China Chemical Network (http://www.63w.cn/) reported: In recent years, domestic urea enterprises have almost been through a rollercoaster of emotions. Whenever the tariffs decreased and exports became profitable, there was widespread celebration within the industry; but once export channels closed, the massive excess capacity forced urea enterprises to struggle for survival. This year, with international demand sharply declining and sluggish market conditions, tariffs are no longer the biggest obstacle to exports. If the international market remains depressed, China’s domestic urea market will face a crisis.
Since August of last year, the global financial storm has caused turmoil, leading to a sharp decline in international urea prices. By the end of the year, they fell to a low of $250 per ton. With the arrival of the spring fertilizer peak season, international prices began to rise from January this year. However, due to reduced demand, the upward trend did not last long, and by late March, urea prices declined again. Currently, international urea market transactions remain sluggish, and prices continue to fall. It is estimated that in the short term, international urea prices will mainly fluctuate at lower levels.
The international urea market has seen reduced volume and price declines.
Since the second half of last year, China's urea exports have dropped sharply as the global financial crisis deepened. From August last year to February this year, the country's urea exports amounted to less than 1 million tons, a decrease of 4.2 million tons compared to the period from August the previous year to February last year. From January to February this year, China exported 534,100 tons of urea, a significant drop from the same period last year, with a decline of 68.82%.
In the first quarter, the average domestic urea ex-factory price was between RMB 1,800-1,900 per ton, while during the same period, international urea prices were between $280-$380 per ton. The difference between domestic and international prices was small, and even inverted pricing occurred. According to China's urea export tariff policy, during the off-season, when the price is below RMB 2,300 per ton, a 10% tariff is levied; above this base price, the tariff ranges from 10%-110%. As a result, urea exports lost their appeal.
Mr. Ding Guoqi, Vice General Manager of Gansu Liu Hua Group Corporation, said: "Currently, international urea prices are even lower than domestic ones. Even if a 'zero tariff' policy were implemented, urea could still not be exported. Unless the state implements an export rebate policy to encourage companies to export, which is unrealistic. If the international market price during the off-season exceeds domestic prices, we would consider exporting some urea, but the export volume would not be large. Because the state, in principle, prioritizes domestic demand for such special products. Once the export volume increases significantly, the state will control it. Moreover, currently, tariffs have not been abolished, and the international market is sluggish, so the outlook for urea exports is bleak."
Urea export markets continue to shrink.
The global financial crisis has led to a decrease in urea demand, causing a sluggish market situation. Many urea companies hoped for a rebound in demand from major urea importing countries like India and Vietnam, which could help lift the international urea market out of its slump. Unfortunately, these traditional urea importers are attempting to reduce their reliance on imports.
India is one of the world's largest urea-consuming countries, and China mainly exports urea to India and Southeast Asia. According to the Indian Fertilizer Association, due to the expansion and recovery of several fertilizer enterprises over the next four years, India's urea production capacity is expected to increase by 30%, or an additional 6 million tons. The goal is to transform from a urea-importing country into a true urea-exporting country. In 2008, India produced 20 million tons of urea, with a consumption of about 24 million tons, requiring an import of 4 million tons. Based on current construction plans, even if only 50% of the planned investments materialize, the added capacity could reach 2-3 million tons. For a large urea exporter like China, this means that the largest export market will quickly shrink, or even disappear.
From Europe to the Middle East and then to Southeast Asia, batches of nitrogen fertilizer facilities will come online soon, further increasing the surplus in the international nitrogen fertilizer market. The outlook for China's urea exports is not optimistic.
Domestic capacity continues to expand.
While the prospects for the international urea market look grim, China's urea production capacity expansion has not slowed down. According to statistics, by the end of 2008, the country's total urea production capacity reached 59 million tons, while the annual demand was around 52 million tons, resulting in an excess capacity of more than 7 million tons. This year, China's urea production capacity has taken another step forward, with an estimated additional capacity of about 4.3 million tons nationwide. Total production capacity is expected to reach 63 million tons, while the combined industrial and agricultural fertilizer usage nationwide is approximately 52-53 million tons. Excess capacity exceeds 10 million tons. Industry insiders predict that the oversupply situation in the domestic urea market will be difficult to reverse in the coming years.
Why has urea production capacity expanded so aggressively in recent years? According to our investigation, large nitrogen fertilizer enterprises have played a leading role in the booming expansion of urea production capacity. They have significantly increased capacity to achieve economies of scale and enhance corporate competitiveness. Jianfeng Chemical is one of the 26 large nitrogen fertilizer enterprises in China that introduced urea equipment early on. The company's urea production capacity is 520,000 tons, and with full operation, it can reach nearly 600,000 tons per year. Currently, the company's phase II large nitrogen fertilizer facility (450,000 tons of ammonia synthesis and 800,000 tons of urea) is under construction, with an expected completion date by the end of 2009.
At the same time, regions with resource advantages such as Shanxi, Guizhou, and Inner Mongolia have accelerated the construction of new urea production capacity. In October of last year, Inner Mongolia Erdos United Chemical's 1.04 million-ton urea facility was completed and put into operation. Additionally, some coal chemical leading enterprises in Shanxi and Guizhou have recently started urea projects of tens of thousands of tons each, making the growth momentum of urea production capacity akin to a “gusher.”
Meanwhile, some medium and small nitrogen fertilizer enterprises with outdated technology and smaller scales continue to operate under local government protection. Some have been acquired by larger enterprises and have regained vitality. Since these medium and small nitrogen fertilizer enterprises have not exited the market, urea production capacity continues to grow, exacerbating the supply-demand contradiction.
Market and administrative measures combined.
Since resolving the supply-demand contradiction cannot rely on urea exports, we must focus on reducing domestic urea production capacity. Currently, the growth rate of urea production capacity far exceeds the growth rate of domestic industrial and agricultural demand for urea, making it unlikely to resolve the excess capacity issue through increased domestic demand.
Mr. Ding Guoqi, Vice General Manager of Gansu Liu Hua Group Corporation, said: "Currently, the international urea market is sluggish, and domestic urea cannot be exported. The massive excess capacity has prompted domestic urea prices to further decline. Urea factory prices in Shandong and Hebei have fallen to RMB 1,700 per ton, and by mid-June, they may drop to RMB 1,600 per ton. If domestic prices stay at RMB 1,600 per ton for a long time, some high-cost, small-scale coal-based urea enterprises may go bankrupt. This is the survival-of-the-fittest market rule. The problem of excess capacity should mainly be resolved through market regulation to achieve basic supply-demand balance. At the same time, backward production capacity can be eliminated through national industrial policies, restricting development of backward capacity through taxation, credit, and other policies. This method is effective, but market regulation should be the main approach, supplemented by administrative measures."
Mr. Guan Haizhou, sales manager of Henan Xinlianhxin Fertilizer Co., Ltd., holds a similar view. He said: "The state should reorganize the industry and treat those enterprises with high energy consumption, heavy pollution, and low output. At the same time, overall excess capacity domestically will also eliminate some small enterprises, and urea manufacturers should move towards intensive development." Mr. Sun Deliang, general manager of sales at Shandong Lianmeng Chemical Group, added: "Eliminating a batch of backward production capacities will allow only those enterprises with strong internal capabilities to survive, improving the disorderly competition in the market."
On May 18th, after being reviewed and approved in principle by the State Council's Standing Committee meeting, the "Planning for Adjustment and Revitalization of Petrochemical Industries" was published on the Chinese Government website. The plan clearly proposes that for the fertilizer industry, large-scale projects should replace smaller ones, and capacity replacement should occur to eliminate technologically backward, heavily polluting, and resource-inefficient capacities. It also guides large energy enterprises to form strategic alliances with nitrogen fertilizer enterprises to achieve complementary strengths.
Excessive capacity is the crux of China's urea market. The timely publication of the planning offers a solution. As long as market rules and administrative measures work together, the chronic problem of excessive capacity will gradually be cured, ultimately restoring harmony and stability to the urea market.
An unexpected financial storm shattered the dreams of urea enterprises focusing on the international urea market, hoping to export massively once tariffs were lowered. Affected by the global financial crisis, current international urea demand has declined, prices are depressed, the price difference between domestic and international markets has narrowed, and with the state's export tariffs in place, urea exports are obstructed. Furthermore, major urea importing countries like India and Vietnam are rapidly expanding their production capacities, narrowing the path for China's urea exports. Hoping to digest excess capacity through exports is unrealistic.