China Fertilizer Network – Urea: Entering the New Era

Has the urea industry truly achieved capacity reduction? Since mid-August 2016, prices have surged sharply, only to see a moderate pullback recently, followed by a modest rebound. When will urea finally experience a broad-based price increase?

Beyond domestic supply and demand, export competition, raw material costs, and transportation factors, national policies also play a decisive role in the future development of urea. In line with the guiding principles set forth in the CPC Central Committee’s No. 1 Document of 2017, released on February 5—“Deepening Supply-Side Structural Reform in Agriculture”—the emphasis on accelerating agricultural supply-side reform and advancing the modernization of agriculture is likely to bring both greater challenges and new opportunities to the urea market in 2017.

In the agricultural sector, the plan explicitly calls for vigorously implementing large-scale regional initiatives to promote water‑saving irrigation, widely adopting sprinkler and drip irrigation technologies, and accelerating the adoption of water‑soluble and organic fertilizers, thereby advancing toward a greener, more sustainable ecological model. For a major agricultural country like China, the gradual replacement of traditional fertilization practices could prove to be the most challenging burden for urea producers. Indeed, as early as 2015–2016, we witnessed the phased removal of preferential policies on electricity tariffs, fuel prices, value‑added tax, and transportation costs, further hastening capacity reduction in the urea industry. According to data from China Fertilizer Net, China’s urea output in 2016 was approximately 64 million tonnes. Even after accounting for some eliminated capacity, many urea plants that have remained idle for extended periods due to cost pressures are unlikely to resume production in response to short‑term favorable conditions. Meanwhile, the loss of downstream customers and market share will likely make resumption even more difficult. In other words, under the influence of these policy changes, urea capacity has been somewhat curbed, in addition to declining demand. As a result, in the increasingly competitive urea market ahead, this capacity restraint should provide a modest tailwind.

In the industrial sector, as China’s economy continues to grow at a rapid pace, relevant authorities reported last year that the country added 50 million kilowatts of new coal-fired power capacity equipped with flue‑gas desulfurization and denitrification systems. Under mounting pressure from environmental inspections, efforts to implement these measures are likely to be further strengthened in 2017. According to data from the National Bureau of Statistics, commercial housing sales in China reached 1.57 billion square meters in 2016, up 22% year on year. This recovery in the real estate market will indirectly boost demand for urea among industrial adhesives and board‑manufacturing firms. Meanwhile, regardless of how crop‑production structures evolve, the demand for compound fertilizers is expected to rise steadily. Consequently, both the production capacity and demand of industrial compound‑fertilizer producers should remain robust, suggesting that overall industrial demand will continue to increase at a moderate pace in 2017.

Internationally, influenced by policy-driven production cuts aimed at supporting prices, China’s coal prices, after a brief pullback following the Lunar New Year, have recently rebounded by 50 to 90 yuan per ton in some regions. Given that coal‑based urea producers account for roughly 67% of the domestic market, the trajectory of input costs remains a key concern for urea manufacturers. Meanwhile, the OPEC+ international meeting has reached an agreement to cut crude oil output, further bolstering price gains; as a result, a sustained recovery in global oil prices this year is now highly likely. Rising oil prices could directly push natural gas prices higher, potentially narrowing the cost gap between China’s high‑end urea producers and their counterparts in other regions. In addition, to advance global trade liberalization, China eliminated all export tariffs on urea in 2017, which should enable Chinese urea suppliers to compete more effectively in international procurement tenders across major demand markets.

China’s drive to advance structural reform is a long-term process, and urea producers will inevitably encounter greater challenges along the way. Nevertheless, adversity and opportunity coexist; amid the coming storms, it is hoped that the urea industry, while remaining aligned with national policies and adapting to an increasingly flexible market mechanism, will rise anew and, together with other sectors, usher in a new era.