Poor demand for urea

Urea futures are coming on the market on Friday. Urea is in a state of weak overall fundamentals and tight partial equilibrium. According to statistics released by the National Bureau of Statistics, as of July 20, the average price of small granular urea in the national market was 1964.30 yuan/ton, down 27.4 yuan/ton from the same period last month, a decline of about 1.38%. The peak season of domestic agricultural fertilizer demand is from March to May. At present, urea prices have decreased significantly compared with the peak season of demand. Although there are still some orders to export to India in the near future, which has slowed down the decline, most manufacturers will export goods to port next week or end shipments one after another. Domestic agricultural market demand is slowly declining due to seasonal impact, industrial demand is also showing a downturn, and in a short period of time demand is difficult to show signs of warming up, market sentiment is generally pessimistic. According to our survey in Shanxi and Hebei provinces, the industry is generally not optimistic about the future market, urea prices have been expected to decline at least until October will not change.

Since the beginning of the year, domestic urea production has been rising oscillatively. In the first seven months of 2019, the cumulative domestic urea production was about 30.88 million tons, an increase of about 1.455 million tons, or about 4.94%. From the perspective of start-up rate, the start-up rate of domestic urea enterprises has basically stabilized at the front line of 68% in the last two months after experiencing a sharp increase in the first quarter. Recently, some enterprises have finished overhaul and started production: Shaanxi Shaanxi Shaanxi 1 million tons of production capacity, daily output increased by 3400 tons; Shanxi Yangfengxi 800,000 tons of production, daily output increased by 2500 tons; Hulun Bell Jinxin, Shandong Ruixing and Inner Mongolia broad field, and so on. In recent years, many plants have been shut down for overhaul or planned to shut down for overhaul. For example, the annual shutdown of Zhongying 800,000-ton plant in Anyang, Henan, affects the capacity of 2600 tons per day; Ordos Chemical and Shandong Hualu parts of the plant are also planned to shut down for overhaul in August, affecting the capacity estimated at 5800 tons per day. Due to the current environmental restrictions in China, especially the impact of sulfur dioxide quota in North China, it is difficult to approve new urea plants, and the probability of future capacity increase is not very large.

Most of the increased supply is assimilated by rising exports. According to the data of the General Administration of Customs, the cumulative export volume reached 17678,000 tons in January-June this year, up 10.641 million tons from 7037,000 tons in the same period last year, an increase of more than 151.20%. However, the import is affected by the increase of domestic output and the slow growth of demand, which shows a considerable decrease over the same period of last year. In the first six months of this year, the cumulative import volume was 1041,000 tons, down by 34,600 tons, or 24.96%. Especially in June, the import volume dropped to almost zero, and the import volume in the second half of this year is likely to continue the sluggish situation in the first half of this year. Overall, net exports increased significantly in the first half of this year, reducing the impact of supply growth on the domestic market.

At present, the domestic summer urea topdressing is basically over, and the demand for agricultural urea is gradually declining. In August, except for a small amount of fertilizer used in some southern markets, most areas of China will enter the off-season of agricultural urea fertilizer. The demand for urea for industrial use in China is also relatively low due to the pressure of environmental protection on the downstream industry. Taking plywood as an example, the purchasing managers’index of plywood has been declining since March, which is 20.63 points lower than the high of 58.07 in March. Linyi, Shandong Province, an important domestic plywood producing area, has recently been under unprecedented pressure of environmental protection and production restriction. It is understood that the Office of the Leading Group of the Air Pollution Prevention and Control Action in Linyi City has issued the Implementing Plan for Strengthening the Control and Control of Air Pollution in Key Industries in July. According to the requirements of the plan, the 50% steam limit for thermal users has been operated since 24:00 on July 14, 2019. Linyi is divided into four areas A, B, C and D, and shut down in turn for six days each time. Gas and power outages are directly taken in the areas where shutdown occurs. At present, production in Lanshan and Luozhuang districts has begun to stop. The plywood factories in Linyi region have begun to stop production, and this situation may last until the end of August or even later. Now it seems that the resumption of production of plywood plants in Linyi downstream is far away. If it lasts for 2-3 months, it will not only have a great impact on the local industrial urea demand and spot market, but also have a certain impact on the overall price of urea.

On the whole, the fundamentals of urea are not very optimistic. Supply growth is not enough under the pressure of off-season agriculture and industrial environmental protection. It is expected that the situation of urea market will not be optimistic, and spot prices will continue to bear pressure. After urea futures are listed, urea enterprises can use futures to carry out hedging operation, lock in the selling price and avoid the risk of price falling. The turning point of domestic urea market is the resumption of production of plywood plants in Linyi area and the improvement of international urea market. Once the production resumes, the plywood enterprises in Linyi will start full capacity production, and then the demand for urea will increase significantly. At the same time, India’s next round of urea import bidding or after September, if the winning price rebounds, it will have a greater impact on domestic urea exports, thereby affecting the mentality of domestic urea market operators, should also be given priority attention.