[Domestic News] Summary of the Domestic Urea Market in 2022 and Forecast for the Urea Market in 2023.
In 2022, the overall domestic urea market in China showed a roller coaster-like trend, with strong upward momentum in the first half of the year. In mid-June, it hit a new historical high, with mainstream prices rising from 2360-2530 yuan/ton to 3120-3220 yuan/ton. However, the urea market then experienced a continuous cliff-like decline lasting for two and a half months, with some areas experiencing a cumulative decline of over 1000 yuan/ton.
In September, as the traditional peak season of "Golden September and Silver October" approached, the urea market rebounded rapidly and shook upward, with mainstream prices rising from 2150-2530 yuan/ton to 2440-2550 yuan/ton, followed by wide fluctuations. As of October 31, 2022, the national average urea price was 2735 yuan/ton, an increase of 334 yuan/ton or 13.87% compared to the average price of 2401 yuan/ton in 2021.
From a market price perspective, the high point of mainstream urea prices in 2022 occurred in June, while the low point appeared in August.
In the first half of the year, the domestic urea market experienced overall volatility and strong upward momentum followed by weak downward fluctuations. From January to mid-May, urea prices showed a significant increase, with regional increases ranging from 660 to 820 yuan/ton, and local increases in Xinjiang reaching as high as 1,000 yuan/ton. Mainstream regions saw prices fluctuate from 2,360-2,530 yuan/ton to a historical high of 3,120-3,220 yuan/ton. The historical high for peripheral regions occurred in mid-May, while the historical high for mainstream regions occurred in early June. Subsequently, the urea market began to fluctuate downward, experiencing the largest decline of the year.
Before the Spring Festival, there were continuous positive market news, such as the ban on coal exports in Indonesia in January, summer storage bidding, aid to Pakistan for the export of 150,000 tons of urea, and short-term shutdowns of some plants due to concerns about the logistics and transportation of the epidemic. After the Spring Festival, with the recovery of demand and the boost of futures sentiment, the market showed upward fluctuations.
In March, despite the expectation of light storage release, the main urea futures rose sharply due to the impact of the international situation between Russia and Ukraine, the domestic epidemic situation, and the unexpected shutdown of some plants in Jincheng. With the arrival of the peak season for downstream demand and the support of enterprise sentiment, urea prices continued to rise sharply under multiple factors.
In April, the domestic urea market experienced a chaotic rise and fall before another strong upward trend. Due to the repeated impact of the epidemic situation, shipping issues caused significant differences in the supply and demand situation between regions, and various enterprises had different inventory, waiting-to-be-sent, logistics, and other conditions, resulting in a lack of consistency in the overall market trend. The main driving force for the upward trend in the latter half of April was the phased increase in urea exports, the recovery of agricultural demand in the south, and the support of high-nitrogen compound fertilizer production.
In May, with multiple positive factors such as low inventory levels for enterprises, relatively ample waiting-to-be-sent stocks, favorable port conditions for exports, expected supply tightening, and downstream replenishment demand, urea prices continued to hit historical highs.
Around mid-June, as the summer fertilizer preparation drew to a close and the urea futures prices weakened due to the impact of low-priced summer fertilizer stocks, urea prices experienced a significant decline for two and a half months.
In the second half of the year, the domestic urea market experienced a sharp decline followed by a rebound and wide fluctuations. In July and August, as domestic agricultural demand entered the seasonal off-season and urea prices plummeted, most domestic urea companies chose to conduct annual maintenance, causing daily urea production in China to fluctuate between around 130,000 to 170,000 tons, down from around 170,000 tons. At the end of August, the supply situation slightly recovered, and after September, daily production continued to hover around 142,000-158,000 tons.
The significant decline in urea prices occurred in June and July, with some regions experiencing a maximum drop of over 1,000 yuan/ton. In August, the domestic urea market fluctuated frequently, repeatedly bottoming out, and most regional prices hit a new low for the year, with prices in Shandong, Shanxi, Henan, and Hebei falling to or below 2,200 yuan/ton.
Starting in September, the price of urea rapidly rose due to strong cost support, positive demand expectations, significant international price increases, increased export volumes, and strong futures trading. The mainstream regional price fluctuated between 2,440-2,550 yuan/ton, up from 2,150-2,530 yuan/ton earlier in the month, before beginning a wide fluctuation. At the end of September, some urea plants in Shanxi stopped operations due to environmental pressures, and many companies in the region once again had to suspend production due to high coal prices. Before the National Day holiday, urea daily production in Jincheng region was reduced by more than 10,000 tons. After the holiday, domestic demand continued to be weak, and the pressure of oversupply became evident, with upstream shipments continuing to be a burden. However, with strong cost support and the approach of winter and off-season purchasing, urea did not have a large basis for a significant drop.
Overall, in 2022, despite an overall oversupply of urea in China, prices still reached a historic high in the first half of the year. This indicates that there are still stages of supply and demand mismatch in terms of time and region, despite low social inventory. In the second half of the year, as domestic demand entered the seasonal off-season, urea prices as a whole were also in the process of rational regression. In the future, some new urea production capacity will continue to be put into operation, but with the continued restriction on urea exports, the overall supply and demand pattern of domestic urea is still weak.
In the second half of the year, the domestic urea market experienced a sharp decline followed by a rebound and wide fluctuations. In July and August, as domestic agricultural demand entered the seasonal off-season and urea prices plummeted, most domestic urea companies chose to conduct annual maintenance, causing daily urea production in China to fluctuate between around 130,000 to 170,000 tons, down from around 170,000 tons. At the end of August, the supply situation slightly recovered, and after September, daily production continued to hover around 142,000-158,000 tons.
As 2022 comes to a close, urea prices reached a historic high in the first half of the year. In 2023, national policies will continue to guide the trend of the fertilizer industry.
Ⅰ. From a cost perspective
The national policy still exerts pressure on the top of coal prices and implements price controls on mid- to long-term contracts to ensure that coal prices are kept within a reasonable range. The Russia-Ukraine conflict is expected to ease in 2023, but the pressure on the sale of coal in the Chinese real estate market will continue to increase due to the economic recession caused by the pandemic. However, with the large number of new downstream projects for coal-to-gas and coal-to-oil production in recent years, the demand for coal has increased significantly. Against the backdrop of stable growth in downstream demand, there has been a noticeable resurgence in coal consumption. In addition, the 2023 electricity coal mid- to long-term contracts will exclude coal bases that were previously designated as government coal reserves and fertilizer production enterprises from the demand pool of mid- to long-term contracts, and this will lead to a cost increase for some coal and urea enterprises that will enjoy mid- to long-term contract prices next year. It is expected that coal prices will continue to operate at relatively high levels in 2023, and there is a high probability of a tight supply-demand situation during the peak period of coal consumption.
Ⅱ. From a supply perspective
There will still be some new urea production capacity coming online in the next 1-2 years, and it is expected that by the end of 2023, domestic urea production capacity will reach 75.39 million tons, with urea production expected to be around 57 million tons. Urea production capacity will continue to rise, and production will continue to increase significantly. Additionally, there is a high probability that the urea export quality inspection policy will continue to be implemented in 2023. The longer the situation of oversupply persists, the more pronounced the weak market performance will be. Furthermore, due to the impact of the pandemic, starting in September 2022, the supply of goods from Xinjiang to other regions will decrease significantly year-on-year, and upstream stocks in Xinjiang will be forced to accumulate. Attention should be paid to the regional transfer of inventory, and the impact on the domestic market cannot be underestimated when a large amount of goods seek to leave Xinjiang after the pandemic improves in 2023.
Ⅲ. From a demand perspective
Global food security issues have received high attention, and domestic policies to ensure food security are continuously being implemented to increase agricultural production. It is expected that agricultural demand will continue to steadily increase in 2023. In terms of downstream demand for urea, agricultural demand accounts for more than 70%. Although agricultural demand accounts for a relatively large proportion, it is highly seasonal. Therefore, the overall domestic demand for urea is relatively concentrated in the first half of the year, and the second half of the year is generally in the off-season.
In terms of industrial demand, due to the sustained high prices of raw materials such as nitrogen, phosphorus, and potassium, the profit margin of compound fertilizers continues to be squeezed, and overall terminal demand is forced to decrease. Compound fertilizer production is delayed, with sales determining production and procurement following demand, but the delayed demand leads to concentrated periodic demand for urea purchases. In addition, in recent years, localized high-tower compound fertilizer production has been put into operation, which has had a positive impact on regional urea market conditions. Under the influence of the global pandemic situation, the economic environment, and environmental protection promotion, it is expected that the plate factory, triamine, and other industries will continue to maintain a low trend in 2023, and attention can continue to be paid to the export situation of triamine. In addition, the demand for urea in industrial power plants, automotive urea, and other industries may continue to steadily increase.
Ⅳ. From the perspective of urea export
Since the implementation of the policy of mandatory inspection for urea exports on October 15, 2021, the domestic urea export volume has been significantly restricted. From January to September 2022, urea exports amounted to 1.5734 million tons, a decrease of 2.4499 million tons or 60.89% compared to the same period last year. The weak supply-demand balance will continue to exist as domestic demand alone cannot fully absorb the excess supply, and port inventories will remain relatively low. However, there are occasional increases in domestic urea exports driven by high profits, Indian tenders, international aid, and other factors.
Ⅴ. From the perspective of national light storage
The national fertilizer reserve policy in the off-season of 2022 added summer reserves on the basis of winter reserves, and in 2023, winter and summer reserves will be linked, with a total reserve of about 11 million tons of fertilizer. On the one hand, it adjusts the supply and demand contradiction in the fertilizer market over time, on the other hand, it resolves the potential crisis of large ups and downs in the market, and also provides effective support for the off-season demand for urea.
Overall, with the continued implementation of the inspection and quarantine policy for urea exports, it is expected that the supply and demand relationship for urea in the domestic market will continue to loosen in 2023, and the focus of urea transactions will generally shift downward. However, due to frequent and large fluctuations in urea prices and the continued high risk of downstream trade inventory, and with low social inventory, the urea market still has the possibility of a strong upward trend during the peak period of fertilizer use, with support from favorable factors such as cost and national reserves during this special time. Based on the operating characteristics of the urea market, it is expected that the mainstream regional price in 2023 will fluctuate in the range of approximately 2,100-2,700 yuan/ton for the whole year.
(Source: Jin LianchuangClick to view)
