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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 are struggling with shipping challenges, and inventory levels are rising, leading to increasing sales pressure. As autumn sets in, the domestic urea market is showing signs of cooling down. However, the future direction of the urea market remains a key concern for industry participants.
The cost of urea production is mainly influenced by oil, coal, and natural gas prices, along with transportation costs. Recently, international oil prices have surged the most, followed by coal, while natural gas prices have risen at a slower pace. According to recent surveys, the average production cost for oil-based urea enterprises in China is approximately 1,300 yuan per ton, while coal-based producers face an average cost of around 1,200 yuan per ton. Gas-based producers, on the other hand, enjoy lower costs, averaging about 1,000 yuan per ton.
Given that 65% of China’s urea production relies on coal as the primary raw material, and coal also serves as fuel, approximately 1.5 to 1.8 tons of coal are required per ton of urea produced. This accounts for roughly two-thirds of the total production cost. The high price of coal is one of the main reasons behind the current elevated fertilizer prices. In the second half of the year, the government has implemented measures such as reducing or eliminating export tax rebates to curb the production and export of energy-intensive, polluting, and resource-based products. These policies are expected to ease domestic coal supply tensions. However, new taxation or special fund policies in the coal sector may increase production costs, which will likely be passed on to consumers. Therefore, it's unlikely that coal prices will fall significantly in the near term. Different types of coal will follow varying price trends.
On the other hand, international oil prices continue to climb. In mid-August, September crude oil futures on the New York Mercantile Exchange broke through the $67 per barrel mark, setting a new record. With China’s economy expected to maintain rapid growth, demand for crude oil and refined products is anticipated to grow in the second half of the year, keeping domestic oil prices high. This sustained high oil price will drive up transportation costs, especially with the recent rise in freight rates, which will eventually be passed on to urea consumers.
Natural gas prices have increased less sharply compared to oil and coal. In China, natural gas is subject to a tiered pricing system, where fertilizer companies receive planned gas at relatively low prices. Although the National Development and Reform Commission plans to gradually raise natural gas prices in the long term, the government is likely to maintain low-cost policies for fertilizer companies to stabilize prices. Therefore, gas-based urea producers are expected to retain their cost advantages.
Export restrictions have also impacted the market. While the initial export suspension and tax rebate policies had limited effects in the first half of the year, new regulations issued in the second half are expected to significantly reduce urea exports, increasing domestic supply and putting more pressure on the market. From January to May this year, a 260-yuan-per-ton export tariff was in place, leading to a significant drop in urea exports. Under the new 30% tax rate, the export tariff could reach at least 500 yuan per ton, further suppressing exports. By November or December, if the export tariff is reduced to 15%, whether exports rebound will depend on international urea prices. It is estimated that 2005’s total urea output will be between 800,000 and 1 million tons.
Domestic demand for urea has slightly increased due to a larger grain-growing area, but supply has grown faster than demand. Urea capacity has expanded by about 10% annually, while demand has only grown by around 5%. Additionally, agricultural urea usage typically declines in the second half of the year, with only limited use in September and almost no use north of the Qinling Mountains after October. This seasonal slowdown will lead to a drop in urea demand.
At the same time, several large urea expansion projects are set to come online in the second half of the year, adding millions of tons of new capacity. Combined with potential urea exports, the total available supply is expected to exceed last year’s level by 5 million tons, creating even greater market pressure.
Lastly, the removal of VAT on urea has led to higher costs for industrial users, such as wood panel and melamine producers. This has started to affect the industrial urea market, making it difficult for prices to rise. With agricultural urea oversupply and rising industrial costs, urea prices are under significant downward pressure.