Urea has seen a decent uptrend in prices

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Urea experienced a decent upward trend Author/Source: Agricultural Inputs News Date: 2016-10-24 Clicks: 23 In mid-October, the urea market finally saw a proper upward trend. This week, the ex-plant prices of urea in China’s main production areas and surrounding regions have increased by 80–100 yuan per ton (the same unit is used below). It is certain that parking companies will resume operations in the near future, and the industry’s operational rate is likely to rise again. Excessive expectations are causing concern in the market, as large companies might refrain from further buying after their initial stockpiling. The author believes that the increase in urea prices in this round is nearing its peak; although there are still bullish expectations regarding coal prices in the industry, the fluctuations in urea prices are determined first by supply and demand and then by costs. 　　“\"Two lows and one high\" drive up prices; the export price in Shanxi, which has long been considered a region with low urea prices, has now reached 1,200 yuan ； The region most eager to raise prices is Central China, where the factory prices for both domestic sales and exports in Henan exceed 1,300 yuan ； As a market barometer, Shandong naturally takes the lead; the new price range of 1,260–1,300 yuan has helped restore market confidence ； At the same time, Inner Mongolia and Xinjiang have also raised the arrival prices of urea from the mainland by 50 to 100 yuan. 　　In this recent rebound in urea prices, the industry, on one hand, acknowledges the notion of “after adversity comes prosperity”, while on the other hand, actively takes actions. Most urea manufacturers choose to maintain firm prices when they have a large amount of product ready for shipment. After the first round of bulk purchases in recent times, downstream distributors have slowed down their efforts to push prices higher, waiting and seeking new opportunities to negotiate better terms. However, currently, the power to set prices has once again shifted back to manufacturers; in the short term, there is a high likelihood that ex-factory prices will continue to be driven upward. 　　The domestic urea market remains sluggish, with downstream buyers showing little purchasing interest for an extended period. As a result, the peak season fails to see any uptick, while the off-season becomes even quieter. The ex-factory prices of urea across various regions are significantly negative, prompting nearly half of the manufacturers to reduce production or shut down their plants. As of early October, the operating rate of urea producers in China had dropped to around 51%. Even so, downstream manufacturers remain on the sidelines, allowing social inventories to stay low. During this period, although there was the traditional demand driven by market fluctuations, dealers only made purchases as needed. This has led to \"two lows\": a low industry operating rate and low inventory levels downstream, which undoubtedly form the basis for this round of price rebound. 　　“\"One high\" refers to cost factors: rising freight costs for road transportation and increasing coal prices have imposed additional cost pressures on already loss-making urea manufacturers. Starting from September 21, the freight charge for transporting urea has increased by 25%–30%; the original fee of 50 yuan has been raised to 62–65 yuan. Domestic coal prices have been rising steadily over the past two months; the price of anthracite coal in Shanxi is around 750 yuan, up by 150 yuan compared to the price in August ； The price of smokeless lump coal in Henan has approached 1,000 yuan, with an increase of over 100 yuan as well. Soaring coal prices, combined with high freight costs, have once again put urea producers, which are already operating at a loss, to the test in terms of costs. This is clearly the most direct trigger for the rebound in urea prices. 　　Future market prospects are gradually becoming clearer. With the industry’s operating rate remaining low, price hikes by urea producers have prompted downstream distributors to make bulk purchases. At first, companies intended to place only moderate initial orders; the desired reserve quantities for large companies were mostly between 10,000 and 20,000 tons. However, for urea producers, this resulted in a surge in orders. Last week, there was even a rush to purchase the product. Typically, large enterprises have outstanding orders ranging from over 40,000 to as much as 80,000 tons. Orders have surged, leading to a shortage in supply; the pressures once faced by urea factories are now being transferred to distributors. Low production levels, low inventory levels, and high costs have become the factors that urea manufacturers use to raise prices, while large volumes of goods to be shipped and insufficient transportation capacity serve as points for factories to negotiate on. Distributors who have lost their say clearly feel resentful. 　　From another perspective, this round of retaliatory price hikes for urea has also sown hidden risks for the future market. Previously, the industry feared that the operational rate would rebound in the fourth quarter, as it is difficult for parking businesses in the north to resume operations once winter sets in. The persistently weak market conditions and inverted cost structures have raised the threshold for resuming production, with uncertain prospects ahead. The increase in the price of urea in China, which has risen by around 100 yuan in the past week, may prompt manufacturing companies to resume production at an accelerated pace. It is reported that urea producers in Xinjiang and Inner Mongolia, which had suspended operations or reduced production earlier, are scheduled to resume production in the near future. Additionally, two other enterprises in Inner Mongolia have stated that they will start up their operations next year. Presumably, parking businesses in other regions that are unwilling to be eliminated will also have plans to resume operations. As a result, the benefits of low inventory levels in the market and low industry utilization rates will be quickly absorbed; although the situation is tight in the short term, there will still be an oversupply in the long run. 　　Urea producers have opted to raise prices due to unbearable cost pressures, while downstream manufacturers have lost their bargaining power due to a lack of inventory buffers. Intended as a small-scale stockpiling effort, it ended up becoming a bulk procurement; factories with numerous pending orders quickly raised their prices. The urea market saw a retaliatory rebound, with prices rising by 100 yuan as a result of the prevailing trends. Given that most factories currently face no sales pressure, high prices for urea are expected to remain until the end of October or early November; what happens thereafter will likely depend on the industry’s operating capacity. (Yang Luyi)