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Industry latitude and longitude: urea market gradually felt cool autumn
Since August, the urea market has experienced a sharp downturn, with prices dropping rapidly. Retailers are hesitant to buy in bulk, manufacturers face shipping challenges, and inventory levels are rising. Sales pressure is mounting, and as autumn begins, the domestic urea market has started to feel the chill of a cooling season. However, the future direction of the urea market remains a topic of intense interest.
Several factors influence the cost of urea, primarily oil, coal, natural gas, and transportation prices. In recent years, international oil prices have surged the most, followed by coal, while natural gas prices have risen more slowly. According to industry surveys, the average production cost for oil-based urea companies in China is approximately 1,300 yuan per ton, coal-based producers average around 1,200 yuan per ton, and gas-based producers operate at about 1,000 yuan per ton.
Given that 65% of China's urea production relies on coal, and coal also serves as fuel, each ton of urea requires 1.5 to 1.8 tons of coal, accounting for roughly two-thirds of the production cost. The current high fertilizer prices are largely driven by elevated coal costs. In the second half of the year, the government has reduced or eliminated export tax rebates to curb the production and export of energy-intensive, polluting products. This policy is expected to ease domestic coal supply tensions. However, new taxation or special fund policies may increase coal production costs, which will likely be passed on to consumers. As a result, it's unlikely that coal prices will fall significantly, though different types of coal may follow varying trends.
Meanwhile, international oil prices continue to rise. In mid-August, New York crude oil futures broke through $67 per barrel, setting a new record. With China’s economy expected to maintain rapid growth, demand for crude oil and refined products will likely remain strong, keeping domestic oil prices high. This will drive up transportation costs, particularly with recent fuel price hikes, which will ultimately be passed on to urea consumers.
Natural gas prices have not increased as sharply as oil and coal. In China, fertilizer companies use gas under a planned pricing system, which keeps their costs relatively low. Although long-term energy shortages may lead to gradual gas price increases, the government is likely to maintain low-cost policies for fertilizers to stabilize prices. Thus, gas-based urea producers will continue to enjoy a cost advantage.
Export policies have also had a significant impact. While earlier export restrictions had limited effects, new regulations in the second half of the year are expected to greatly reduce urea exports, increasing domestic supply and market pressure. From January to May, an export tariff of 260 yuan per ton was in place, leading to a noticeable drop in exports. With the new 30% tax rate, the export tariff could reach at least 500 yuan per ton, further suppressing exports. By late 2005, if the tax rate drops to 15%, export volumes may recover, depending on global urea prices. It is estimated that total urea output in 2005 will range between 800,000 and 1 million tons.
Domestic demand for urea has increased slightly this year, with farmland area expanding by 2.3%. However, urea production capacity has grown at an average of 10% annually, while demand has only increased by around 5%, leading to an oversupply. Additionally, agricultural demand for urea declines in the second half of the year, with usage mainly concentrated in September and the Jianghuai region. After October, the market enters a slow season, and companies begin preparing for winter storage, causing a significant drop in demand.
At the same time, several large urea expansion projects are set to come online, adding millions of tons of new capacity. Combined with export resources, the total available supply will surpass last year’s levels by over 5 million tons. This surplus will put further pressure on prices.
Lastly, the removal of VAT on urea has led to higher costs for industrial users, including wood panels, AC foaming agents, and melamine. These increased costs are beginning to affect industrial urea demand, making it difficult for prices to rise. With agricultural urea oversupply and weak downstream demand, the urea market faces continued downward pressure.