Viewpoint: Urea market hinges on China, imports in 1Q

Spanish Market: Fertilizers
26/12/17

Unexpected supply shortages in China and resurgent buying from India fueled a quick rise in US granular urea prices as the peak buying period for the 2018 spring planting season approaches.

The US granular urea market ended 2017 at around a one-year high of $260/st fob New Orleans, marking a $100/st rise over a volatile second half of the year. But several variables will determine whether the rising trend continues in early 2018.

At the forefront is China, which has drastically cut exports and begun importing urea as it deals with lower domestic production. Natural gas-based Chinese urea plants have largely idled in order to divert supply for the winter heating season, following a steep drop in coal-based plant operating rates because of high coal prices and environmental restrictions. In all, the shift in China has resulted in an estimated 500,000-600,000t swing in the global urea market.

The tight Chinese situation has so far offset the price impact of growing US urea production. How long the supply issues in China last into 2018 will play a large part in determining the strength of the US market.

Domestically, the focus remains on the supply side as the final batch of new urea plants come on line. Koch began production at its new 900,000 st/yr granular urea plant in the fourth quarter, while Dakota Gas plans to begin production at its new 400,000 st/yr Beulah, North Dakota, plant in January 2018. Those plants will cap off a wave of expansions that have added nearly 5mn st/yr of urea capacity to the US market since late 2015, joining already-operating units by CF Industries, Agrium and OCI.

That shift had a profound impact on US urea prices and trade flows in 2017. Nola barge prices set a 14-year low and spent most of the year at a discount to offshore markets. This closed arbitrage opportunities for spot cargoes into the US Gulf and lead to a 35pc drop in imports through the first four months of the 2017-18 fertilizer year. Record US urea exports — 463,000st from July-October — also resulted from new production and low domestic prices.

But that dynamic has left the US short urea heading into a key buying period. The US still needs imported urea, with domestic capacity alone unable to meet demand. The US typically imports the most urea during the first quarter because of demand for the spring planting season.

The US Gulf urea market, while still in need of attracting spot cargoes, will still likely remain sensitive to major swings in supply because of added domestic capacity, as the first quarter of 2017 proved. The US over-imported in early 2017, sending prices from a peak of $261/st fob Nola in January down to $184/st fob by the end of March.

Overall nitrogen demand for the 2018-19 crop appears to be on par with the prior season. The USDA projects the US will plant 600,000 more acres of corn in 2018 at 91mn acres, suggesting a slight boost in nitrogen demand.

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