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Rising raw material costs make it difficult to keep prices stable; the urea market remains sluggish. Author/Source: China Chemical Industry News Date: 10-18-2016 Clicks: 2 Since the beginning of this year, coal prices in China have continued to rise sharply, with rises expected for natural gas as well. However, the price of urea produced from coal and natural gas has remained low, failing to keep pace with the rise in the prices of these raw materials. Market analysts believe that due to overcapacity and low international prices, there are few prospects for an increase in urea prices, but the current price level represents the bottom of the market. Gas prices continue to rise. Since the beginning of this year, as efforts to reduce production capacity have intensified and coal output has declined, domestic coal prices have kept rising. On October 12, the Bohai Rim thermal coal price index closed at 570 yuan per ton (the same unit applies below), up by 9 yuan from the previous reporting period, marking 14 consecutive periods of increase ； The price has risen by 199 yuan from 371 yuan at the beginning of the year, resulting in a cumulative increase of 53.8%, once again setting a new high for the year. Natural gas prices are also facing an increase. On October 12, the **National Development and Reform Commission officially issued the \"Interim Measures for the Management of Natural Gas Pipeline Transportation Prices\" and the \"Interim Measures for the Supervision and Review of Pricing Costs for Natural Gas Pipeline Transportation\". These measures aim to reform the pricing mechanism for natural gas pipeline transportation, with prices being set and adjusted in accordance with the principle of \"allowable costs plus reasonable profits\". At a seminar held at the end of September by CNPC and the Shanghai Petroleum and Natural Gas Trading Center, **a representative from the Price Department of the National Development and Reform Commission said that the gas prices for peak-season use in winter 2016 would be increased by up to 20%, and upstream companies needed to negotiate thoroughly with downstream companies regarding these price increases. In our country, about 70% of urea is produced using coal as a raw material. Recently, coal prices in some areas have risen by nearly 100 yuan per ton, while the cost of urea has increased by around 100 yuan per ton. Furthermore, about 30% of the urea produced in our country is manufactured using natural gas; if the price of natural gas rises by 0.1 yuan per cubic meter, the cost of urea is expected to increase by 60 yuan per ton. A 20% increase in natural gas prices will raise the cost of urea by 120–240 yuan per ton. Urea prices remain stable; however, the rise in raw material costs has not affected the urea market. Since the second half of this year, domestic urea prices have remained around 1,200 yuan. On October 12, the main domestic ex-plant price for urea was reported at 1,220–1,270 yuan. The low prices of urea stand in sharp contrast to the high prices of coal. Why hasn’t the price of urea risen in line? Zhou Dongping, chairman of Hunan Toyota Agricultural Supplies Company, provided an analysis. The first is seasonal factors. In our country, fertilizer use is primarily concentrated in the first half of the year, with the highest consumption occurring during the spring plowing season; usage in the second half of the year accounts for less than 40% of the annual total. The period of high fertilizer use for winter wheat is in the second half of the year, and preparations for fertilizers are now nearing completion. Additionally, there is a need for fertilizers for cash crops such as vegetables and fruit trees during autumn and winter, but due to low prices of agricultural products this year, farmers are not very enthusiastic about planting. Moreover, the situation for winter storage of chemical fertilizers this year is not optimistic ； Due to low international prices, export volumes are not expected to be high in the fourth quarter, with few positive developments likely in the market. As a result, dealers are not very enthusiastic about purchasing goods, and the market is weak. Second, the utilization rate has not declined but instead increased. This year, urea prices are low, resulting in severe losses for companies. Logically, the operating rate of these companies should decline further, but according to statistics, in late September, as some companies that had reduced production resumed operations, the overall domestic operating rate for urea production increased from 55% to around 57%. This has increased dealers’ concerns – it seems that urea manufacturers have more resilience than expected, and some companies continue to produce even when they are losing money. Dealers are concerned that fertilizer production will continue to increase in the future, so they have become cautious. Third is to align with international prices. At present, the prices of fertilizers in our country are becoming more aligned with those in the international market, while international fertilizer prices are currently at low levels. Internationally, the FOB price of urea is only 180–195 dollars, the FOB price of diammonium phosphate is 320–340 dollars, and the spot price of potassium chloride is 192–240 dollars. With international prices so low, it is difficult for domestic fertilizer prices to rise as well. Fourth is the lagged response. After energy prices rise, it often takes some time before fertilizer prices increase as well. On the one hand, the market needs to confirm whether the rise in energy prices is real and genuine ； On the other hand, manufacturing companies generally maintain a certain inventory of raw materials. Costs only begin to rise after these previously purchased, low-cost stocks are used up, at which point the urgency for companies to raise prices becomes greater. Still at market lows. At the end of September, the Organization of Petroleum Exporting Countries reached an agreement to cut production, agreeing to reduce daily crude oil output by nearly 1 million barrels to 32.5 million barrels, with these cuts to take effect at a meeting in November. This is the first production cut agreement since oil prices collapsed two years ago due to an oversupply. Affected by this, international oil prices recorded the largest daily percentage increase since April this year. As of October 13, international oil prices had stabilized at $50 per barrel. Li Yueming, manager of Guangxi Green Plant Fertilizer Co., Ltd., believes that rising oil prices bring hope to the urea market. Since oil prices drive energy prices, the prices of other energy sources such as coal and natural gas generally follow those of oil. If there is an expectation of steady price increases for oil due to an agreement reached by OPEC, then coal and natural gas prices will also rise, further increasing the cost of urea. Li Yueming said that it is not appropriate to be overly pessimistic about the urea market in the future. Although it is currently difficult for urea prices to rise, overall, as costs increase, the underlying support for urea prices has strengthened significantly, making further significant price drops impossible. By next year’s spring plowing season, it is possible that the price of urea could increase by 100 to 200 yuan per ton. Some industry experts also believe that the remaining domestic urea production capacity consists of listed companies, low-cost advanced production facilities, enterprises that integrate coal and fertilizer production, or large state-owned enterprises; there is very little capacity that can be phased out in the future. Even if there is a decline in the operating rate as expected, it is merely a form of \"hibernation\"; it will wake up as soon as coal prices drop or urea prices rise. Therefore, only by drastically reducing the supply of urea thanks to the current high prices of coal, and transferring that reduced supply to next year’s inventory, can the urea market see a real turnaround.