Will urea prices rise or fall? First, give one reason why they won't fall.

As new urea production capacity keeps entering the market in recent years, and plant scales often exceed the million-ton level, has the position of established enterprises been shaken?

Most urea enterprises keep seeking a way to survive amid the predicament of overcapacity, continuously optimizing production processes and also strengthening their own competitiveness. So how much reference value do traditional leading enterprises still have?

Furthermore, sales channels have changed. Due to industrial structural adjustments in various provinces, both agricultural and industrial demand for urea is changing. Should the so-called “benchmark enterprises” be reselected?

No loosening on the cost side for now

The sharp rise in coal prices, higher railway freight rates, and tight logistics capacity are the direct reasons for the increase in urea enterprises' production and operating costs. Analyzing the above three aspects, a short-term pullback in coal prices is unlikely. The pace of resuming production at previously shut-down coal mines is relatively slow, the anthracite market supply is tightening, and coupled with insufficient railway capacity, the mainstream delivered-to-plant price of coal purchased by urea enterprises is 800-900 yuan, with some even higher. This has also pushed the production cost of coal-based urea in major urea-producing regions (Shandong, Shanxi, Henan, Hebei, etc.) to 1350-1450 yuan.

Thus, although urea prices across the country have risen by at least 200 yuan and at most 300 yuan over the past two months, in the face of coal prices doubling, most urea enterprises say they can only reach the break-even point. This can be verified by the industry's sustained low operating rate during this period. Railway transport went from canceling discounts to some railway bureaus raising freight rates, and then to percentage-based freight increases, and the transport cost of urea has genuinely risen by 10%-20% (with larger increases in Southwest China and other places). Although some industry insiders say the tight railway capacity situation will ease in mid-to-late December, the Spring Festival travel rush starting on January 13 will obviously be another new round of testing. Due to heavy logistics pressure, the low-priced urea supply from ** and Inner Mongolia that the industry expected has become uncertain, and urea supply in the Southwest and South China markets is tight. This is also one of the reasons why urea prices in various places are “hard to cool down from their fever.”

Later market supply is expected to tighten

Although urea prices have risen sharply recently, there is no profit compared with the increase in costs. The urea industry, which is at the break-even point or still in an inverted situation, can only maintain a low operating rate, and the national urea enterprise operating rate is still less than 52%. Moreover, some producing enterprises are reselling liquid ammonia, so the actual urea supply may be overestimated.

However, from the recent sharp rise in urea prices, enterprises seem to have tasted the sweetness of reducing output, or at least they can feel the harm of a “price war.” Urea enterprises currently unable to operate at full capacity will probably not lightly say they will increase production before prices reach a reasonable profit point.

Last week, some industry insiders made a simple estimate of later supply: if the 52% operating rate continues, national urea output in the second half of the year will be around 22 million tons. After deducting the estimated 5.5-6 million tons of exports in the second half of the year, and further deducting the industrial urea consumption from the recovery of real estate in the third quarter, from now to the end of the year and even before February next year, the domestic urea off-season storage market supply is clearly in a tightening state.

As the pace of this round of urea price increases slows, downstream dealers are bound to adopt a certain bargaining attitude toward high-priced urea, and agricultural off-season storage will be further delayed. This is very likely to become a reason for urea to be seen as bullish again later.

High urea prices do not lack support from the cost side and the supply side. Costs remain high and will not fall, the operating rate remains persistently low, dealers are bargaining over prices, and off-season storage is slowing. All of these will intensify the supply pressure in the spring urea market. At least judging from the current situation, urea does not yet have the conditions for a sharp price drop.

(Source: Agrichemical News, Author: Yang Luyi)