Natural Gas Supply Constraints Shutter Chinese Urea Production

November 13, 2013 09:40 AM

The past few years have seen dramatic growth in urea production in China resulting dramatic slides in global urea pricing. The current urea price as reported to your Monitor stands at $449.57/short ton -- 22 1/2% below last year's price.

An annual summer export holiday from June through the end of October encouraged sendouts from China by lowering urea tariffs to just 2%. That allows urea producers to service domestic demand, and export the surplus. But as winter looms, natural gas supplies are well below what that nation believes it needs to keep the heat on through the next few months.

This prompted the suspension of natural gas supplies as feedstock for urea production at Cangzhou Dahua Co. Ltd, near Beijing this week. China's leading oil and gas producers have vowed to increase natgas production over the coming months to fill the gap, and the suspension of urea production may impact fertilizer pricing here in the United States.

A variety of factors have led to deep declines in fertilizer pricing this year, starting in June 2012 when urea began to slide. Anhydrous and UAN solutions are all much lower year-over, as is urea, but if the decline in urea was set-off by oversupply from China, a production suspension in that same country may force prices back higher.

Our view is that fertilizer pricing is driven as much by supply and production features as it is by December corn futures, which dragged U.S. fertilizer prices lower to current levels. The sway December corn pricing holds over fertilizer pricing may be tested in this Chinese natural gas shortage. If the sendout price for Chinese urea increases, anhydrous and solutions may follow, with phosphate and potash in tow.

However, if a urea shortage occurs while December corn futures are at a low, an upward pricing response from urea would be interesting, but if that response pulls other nutrients with it, December corn futures' grip on nutrient pricing will show itself to have loosened.

Officials have not reported how long the natural gas suspension will last, or when urea production will resume at Cangzhou. Urea production in 2013 lags the prior year in China only slightly suggesting inventories may be in place to smooth the production gap. But if production stalls too long, the global urea overhang could be trimmed back into balance, injecting strength back into global urea sendout prices for spring.

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