OUTLOOK ’12: China’s domestic urea output to exceed demand

11 January 2012 05:58  [Source: ICIS news]

By Rachel Yang

SINGAPORE (ICIS)--China’s urea production is expected to increase in 2012, exceeding growth in downstream demand, with producers to face stiff competition amid a weak supply-demand outlook, market participants said.

The actual output of urea is expected to increase by 5m tonnes to 63m tonnes in 2012, but downstream demand is expected to grow by only 1.87m tonnes to 49.87m tonnes this year, according to Chemease, an ICIS service in China.

The supply glut experienced last year is expected to stretch into 2012 as output may exceed demand by about 13m tonnes, industry sources said.

“As over-supply is expected to continue in 2012, only factories that have the advantage of resources and funding will remain competitive in the market,” a Chemease analyst said.

Besides, China’s exports are also expected to remain weak this year because of the country's tightening urea export policy, making it difficult for producers to offload excess cargoes overseas, market sources said.

Urea exports were subject to a 110% tax during the high seasons from January to June, and November to December in 2011, with prices at yuan (CNY) 2,100/tonne ($333/tonne) FOB (free on board), and this policy will continue in 2012, according to the Tariff Commission of the State Council.

“China’s urea exports took a sharp drop in 2011 because of the strict urea export policy, which is still expected to affect the market in 2012,” an industry source said.

Several start-ups this year will possibly worsen the oversupply situation, market sources said.

Xinjiang Yihua Chemical, a subsidiary of Hubei Yihua Group, will bring on stream its 1.4m tonne/year urea plant at Changji in Xinjiang in 2012, a company source said.

China Blue Chemical is to start production at its 1m tonne/year urea plant at Jincheng city in Shanxi province in 2012 as well, according to a company source.

Two other companies, Kaifeng Jinkai Chemical Industry and Inner Mongolia Hulun Buir Jinxin Chemical are planning to bring on stream their 800,000 tonne/year urea plants at Kaifeng and Hulun Buir respectively in 2012.

In addition, five companies with a total urea capacity of 2.62m tonnes/year delayed the start-up of their plants from 2011 to 2012, according to Chemease.

Downstream demand for urea, mainly for applications in the agricultural, nitrogen phosphorus potassium (NPK) and melamine sectors, was at 33.6m tonnes in 2011, up by a mere 2% from 2010.

Demand from NPK is predicted to rise by 2% to 9.8m in 2012, while melamine demand is predicted to rise by 69% to 2.4m.

In addition, the prices of feedstock coal and natural gas are expected to increase in 2012, and the production cost of urea manufacturers will rise as a result.

The average prices of urea in 2011 was worked out at CNY2,100/tonne EXW (ex-works) and are expected to hit a low of CNY1,900/tonne during the off-peak season in 2012, according to industry sources.

Macroeconomic factors such as an uncertain global economy and domestic inflation are expected to dampen the market further, market players said.

“As inflation and unfavourable economic conditions continue, domestic urea players are now holding a cautious attitude on the urea market,” an industry source said.

Urea is also used in the other industries such as medicine, explosives, leather making and pigments.

Additional reporting by Nicole Zhang

($1 = CNY6.31)

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By: Rachel Yang

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