Overcapacity Caused Urea Firms Pain   

By Zhong Weike   

In the global economic crisis, China's urea market remained slack in the first half of this year, in line with the end of 2008. Prices increasing in February-March have long brought a temporary happiness to domestic urea makers. But the government released its urea stock at the end of March, pulling the price back to the downturned levels in the second quarter.
    Many urea makers reported a slack demand in H1, which, however, did not stop the capacity expansion. China produced 31.64 million tons of urea in H1, increasing 8.9% year over year. The estimated demand is up to 46 million tons for the whole year, considering the fact that the farmers are not buying fertilizers due to their reduced income during the crisis. The export tariff of 110% helped keep urea in the domestic market and inventory. In H1 China exported 680 thousand tons of urea, 3 million tons or 80.8% less than in the year-ago period. According to statistics of CNCIC (China National Chemical Information Center), China added 2 million t/a of new capacity in 2008, bringing the country's total capacity to 59 million t/a. In the first six months of this year, the new added capacity exceeded 2 million t/a. It is predicted that China's total urea capacity will reach 63 million t/a at the end of 2009. All urea makers who are expanding urea capacity believe they themselves will beat out their competitors.
    Twenty four listed companies are involved in urea manufacture in China, together they account for approximately 40% of the country's total urea capacity.

Ranking by total sales

For the first half, six of them reported a year-on-year growth in total sales and the other eighteen reported a year-on-year decline. Chongqing Jianfeng Chemical Co., Ltd. recorded the biggest growth, 82.29%. This year the company started a new business - trading - which contributed more than 60% of its total sales. Hunan Tianrun Chemical Industry Developing Co., Ltd., the smallest among the 24 companies, came next with a 79.12% growth. Sichuan Meifeng Chemical Industry Co., Ltd. who suffered the impact of the earthquake in May 2008 ranked third, 49.01%. Shanxi Coking Co., Ltd. reported the biggest drop - 66.37% year over year, hurt by the price decline of coke. Shandong Haihua Company Limited and SinoFert Holdings Limited ranked second and third, with a year-on-year drop of 52.87% and 43.96% respectively. Shandong Haihua Company Limited was mainly affected by its soda ash business and SinoFert Holdings met difficulties in the trade of potash fertilizers.

Net profit review

Fifteen companies reported a net profit in H1 and the other nine suffered a loss. For H1 of 2008, all these 24 companies reported a net profit. Shanxi Coking Co., Ltd. was the biggest loser, followed by Shandong Haihua Company Limited and Yunnan Yuntianhua Co., Ltd.
    Sinopec Corp. earned the biggest year-on-year growth in net profits, 332.6%. Chongqing Jianfeng Chemical Co., Ltd. grew by 19.74% and Shanxi Lanhua Sci-Tech Venture Co., Ltd. increased 15.25% annualized. Two other companies also gained a positive growth in net profits - Sichuan Meifeng Chemical Industry Co., Ltd. (14.58%) and PetroChina Company Ltd. (4.08%).

Urea business rankings

Twenty companies reported breakdown data for their urea business in H1. PetroChina Company Ltd. (China's biggest urea maker), SinoFert Holdings Limited (China's biggest urea trader), Sinopec Corp. and Shanxi Coking Co., Ltd. did not disclose their detailed urea performance.
   Among the twenty companies, nine increased their sales in urea business and the other eleven dropped. Hubei Yihua Chemical Industry Co., Ltd. ranked the first by having jumped three positions. Its year-on-year growth in urea sales was 69.3%, second only to the 275.26% growth of Hunan Tianrun Chemical Industry Developing Co., Ltd. and outperforming the 30.08% growth of Sichuan Meifeng Chemical Industry Co., Ltd. The biggest drop was recorded by Jiangxi Changjiu Biochemical Industry Co., Ltd. (44.65%), following that were Shandong Haihua Company Limited (dropping 35.08%) and Qingdao Soda Ash Industrial Company Limited (dropping 30.59%), which are both located in east China's Shandong province and are China's leading soda ash makers.
   Four companies recorded a negative gross margin in urea business; all of these use coal to make urea. Fifteen companies reported a positive gross margin and China BlueChemical Ltd. did not disclose the gross margin of its urea business. Among the nineteen reported companies, twelve witnessed a year-on-year drop of gross margin and seven enjoyed a year-on-year increase. The highest gross margin was still reserved by Yunnan Yuntianhua Co., Ltd. (47.26%). It is a pity that this company has shifted its focus into fiberglass business that brought loss to the company. Guizhou Chitianhua Co., Ltd., Chongqing Jianfeng Chemical Co., Ltd., and Liaoning Huajin Tongda Chemicals Co., Ltd. lifted their gross margin to larger than 40%.

Individual cases

Hubei Yihua Chemical Industry Co., Ltd. (SZ: 000422) became China's second largest urea maker by its 2.09 million t/a capacity. Its huge growth in urea sales was nearly offset by the drop in other chemical businesses such as polyvinyl chloride, pentaerythritol, methanol and diammonium phosphate. The startup of the 1.04 million t/a natural gas based urea project has not helped the company improve its gross margin significantly. The 69.8% drop in net profits was attributed to the sharp price decline. The company is expanding and renovating its two urea units, which are expected to be completed in 2009. Its sales and profits in Q2 both increased over Q1.       

China BlueChemical Ltd. (HK: 3983) has a urea capacity of 1.84 million t/a, second only to PetroChina Company Ltd., Hubei Yihua Chemical Industry Co., Ltd. and SinoFert Holdings Ltd. This CNOOC controlled company manufactured 940 thousand tons of urea in H1 in three units. This July the company acquired two coal assets in Shanxi province, aiming to ensure its coal supply and expand its urea capacity.

Shandong Luxi Group Co., Ltd. (SZ: 000830) said the price drop of urea reduced its sales revenue by RMB235 million in H1. The price drop was also the main cause of a decline in net profits. The company is extending its product portfolio in order to improve its competitiveness and risk resilience. It is renovating its existing ammonia, urea, compound fertilizer and chlor-alkali units, and is constructing a caustic soda unit, a 120 000 t/a methane chlorides project, a 160 000 t/a melamine project, a 200 000 t/a DMF project and a 200 000 t/a silicone project. The company's sales revenue in Q2 fell lower than in Q1 but its net profits in Q2 were 264% higher than Q1, possibly because the company sold RMB109 million of stored compound fertilizer in Q2.  

Liaoning Huajin Tongda Chemicals Co., Ltd. (SZ: 000059) produced 770 thousand tons of urea on its 1.5 million t/a units in H1. Although the firm cited a lot of difficulties in selling urea, its urea sales increased a little, thanks to its stable sales network. Its ABS business stopped production in February because of a supply interruption of the feedstock - ethylene. Its own 450 000 t/a ethylene unit came on line at the end of September, which will help the ABS unit resume production.   

Sichuan Lutianhua Co., Ltd. (SZ: 000912) maintained steady operation in its urea business, with a 1.1% year-on-year decline in urea sales. The urea sale price decline in H1 of 2009 was offset by the impact of the snowstorm that happened in January-February of 2008. However, owing to the supply deficit of natural gas, its 400 000 t/a me