Chinese cuts to change Asian urea trade
London, 13 December (Argus) — A major reorientation of urea trading patterns is taking place in Asia, brought about by cuts in Chinese urea output. Producers in China have been the principal suppliers of the prilled urea and some of the granular urea purchased in Asian markets for the past 10 years – but no more.
Exports of urea from China are expected to fall close to zero in the first quarter of 2018 because of a threatened shortage of urea in the local market. The Chinese government is also considering re-imposing an export tax on urea to focus supply entirely on the local market.
In the first quarter of 2017, China exported just under 500,000t of urea to regional markets, excluding India and Bangladesh. A further 600,000t were exported in the second quarter.
These markets have grown used to supply in small vessels, possible only from nearby sources, and are heavily reliant on China for prilled urea.
Lacking competitive offers of urea from China – domestic prices have risen to the equivalent of $285/t fob in central China this week – buyers in regional markets are having to look for alternatives.
But there are very few, especially for prills.
Lack of alternative Asian supply
Indonesia produces about 6.5mn t /yr of urea but exports only limited, variable quantities from year-to-year. Two Middle East producers, Qafco and Sabic, make about 120,000t/month of prilled urea between them. Exports are largely committed to contract markets. Small quantities of Iranian prilled urea are available for export, but not every buyer can handle Iranian origin.
The only sizeable source of prilled urea in the world remaining is Russia, where producers ship around 300,000t/month on average from Baltic ports. Unless buyers switch from prilled to granular urea, they will have to rely on Russian urea to cover some of their requirements and overcome the logistical hurdles to ship from the Baltic to southeast Asia and the Far East.
This major re-orientation of trade is starting, but it has additional costs and risks.
Shipping fertilizers from Baltic ports to the Far East and southeast Asia takes 5-6 weeks, compared with 1-2 weeks from China, raising the risk of price fluctuations during the voyage. Shipments are only economic in vessels for 40,000-60,000t, whereas many buyers in southeast Asia are accustomed to urea arriving from China in 5,000-10,000t cargoes, involving buyers holding much greater inventories than before.
One option is to ship panama cargoes to China, minimising freight costs, and re-export from Chinese ports in smaller vessels. Discharge and reloading urea costs as little as $8-10/t in Chinese ports.
Traders have shipped Iranian urea to north China on this basis - two 60,000t vessels are moving in December – and one 50,000t cargo will move from Oman at the end of the month to southern China. These are all granular urea, however, and no one has managed to conclude a prilled urea cargo.
Chinese import potential
Linked to this re-orientation of trade is the wider question of urea imports into China itself. Prices are not yet aligned to permit large-scale imports, but the day when Chinese imports will be an important feature of urea trade is approaching.
Falling production in China is the reason. Industry figures show urea production was down 12.6pc January-October and calendar year output will be little more than 55mn t, about 7mn t lower than in 2016. Consumption of urea in China totals 53-54mn t annually and there are fears that the market will be short of urea in spring 2018.
It is now estimated that only about 15pc of gas-based urea units are operating in the country due to diversion of gas to domestic heating and other priority areas in China. Between 25 and 30pc of China's urea capacity is based on natural gas. The cutbacks at gas-based plants will last until the end of the domestic heating season in March.
In short, the situation is primed for imports.
But based on fob levels in the Middle East and the Baltic, plus freights of $15-20/t and $40/t respectively, prices of $255-260/t cfr are $20-40/t too high for imported urea to be economic in China.
Import duty, VAT and handling costs push the cost of imports above the current domestic price levels even though these are rising, reaching Rmb 1,830-1,840/t bagged ex-works (approximately $280/t) in central China this week. Rising prices in China are likely to put urea imports within range over the next month, however.