Urea: Will capacity really be reduced so quickly?

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Urea: Will capacity reduction really happen so quickly? Author/Source: Date: 2016-01-19 Clicks: 42 The issue of capacity reduction in the urea industry has become a hot topic. In 2014, the urea industry was on the verge of experiencing such a reduction – in mid-to-late April 2014, urea prices dropped to their lowest levels since 2008. It was thought that this would lead to a reduction in production capacity. Fortunately, however, the low export price of around 1,350 yuan per ton forced some small urea manufacturers in Shandong and Henan to suspend operations for half a year to a year due to issues such as prices being significantly lower than costs and difficulties in capital turnover. Later, large corporations invested in these businesses, enabling them to restart operations with lower costs and higher production volumes. Looking back at the end of 2015, the ex-factory price in Shandong and the two river regions was around 1,300 yuan per ton; by mid-January 2016, it had dropped to around 1,220–1,230 yuan per ton in those areas. So, will some of the outdated production capacity within the urea industry really withdraw from the market soon? Next, Xiaochew from China Fertilizer Network will lead us in a brief discussion on this issue. 　　The cost of urea is currently lower than it has been at any point since 2008; even those urea producers with high costs are unlikely to withdraw from the market in the near future. Taking Shandong and the Two Rivers regions as examples, according to incomplete statistics, the current production cost for high-quality urea in these areas is around 1,200 yuan per ton, while the cost for urea produced using new processes and technologies is around 1,100 yuan per ton. Given that the current selling price at the factory level is 1,220 yuan per ton, urea prices are likely to continue to fall in the future ； Secondly, international commodity prices are weak; by early January 2016, crude oil prices were below $30, and experts expect them to drop further to around $20 in the coming time. The coal industry is not spared either, as its prices may continue to fall, which means that urea costs could drop again during the rest of 2016 ； Once again, in 2016 the urea market was in a very poor state, with prices at such a low level that operations were unprofitable. It is possible that a situation similar to that in 2014 could occur: some companies would reduce their production levels and wait for the market conditions to improve before resuming operations. 　　Demand, when pushed to extremes, can have the opposite effect. From October to December 2015, aside from the two urea procurement tenders in India where China won bids for amounts of around 600,000 tons and 1 million tons respectively, poor crop yields and incomes, along with low prices for raw materials, led to a weak market for compound fertilizers in China, which provided little support for the urea industry. As urea prices continued to fall, distributors purchased smaller quantities over time, suffering losses and becoming more cautious in their operations. By mid-January 2016, it was estimated that the amount of urea held by some intermediaries and most retailers was less than 50% of that in the same period in previous years. Initially, there seems to be a possibility of an upward trend in urea prices in the spring market. As for the issue of overcapacity, if downstream users continue to use the fact that there is an excess of 6–10 million tons, or even 20 million tons, of urea as an excuse to drive down prices, then Chinese urea manufacturers can stabilize and even raise prices by reducing their production levels at the appropriate time, thereby helping to overcome the challenges faced by the urea industry during spring. This could even help maintain stable urea market conditions during the summer, meaning that there would be no need to reduce production capacity so quickly! 　　It is likely that some people may consider Xiao Che’s views to be a bit arbitrary; that’s perfectly fine. Indeed, overcapacity in the urea industry is a problem we will have to face. Only by having those urea production facilities that are energy-intensive and costly to operate withdraw from the market quickly, while new facilities that are low-cost and have advantages in terms of transportation take their place, and by converting part of the regular urea into sulfur-containing urea types that are suitable for soil use and environmentally friendly, as well as urea suitable for use in vehicles, etc., and by expanding the sales channels for urea in various ways, can China’s urea industry achieve sustainable and healthy development. http://www.nmtech.com.cn/*nwen_hyyw_xx.asp?path=45&id=174978