Urea Market to Bottom out   

By Jiang Linghu    

Since this spring, the weather has been very abnormal in most regions of China. In the north, it was colder than usual, but in the south, a drought happened widely. This has delayed spring plowing in the country, leading to the constant decline of urea prices, which have dropped from RMB1 800 - 1 850/t in February and March to RMB1 550 - 1 600/t in April. Some companies even sell urea at prices less than its production cost.
   By raw materials, China's urea production processes are divided into the gas route, the oil route and the coal route. The coal route units account for more than 70% of China's total urea capacity. So in China, counting the production cost of urea can take the leading coal-based urea enterprises as reference. The coal ash gasification process is currently the lowest-cost coal-based urea production process in China. The urea manufacture cost of common plants using coal ash to gasify is about RMB1 300/t, with a whole cost of less than RMB1 500/t. The whole cost of urea in the plants that use mould coal (ball coal-based or stick coal-based) to gasify is slightly higher than that of coal ash gasification plants, also around RMB1 500/t. The production costs of lump coal-based and anthracite-based urea plants are the highest, with manufacture production cost between RMB1 400 and 1 500/t, and whole cost between RMB1 600 and 1 700/t. Based on the urea ex-factory price of RMB1 500 - 1 550/t in April, many urea enterprises suffered losses.
   Fertilizer makers are highly dependent on electricity and need to consume 420 kWh of electricity when producing one ton of synthetic ammonia. Drought in southwestern China regions has led to a sharp supply drop in hydraulic power. So many local governments have taken measures to limit the electricity consumption of industrial enterprises. Affected by this, most chemical fertilizer makers can not operate at full capacity. Currently, the countrywide average capacity utilization rate of fertilizer plants is about 70%. Reportedly, since the end of December 2009, Yunnan Yuntianhua Co., Ltd., a leading fertilizer producer in drought Yunnan province, has been ordered to cut its electricity consumption. The capacity utilization rate of its ammonia plants is only 50% now. It is expected that in the second quarter of 2010, the short electricity supply conditions may be even more serious. Moreover, affected by drought, in Yunnan province, the other eight urea makers have now ceased production in April. According to related data, China's domestic urea output has declined sharply. At present, China's average daily output of urea has dropped from 167 000 tons in February to 161 000 tons in March, down by 6 000 tons.
   A large area of rainfall in early April has greatly eased the drought in central and southern China. Farmers have started spring farming.
   The stable and low coal prices also have supported the recent decline of urea prices. On the other hand, in order to dig wells and pump water from the wells, the demand for electricity in several southwestern provinces has soared. As the climate turns warmer, the rise of coal and electricity prices is imminent. In addition, the RMB appreciation, foreign trade deficit in the first quarter of 2010 and exports decline will further push up the prices of resources like coal and natural gas.
   Therefore, under the action of the above factors, China's domestic urea prices will rebound in the second quarter of 2010.