China audits to have little impact on fertilizer output

The latest round of government environmental inspections in China will have only a minor impact on the country's urea production, while output of other fertilizers is likely to be unaffected.

The first set of audits started on 30 May in Hebei, Inner Mongolia, Heilongjiang, Jiangsu, Jiangxi, Henan, Guangdong, Guangxi, Yunnan and Ningxia provinces. The second round of audits will run from 15 June to the end of June at a localised level in the same provinces.

The latest audits will have a minor impact on urea production rates, Argus estimates. Average production rates, which are currently around 64-65pc, are expected to drop by 3-5 percentage points as the audits will likely result in closures of some small and medium size units that are usually less compliant with environmental regulations. China produced 53.4mn t of urea and exported 4.7mn t in 2017, according to industry data.

The audits come as international urea prices are rallying amid imbalanced supply and demand.

Algerian urea sold at $295/t fob in the past week, the highest level since October 2017, while Egyptian prices rose by $21-22/t last week to $283-284/t in long positions taken by traders for August.

China has been largely absent from the export market so far this year, and the fall in production means this trend is unlikely to be reversed.

China exported 294,000t of urea in January-March 2018, down by 76pc year on year, according to GTIS data.

The Chinese phosphates industry is unlikely to see any material changes from the audits as production rates are already at the lowest this year, averaging 60-65pc for DAP and 45-50pc for MAP. Many phosphates producers already adhere to a high degree of environmental compliance, so the impact will be muted.