Why Are Urea Prices So High in China?

In recent years, China's urea price has basically been the lowest in the world, especially last year. Under normal circumstances, China's urea FOB price per ton is 20~30 USD lower than the international price, sometimes even 50 USD lower. Moreover, many people have become accustomed to China's low urea prices, as if it were only natural. However, this year the situation has reversed: China's urea price is 15~20 USD higher than the international market. China's urea price has changed from a lowland to a highland. What exactly is the reason for this?

First, let us look at the domestic market. There are two reasons for the upward movement of domestic prices:

First, last year there were large export volumes, while production fell year-on-year, which reduced the supply of goods in the domestic market and eased the contradiction between market supply and demand. According to statistics from the China Nitrogen Fertilizer Industry Association, this year's resource volume decreased by about 10% year-on-year. Data show that in 2014 China's urea output decreased by 1.15 million tons year-on-year, export volume increased by 5.35 million tons, and full-year supply decreased by 6.36 million tons year-on-year. Meanwhile, consumption increased by 1.5 million tons year-on-year. In 2014, not only was the inventory accumulated earlier consumed, but most of the urea that should have been carried over to 2015 was also consumed. On the demand side, it is expected that in 2015 agricultural demand for urea will remain stable, while industrial demand will maintain a growth rate of 6%~8%. It is estimated that in 2015 industrial demand for urea will be 16 million tons, an increase of 1 million tons year-on-year. The main increment comes from artificial boards, flue gas denitrification for thermal power and cement, automotive urea, and so on.

Second, cost support. Urea enterprises suffered relatively large losses. According to industry statistics, in 2014 the nitrogen fertilizer market was extremely sluggish, and enterprises suffered widespread losses. The whole industry's main business revenue was 261.67 billion yuan, down 6.2% from the previous year, with losses of 5.66 billion yuan: the whole industry had 331 enterprises above designated size, of which 156 were loss-making, with a loss rate of 47.1%.

Now let us look at the international market. In the first few months of this year, Baltic urea fell by 70 USD/ton, and Black Sea urea fell by 64 USD/ton. There are three reasons for the sharp decline in international urea prices:

First, international oil prices fell sharply. The vast majority of international urea uses natural gas as raw material. After oil prices fell sharply, natural gas prices also declined, reducing enterprises' production costs. Last year, a Ukrainian urea plant once suffered severe losses due to high natural gas prices and was once forced to suspend production. But this year, as natural gas prices were lowered, even though this year's urea price is still 20 USD/ton lower than last year's lowest price, enterprises are still producing. It is learned that manufacturers will not consider shutting down or reducing production for the time being unless the urea price falls by another 10 USD/ton.

Second, demand is poor. Thailand imported 36,000 tons of urea in February, a record low. In the same period last year, imports were 181,000 tons. Cumulative urea imports in January~February were only 178,000 tons, down 37% year-on-year. In February, Australia imported 158,000 tons of urea, and cumulative imports in January~February were 179,000 tons, down 32,000 tons year-on-year. In addition, countries such as the United States postponed urea demand because of cold weather. Europe showed a weak trend, with limited demand.

Third, fear of large Chinese urea exports. Last year China's urea export volume reached as high as 13.62 million tons, accounting for about 30% of international trade. This year, China's chemical fertilizer export policy was further relaxed, abolishing the peak and off-peak season policy and instead uniformly levying a tariff of 80 yuan/ton for the whole year. This triggered panic among some international manufacturers, who feared that China's urea export volume would increase substantially this year, and therefore adopted a low-price policy in response.

Facts have proved that China's urea price can absolutely be higher than the international price. Chinese urea enterprises should build up self-confidence, not belittle themselves, and not always think about low-price exports. It is hoped that China's urea price being higher than the international price can become the new normal.