China is not only the number one consumer of urea in the world, but also the number one producer. Each year, China produces roughly 60 million metric tons of urea but is expected to increase production capacity by the end of this year to 73.7 million tons. July first marked the opening of China's summer export season, lowering its export tariff from 110% to just 2%.
The lopsided policy ensures China's domestic need is met first before exporters can access product. Once the urea application season is over, and growers and industrial needs are all satisfied, the price of moving urea out of China turns dramatically in favor of exporters.
China has oversupplied the urea market so much that prices here in the Midwest have slid $150.00/ton over the last 12 months. Planned additions to urea production capacity will keep the oversupply in place for the foreseeable future. Here in the Corn Belt, urea fell $3.16/ton last week as a continuation of its downward trajectory, and U.S. importers believe we have yet to see the floor.
The implication for urea users is low pricing over the next few years, however, prices will have to slide even further if urea is to woo anhydrous users over. Despite the aggressive declines of the past year, urea still demands a premium to anhydrous at 60 cents/lbN to anhydrous' 51 cents/lbN. But price isn't all that N shoppers look at, and if urea is to win over anhydrous users, it will have to wait for attitudes and production strategies to dictate the switch.
There are those who believe China is flooding the market to one day jockey for a higher price. This may be the case but in the present day, the world market is already flooded with urea and China's July-October export tariff window encourages movement. If China should one day corner the world market and jack up the price of urea, domestic production increases in the U.S. due to come online in the next few years will go a long way toward filling the gap, insulating end users in the U.S. from international price jockeying.
China's export window is currently open wide, just in time for resupply in the United States. The price declines offered by the abundant supply will help keep urea and UAN solutions users in the money, and production capacity increases both in China and the United States could keep moving urea's floor lower for another year.