The utilization rate plummeted to 50%! Could urea prices rebound to 1,900 yuan per ton by next spring?

Thread Content

The utilization rate plummeted to 50%! Could urea prices rebound to 1,900 yuan per ton by next spring? Author/Source: China Agri-Media Date: 2016-11-24 Clicks: 1 The urea market continues to show signs of recovery. After a prolonged period of decline, the price of urea has shown a clear upward trend since mid-September. “At present, the prevailing transaction price in Shandong region has risen to 1,520–1,530 yuan per ton. Although this represents a significant increase compared to the previous lowest prices, the operating conditions of enterprises have not improved yet. ” Liu Weichang, manager of the sales department at Shandong Ruixing Group Co., Ltd., told reporters that this rise in urea prices is actually a passive one. During the off-season for sales, demand is limited; however, due to the sharp increase in coal prices, companies face greater pressure to survive and are forced to reduce their production volumes. 　　“After a significant increase over the past month, the price of urea is now showing signs of slowing down, but the overall trend remains positive. ”Yang Tongyu, deputy general manager of Yanhua Fertilizer Co., Ltd. under Henan Jinkai Group, said that the price of urea has risen by nearly 200 yuan per ton in the past month. The main export price in the Henan region has increased from 1,350 yuan per ton at the beginning of November to 1,520 yuan per ton at present. However, since it is not yet the fertilizer usage season, the upward trend has slowed down after this round of increases. Nevertheless, market expectations remain relatively optimistic, mainly because this rise in prices is driven by rising costs and a decline in the industry’s operational capacity. 　　Rising prices have not changed the companies’ difficulties. Although urea prices have risen significantly, this increase is negligible compared to the rise in coal prices. Since the beginning of this year, driven by supply-side reforms that aim to reduce production capacity and by an improvement in demand from downstream industries, the markets for thermal coal and coking coal have seen a situation where supply falls short of demand. The prices in these markets have risen sharply; in fact, for the main futures contracts of thermal coal, coke, and coking coal, prices have increased by around 2-3 times since the start of the year. Liu Weichang said that the operating rate of urea production in China continues to decline, which reflects a change in the mindset of enterprises. Most companies now realize that the more they produce, the greater their losses will be; therefore, only by reducing their production levels can they help stabilize and lift prices. 　　Yang Tongyu believes that due to the sharp rise in coal prices, urea manufacturers have been forced to raise prices, while their operating rates have dropped to around 50%, which reflects the difficulties faced by the industry at present. “The price of urea has risen by nearly 200 yuan per ton, but the cost of coal at the delivery point has increased from 400 yuan per ton to 700 yuan per ton – a rise that is much greater than that of urea. As a result, companies incur losses when selling at a factory price of 1350 yuan per ton. With the current factory price of 1520 yuan per ton, the extent of these losses has not decreased; instead, it has increased. This is the main reason for the significant drop in the industry’s operational capacity. ”Yang Tongyu emphasized that as winter heating increases the demand for coal, coal prices are likely to remain on an upward trend in the coming period. This will put additional pressure on urea manufacturers, and it is possible that the industry’s operating rate will decline further in the future. 　　It can be seen that the rise in urea prices has not alleviated the difficulties faced by enterprises; this is indeed the reality of the current urea market. In fact, it’s not just rising coal prices – recent increases in shipping costs and the cancellation of gas price discounts have also placed certain cost pressures on enterprises, although the sharp rise in coal prices has the most significant impact on costs. 　　There is still room for price increases. During the off-season for fertilizer use, urea prices have seen a round of passive increases driven by rising costs; although the rate of increase has slowed down at present, market expectations remain fairly optimistic. 　　Yang Tongyu said that the urea market is still in the off-season at present, so price increases have not stimulated dealers’ enthusiasm to stock up, and the market remains on the sidelines. It is expected that by early December, compound fertilizer manufacturers will begin producing high-nitrogen fertilizers for next spring, which will further drive up urea prices. Additionally, winter fertilizer stockpiling will also have a positive impact on the market. “Although the urea market is generally sluggish at present, it should be noted that there have been significant changes in the supply and demand balance this year. Driven by international policies aimed at reducing production capacity, outdated production facilities in the urea industry are gradually being phased out. The industry’s operating rate of 50% represents a low level in recent years. Therefore, given the overall situation of excess supply over demand in the industry, urea production in the spring of next year is expected to decrease significantly compared to previous years, and this is the main reason for optimism regarding the market at present. ” 　　Liu Weichang believes that after two years of losses in the urea industry, efforts to eliminate outdated production capacity have begun to bear fruit; currently, the overall supply of urea in China has decreased by nearly 10 million tons. Under the pressure of rising costs, the industry’s operating rate will continue to drop and supply levels will further decline, which means prices will only rise. “During the fertilizer application period next spring, it is possible that prices could rebound to 1,900 yuan per ton; only by reaching this level can the industry turn around its losses. For manufacturing companies, the operating rate is not expected to increase significantly in the short term. Given the persistent steady demand in the market, whether distributors carry out winter stockpiling this year or not, there will be no surplus supply in the urea market next spring; in some areas, there may even be shortages of supply. ” (Zhang Gaoke)