea in China increased by 15 dollars per ton, reaching 360 dollars per ton. The international price for urea packages was 414.8 dollars per ton; the lowest prices were seen in the Middle East, ranging from 370 to 415 dollars per ton. During the same period, the CFR price from China to India was 417 to 419 dollars per ton. Although international urea prices have dropped slightly recently, China still has an advantage when it comes to exporting urea. Southeast Asia is the largest region for urea consumption and imports, and China enjoys geographical advantages as well as lower shipping costs. 　　2. Tight supply and demand in 2008 　　Supply and demand of urea for spring plowing will be tight. Due to the seasonality of agriculture, from October 2007 to March of the following year is the off-season for urea, and it is also the period of reduced stockpiling of **fertilizers. From October to December 2007, China’s domestic production and exports of urea were 4.7 million tons, 4.6 million tons, and 4.37 million tons respectively, while the exports were 458,000 tons, 926,000 tons, and 1.518 million tons. Thus, China’s domestic urea inventory was 10.76 million tons, which was 2.02 million tons less than in the same period of 2006. In the first three months of 2008, due to weather conditions such as rain, snow, and freezing, as well as shortages in coal, electricity, oil, and transportation, along with insufficient natural gas supply, production is expected to be lower than normal. Based on previous data, we optimistically estimate that production during those first three months will be 13 million tons; after accounting for exports, domestic reserves will be at most 11.5 million tons. Thus, from October 2007 to March 2008, domestic urea reserves amounted to 22.26 million tons, which is 2.5 million tons less than in the 2006/07 period. Since urea used for spring plowing accounts for around 60% of the total annual urea consumption, a shortage of urea for this purpose is almost inevitable. Due to the domestic maximum export price, the rise in domestic urea prices will be limited. However, as the supply of urea on the international market remains tight, and with the start of spring plowing in the Northern Hemisphere, the international urea market will enter a peak period, leading to further increases in prices after adjustments. Under the current tariff policies and given the significant rise in urea production costs, domestic companies will consider exporting when the export price is higher than the domestic price. As a result, the supply of urea in the domestic market will remain tight. At the same time, due to tight railway transportation, there will be shortages of urea supply in some areas of the country. 　　3. Optimistic outlook for urea manufacturers using gas-based processes Currently, urea production methods are generally divided into those based on gas, coal, and oil. With the continuous rise in international oil prices in recent years, oil-based urea production enterprises in China have largely ceased operations; currently, China’s urea manufacturers rely mainly on gas-based and coal-based feedstocks. In China’s nitrogen fertilizer industry, influenced by the country’s energy structure characterized by an abundance of coal, a shortage of oil, and limited gas resources, coal is the primary raw material, accounting for nearly 70% of the total amount used. Enterprises that use natural gas as a raw material for producing nitrogen fertilizers account for about 30% of the total production. 　　Due to differences in supply and demand dynamics, the increase in natural gas prices is lower than that of oil and coal prices. In China, a tiered pricing system is applied for natural gas use; fertilizer manufacturers are allocated a fixed amount of gas supply, and they pay a scheduled price within that allocated amount, which makes the gas used by these companies relatively inexpensive. However, given the long-term trend of energy shortages in our country, the National Development and Reform Commission will gradually raise natural gas prices for different users, thereby driving up overall gas prices over time. But in order to stabilize fertilizer prices, it will continue to support policies that allow fertilizer manufacturers to purchase gas at low prices; as a result, natural gas prices will not rise significantly. Consequently, fertilizer manufacturers that use natural gas will continue to enjoy cost advantages. 　　III. Investment tips for bank credit opportunities At present, the urea industry is driven primarily by agriculture and industry; the demand growth rate is significantly higher than that of supply, so the period of high profits in this industry can last for at least 10 years or more. 　　The increase in demand for agricultural urea in 2007 stemmed from three main factors: first, it served as a substitute for ammonium carbonate, whose use has been declining in recent years, being replaced mainly by urea and compound fertilizers ； The second is for the production of high-nitrogen compound fertilizers. In recent years, the development of high-nitrogen compound fertilizers has been rapid, resulting in a growing demand for urea ； Third, the planting area of food crops and cash crops has increased. However, the soil testing and formula fertilization program, which is currently being vigorously promoted, has had a certain negative impact on the increase in demand for urea. Overall, it is estimated that the growth rate of agricultural urea in China in 2007 will be around 3%. 　　Regarding industrial urea, China’s melamine industry is expected to experience rapid growth in 2007. Currently, there are over 100 melamine manufacturers in China, with a total production capacity of 750,000 tons per year; the annual growth rate is above 20%. The demand for urea in 2007 is expected to exceed 1.4 million tons. At the same time, the board industry is also showing good growth momentum at present, and the demand for urea is set to maintain a growth rate of over 10%. 　　According to statistics from the Ministry of Agriculture, between 2003 and 2005, the annual increase in nitrogen fertilizer usage in China was 1.67%, 5.10%, and 2.79% respectively; the growth rate of fertilizer use in agriculture was much lower than the increase in urea production capacity. Furthermore, although the amount of urea used in industry has been increasing in recent years, the annual increase is only around 500,000 tons, which is still negligible compared to the expansion rate of 3.5–4 million tons per year. 　　Therefore, we recommend that banks pay attention to the development of the urea industry; driven by rising urea prices, the prospects for this industry are becoming increasingly promising. Banks are advised to closely monitor the development of urea manufacturers that rely on gas as a raw material and to provide them with appropriate credit support.