Nitrogen Fertilizers: Streamlining Capacity for a Very Tight Market

By Su Jianying, China Nitrogen Fertilizer Industry Association

The main-business revenue of China’s nitrogen fertilizer sector, January-October 2016, was RMB180.93 billion, down 14.1% from the same period of the previous year, according to the National Bureau of Statistics. Of the 284 nitrogen fertilizer enterprises covered by the statistics, 148 (52.1%) suffered losses, amounting to RMB13.25 billion, an increase of 55.7% over the same period of the previous year. Sliding quickly during the second quarter of 2016, in particular, the price of nitrogen fertilizers has hit bottom, more or less. Only some excellent enterprises can make a profit today, and it is necessarily little. Most nitrogen fertilizer enterprises that are still operating are losing money.

Reduction of national capacity

Nitrogen fertilizer prices dropped in 2016 to a low not seen in the past dozen years. Many enterprises operated below cost. The industry accelerated its elimination of old, high-cost facilities, energy-wasting equipment and production units that were otherwise outdated. During the first three quarters of 2016, ammonia capacity of 4.13 million t/a and urea capacity of 3.33 million t/a were eliminated, according to the National Bureau of Statistics. The new ammonia capacity was 2.35 million t/a and the new urea capacity was 1.10 million t/a in 2016. Total capacity has started a long-term decline.

Sustained reduction of output

The nitrogen fertilizer market in China was slack in 2016. Operating rates decreased constantly, from 72% at the end of April to 50% at the end of the year, the lowest level since 2011. Ammonia output was 52.49 million tons during January-October 2016, a drop of 5.2% from the same period of the previous year, according to the National Bureau of Statistics. The output of nitrogen fertilizers was 38.19 million tons (100%), a drop of 4.1%. The output of urea was 56.49 million tons (physical goods), a drop of 4.1%. The output of nitrogen fertilizers and the output of urea in October were even lower, by 12.2% and 18.4% respectively, than October 2015, being only 3.52 million tons and 4.88 million tons. The output of urea in the whole year of 2016 is estimated to have been only 66 million tons (physical goods), a drop of 4.50 million tons from the previous year.

Significant increase of production costs, drastic drop of selling prices

Nitrogen fertilizer producers’ costs of electricity, gas and freight all increased. A new value-added tax was levied. The cost per ton of urea was therefore RMB250-300 higher. Constantly increasing coal prices also boosted production costs. November surveys by the National Bureau of Statistics in 12 provinces show that the prices of anthracite and bituminous coal used to make nitrogen fertilizers went up by RMB170/t and RMB320/t YoY, respectively, or 27% and 70%. While the costs increased, nitrogen fertilizer prices came all the way down. In August prices dropped to the lowest level of the past dozen years. The average ex-factory price of small-granule urea was only RMB1 142/t, and the price of large-granule urea was RMB1 204/t. Despite an increase of RMB200-300/t starting from September, the price growth was still slower than the cost growth, and enterprises could hardly turn a profit.

Decline of export

Natural gas prices around the world have declined since 2015. In the United States and Europe, the prices of gas used in the production of nitrogen fertilizers came down by around 30%, making the production cost of nitrogen fertilizers much lower. Internationally, the market competitiveness of Chinese nitrogen fertilizer products made from coal was greatly weakened, and China’s export of nitrogen fertilizers declined in 2016 – the volume was 6.09 million tons (100%) during January-October, a drop of 21.5% YoY. The amount of urea exported in those months was 7.79 million tons, a drop of 25.7%.

Prospects in 2017

Despite the elimination of 8.20 million t/a ammonia capacity and 6.75 million t/a urea capacity during 2015-2016, the remaining capacity is in surplus by around 15%. Capacity reduction will remain a primary task for the sector for the next two years.
Coal prices are expected to decline a bit this year, but not to fall lower than the 2016 average. Market-oriented reform of the prices of the natural gas used to make chemical fertilizers was announced in a circular issued on November 5, 2016 by the National Development and Reform Commission. Government control of those prices will be totally lifted November 10, after which prices will be negotiated by sellers and buyers.
Owing to the reduced output of nitrogen fertilizers in 2016, inventories are much lower. The combined urea inventory of producers was 500 kt at the beginning of December 2016, a YoY drop of 400 kt, according to the National Bureau of Statistics.