Global urea production problems are starting to stack up and the supply overhang that pressured urea pricing to their current low levels may be running out of steam. Experts report that urea sendout prices have increased at most export locations, suggesting a possible price recovery.
Producers in staple nitrogen export countries are dealing with a host of difficulties. Libya, Algeria, Egypt and Ukraine are all among those urea powerhouses currently experiencing export slowdowns. Exports from Egypt are currently limited by government policy there that requires producers to service domestic demand before turning to exports. That plus political unrest that could easily catch fire again are keeping a lid on Egyptian sendouts. Libya has reportedly shifted its nitrogen focus to ammonia at the expense of urea production, and Algerian plants are currently shuttered with no indication production will resume soon.
Ukraine's difficulties now lie in keeping the national peace as violent protests follow President Yanukovich's refusal to sign an Association Agreement with the European Union. Meanwhile, urea sendouts have plummeted 45 percent below year-ago, decreasing the amount of product on the market.
Most believe urea prices will remain flat to slightly higher during the winter with a chance for a downside dip after the spring rush. However, demand for spring nutrient is expected to be high as few tons have been forward booked at this point. That strong expected demand in itself could fuel a price recovery by spring as urea will look to regain price strength where it can.
When urea moved lower it was due to global oversupply at the hands of the Chinese. Since then, Chinese production has been cut as that nation deals with air quality issues -- Chinese nitrogen is produced with imported coal rather than natural gas, making it a dirtier process. But the year-long urea decline was inspired by production and supply features in a time when other nutrient -- including potash -- was taking price cues from U.S. corn futures.
Commodity bears have hinted at a bullish shift as the stock market urges traders back into commodities on the strength of WTI crude oil. That could move corn futures higher, but the current supply situation is likely to limit corn's upside potential. However, any move may be enough to fuel a urea price recovery as producers look to recover margins and those all-important returns to shareholders.
A number of factors are filling urea's balloon at present. Production is at low levels, exports and forward booked purchases are minimal and corn futures may finally find that leg higher. All of this suggests higher urea by spring. We do not expect a full price recovery, but if corn finds strength, farmers will feel more comfortable parting with NPK bucks, increasing spring demand. This week urea placed a much anticipated hook in the retail price chart suggesting now is the time for savvy growers to catch up on spring coverage.