INSIGHT: Global urea market will be hit by China export curbs

08 February 2012 15:49  [Source: ICIS news]

By Lauren Williamson

Farmer spreads fertilizer on fieldLONDON (ICIS)--China has taken drastic measures to curtail its urea fertilizer exports since 2010, and its policies for 2012 look set to achieve the same result.

Since November 2011, China has imposed a high 110% export tax on urea, effectively halting most or all legitimate exports of the fertilizer commodity.

Global urea prices did not react strongly to this event, thanks to the seasonal ebb of south Asian demand. But when Pakistan and India start buying again in the second quarter of 2012, the absence of Chinese urea – typically the cheapest and most abundant source of prilled urea – could have a significant impact on the market.

This export regime is still fairly new, having been introduced only in 2010 when the government made a u-turn on its previous policies and opted to impose strict regulations in an effort to curb inflation and provide cheap urea fertilizer for the domestic market.

The existing policy imposes a 110% export tax on urea from November to June and then reduces this tax to 7%, based on a formula, for the period from July–October. The policy has clearly worked since exports from 2010 to 2011 were nearly halved.

Just 12–15 years ago, China was a net importer of urea, and this import situation helped stabilise what has become one of the most volatile and unpredictable fertilizer markets.

“The urea market used to be much more stable,” lamented a European-based trader with offices in Beijing. “China would import on contracts and those contract prices helped keep the market from being too volatile.”

In 1995, China imported more than 6m tonnes of urea, making it one of the world’s largest importers at the time. Strong demand was prompted by the communist government’s “Great Leap Forward” campaign of the late 1950s–1960s and gained strength in the following decades.

The “Great Leap Forward” resulted in agricultural collectivisation and helped transform China into a more modern, industrial economy.

Government leaders, knowing that hungry people are more difficult to placate politically, encouraged this agricultural revolution by dramatically increasing the use of fertilizers in order to feed a rapidly growing population.

The product of choice was urea, with its rich 46% nitrogen content and ease of distribution being a dry bulk product.

Urea imports, however, had an undesirable negative impact on China’s trade balance and steps were taken to achieve self sufficiency in domestic urea production starting in the 1980s.

By 1998, China’s urea imports had fallen to just over 100,000 tonnes – a 98% reduction from its import figures just three years before.

A look at export data from recent years reveals China’s tremendous shift from heavy-weight importer to heavy-weight exporter. It is now able to export as much as it used to import.

Year

Exports (m tonnes)

2011

3.6

2010

7.0

2009

3.4

2008

4.3

2007

5.2


China’s market power lies in the sheer weight of its production capacity, estimated at 64m tonnes in 2011, according to ChemEase, an ICIS service in China.

This capacity will decrease as China endeavours to shut down inefficient plants. But China’s export regime will continue to control the amount of available urea on the international market. Global prices will fluctuate heavily depending on how this upsets the global supply balance.

An interesting by-product of these trade restrictions has been the evolution of illegal cross-border trade. Excess tonnage that cannot be absorbed by the domestic Chinese market ends up in Vietnam before being sold internationally.

The government has tried to crack down on this trade over the last year, particularly after some scathing media reports, but it still occurs.

“They do it at night,” a trader said. “These tonnes roll in on passenger barges. It’s corruption. People get rich from it but what can you do?”

The Chinese government has tried to clamp down on this type of trade, but to minimal effect, say traders.

“We know the companies that get this product,” said a trader based in southeast Asia. “They get the urea then issue a false certificate of origin and sell it on.”

Most of the larger companies refuse to touch this urea because of the legal complications and associated risks. Nonetheless, it moves out into the region, even shipping into south Asia and Africa and undercutting legitimate market prices. This can make it difficult to be competitive and hard to assess where the legitimate market is, suppliers say.

The cross-border trade has slowed in recent weeks but it has been estimated that 1m tones streamed over the border in 2011.

Trade data show that 500,000 tonnes of urea were exported from China during the first quarter of 2010 despite the high 110% export tax.

If history is any indication of what the first quarter of 2012 may look like, we can expect some cargoes to be exported before the next low export tax period begins in July.

While some traders have criticised China for hindering the free market process, its strict export regime will continue to be a contributing factor in the urea market’s inherent volatility.

These same traders say they expect – and hope – that China will at least begin marketing its urea by May. This is when demand in South Asia ramps up strongly in advance of the kharif  – or summer crop season  – otherwise the market may end up short.

For more information on urea and other fertilizers, visit ICIS Pricing Fertilizers


By: Lauren Williamson
+44 (0) 20 8652 3214



AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly

ICIS news FREE TRIAL
Get access to breaking chemical news as it happens.
ICIS Global Petrochemical Index (IPEX)
ICIS Global Petrochemical Index (IPEX). Download the free tabular data and a chart of the historical index