Nitrogen+Syngas 367 Sept-Oct 2020
30 September 2020
Urea markets – Covid and beyond
UREA MARKETS
Urea markets – Covid and beyond
Although the Covid-19 pandemic has been the big story in every market this year, the disruption and dislocations that this has caused have masked some of the bigger trends in the urea market, such as the revival of Chinese exports and India’s push for self-sufficiency.
The urea market has had a turbulent year. At the start of the year, with only China seriously affected by the Covid pandemic, prices rose as the US found itself undersupplied, and South American buyers sought to increase inventories. Then, once the US application season was past, in May prices dropped to several year lows as buying dried up, with traders waiting to see what the impact of the Covid-19 pandemic would be as it began to seriously impact Europe and North America, and feedstock costs tumbled due to the crash in the oil and gas markets. However, a relatively benign monsoon season in India led to a scramble for more urea, with 5 million tonnes bought in July, and the market rallied again.
At the moment, governments have prioritised agricultural production, and any expected reduction in demand due to Covid seems not to have happened. That being the case, the pandemic has mainly caused supply-side disruption, with some plants forced to close, at least for a few weeks, and in particular the lack of air travel has interrupted construction and commissioning of new plants.
It is still impossible to say how the rest of 2020 will play out, let alone 2021. Europe and North America fears a ‘second wave’ of Covid restrictions this winter, as falling temperatures force people back into closer proximity. In spite of the major international effort on producing a vaccine, it is likely one will not be widely available before next year. However, as countries become more practised at living with the virus, better treatments, more testing and widespread adoption of better practises may well mitigate the impact.
But while Covid may provide some short term disruption, over the longer term, there are other factors at work in the urea industry which are likely to have a more lasting effect on prices.
China
China continues to be the bellwether for the urea industry. In spite of a huge programme of plant closures over the past five years, the country remains far and away the world’s largest producer and consumer of urea, and availability of Chinese export tonnage has been the key price determinant for the market for most of the past decade.
The large availability of Chinese urea was as a consequence of a self-sufficiency programme dating back to the Mao era and the so-called ‘iron rice bowl’ – a guarantee that the state would keep the nation fed. Rapid growth in demand for urea during the 1990s actually outstripped Chinese domestic production for a while, and the country became a major importer, but this was soon overtaken by a crash programme of building domestic capacity. By 2003 China was a net exporter of urea, and capacity continued to be over-built to stay ahead of demand into the 2010s. By 2015, domestic capacity reached 86 million t/a, far in excess of consumption (60 million t/a that year), and imports surged to 13.7 million t/a, swamping the international market.
That year was a turning point for China, however. The 13th Five Year Plan, which began in 2016, saw a concerted decision to move the Chinese economy from a primarily industrial focus to a more consumer-led economy. There was also a recognition of the environmental damage that China’s rapid industrialisation had done, and a new ‘green’ focus for the economy. As well as a general attempt to move the Chinese economy from its reliance on coal, in the fertilizer sector, this led to a plan to cap fertilizer consumption at its 2020 value and try to achieve more balanced and less intensive agricultural production. It also led to a crackdown on air pollution in the major cities of the east coast, especially during winter months, and water pollution in the Yangtze River.
The environmental crackdown shut a good number of plants on a seasonal basis, but low prices and difficulty in renewing permits has also led to many closures of older, less efficient urea capacity in China. It is estimated that up to 20 million t/a of Chinese urea capacity may close in whole or in part between 2015 and 2020, and at least 13 million t/a of this will be permanent. For the most part this has been older plants whose gasification technology requires purer and more expensive anthracite coal. The new generation of more advanced gasifier plants are able to run on lower grade and cheaper bituminous coal. They are also larger and more energy efficient, and hence cheaper to operate. This was important, as similar crackdowns on Chinese coal capacity led to rising prices over the period 2015-2019, although during 2019 the government allowed some mines to reopen and output jumped nearly 10% year on year. Coupled with the Covid19 outbreak, this has led to a collapse in Chinese coal prices this year – down by around 25% since January. Meanwhile, natural gas-based capacity continues to face shortages of gas and is often only seasonally active.
As capacity has closed, so has China’s share of global urea capacity. In 2015 China represented 39% of all urea capacity worldwide, but by 2019 this had fallen to 32%. Chinese urea production has fallen with the closures in capacity, from 68 million t/a in 2015 to 52 million t/a in 2018, although this rose in 2019 to 54.9 million t/a as coal prices fell and the Yuan fell against the dollar.
As noted, agricultural consumption of urea continues to fall as farmers attempt to be more sophisticated in their applications and nutrient use efficiency increases. Industrial consumption is rising, especially for diesel exhaust treatment, and urea-formaldehyde and urea-melamine resins, but at present is not sufficient to balance falling agricultural use. Chinese urea consumption was 51 million t/a in 2018 and 50.2 million t/a in 2019, down from a peak near 57 million t/a in 2015.
This has meant that, although Chinese urea exports fell dramatically from 13.7 million t/a in 2015 to just 2.4 million tonnes in 2018, 2019 saw something of a bounce back, with exports rising to 4.7 million tonnes, contributing to weakness in the market. Looking forward, there is a continuing switch to more productive bituminous based urea capacity, with more new plants on the horizon, and a corresponding fall in anthracite capacity. This new cheaper and more efficient capacity may lead to a boost in exports and a lower floor price for urea.
India
India is the second largest consumer of urea in the world, reaching 32 million t/a in 2018-19. India, like China, had a policy of self-sufficiency in urea production, dating back to the ‘Green Revolution’ of the 1970s and 80s, but this lapsed in the mid-90s as naphtha and natural gas prices rose and availability tightened. Indian urea production plateaued at 20-22 million t/a, and since 1995 India has progressively become an increasingly large importer of urea; now the world’s largest, at 7.5 million tonnes in 2019. Indian buying has come to dominate urea markets in much the same way that Chinese exports did.
“Current likely completions will mean India adds 6.4 million t/a of domestic urea capacity.”
The Modi government has set a return to domestic urea self-sufficiency as one of its major targets, and in 2017, it announced an ambitious $8.7 billion plan to end imports of urea within five years, by rebuilding five closed down urea plants and setting up new facilities, bringing 6.4 million t/a of new urea capacity on-stream. It has also encouraged private developments, two of which are now complete. Chambal Fertilizers and Chemicals had closed its old urea plant at Kota near Gadepan in Rajasthan state in 2015 due to unfavourable economics, but has now built a new 1.27 million t/a replacement plant, which was commissioned in January 2019. Meanwhile, Matix Fertilizers and Chemicals completed a new plant in West Begal, also 1.27 million t/a, in 2017, but lack of coalbed methane availability prevented it from running at capacity, and it now awaits a link to the Dhamra LNG terminal.
Of the five government plants, also all 1.27 million t/a of urea capacity, the first, at Ramagundam, was due to start up earlier this year, but has been delayed by Covid and is now looking at beginning operations in October. The Gorakhpur, Barauni and Sindri plants were reported in August to be 80%, 74% and 73% complete, respectively, and are all looking at start-up in 2021. All three will be fed by LNG imported on the east coast at Haldia and supplied along the Jagdishpur-Haldia pipeline.
The final plant of the five government developments is at Talcher in Odisha State. Like the other projects, it is to have a final capacity of 1.27 million t/a of urea, although unlike the others the plan is to run it on coal as a feedstock. This is something of a radical development for India, which had an unhappy history with its first two coal-based urea plants, built in the 1970s, which suffered from all manner of production issues and which were finally closed down. The high ash content (35-45%) of Indian coal also means that certain types of gasifier are not suitable. However, the success of China in developing coal-based urea capacity has led to a re-think. The EPC contract for Talcher Fertilizers Ltd was awarded to Wuhan Engineering last year, but construction has made slow progress as Chinese engineers have been unable to travel due to Covid restrictions, and Indian-Chinese clashes over disputed territory in the Himalayas have also complicated the political environment. Although completion is scheduled for 2023, this may be an optimistic date.
A plan to build a new 1.27 million t/a urea plant at the Brahmaputra Valley Fertilizer Corp (BVFCL) site at Namrup in Assam, so-called Namrup-IV – was approved in October 2018, to replace the two older 220,000 t/a and 270,000 t/a units currently at the site, adding a net 780,000 t/a. However, an explosion at the site in January shut down Namrup-II, and there is no progress reported as yet on the new plant. Even so, current likely completions will mean India adds 6.4 million t/a of domestic urea capacity in the period 2019-2021, provided that there are no further delays, and that gas supplies are available to operate the plants. In practise this may mean that the capacity addition is more staggered, out to 2023, say.
Even so, in theory this should reduce Indian urea imports by a similar amount, although this year, like 2019, has seen exceptional demand in India. India imported 9.7 million tonnes of urea in 2019, and has seen record buying in the first half of this year. Indian demand for urea is projected to increase by about 3.5% year on year, which could see it add 4 million t/a of demand over the next five years.
Brazil
Brazil is another major importer of urea, and this figure has been growing due to shutdowns of domestic capacity. Brazilian demand for urea was 6.3 million t/a in 2019, the same as for 2018, but domestic production declined to 0.9 million t/a, and will be lower still this year, as 2019 saw the closure of two urea plants at Camacari and Laranjeiras, with a combined capacity of 1.0 million t/a of urea. The only remaining plant in Brazil is now the 660,000 t/a Araucaria plant, and state owned operator Petrobras has also suggested that that could face closure as well. As a result, Brazil’s expanding agricultural economy, which is seeing nitrogen demand rise at about 4% year on year, could be importing record amounts of urea this year. Brazilian imports of urea stood at 5.5 million t/a last year, but are forecast to rise to 6.8 million t/a by 2023, which would – assuming the completion of domestic Indian urea capacity – make Brazil the world’s largest urea import market.
Iran
Iran remains another wild card in the international urea market. Iran has long sought to monetise its huge natural gas reserves via downstream chemical production, with urea and methanol among the major products. However, the Trump administration in the US has pulled out of an international deal over Iran’s nuclear programme and reimposed sanctions on the country, making exports of urea from Iran’s continuing pipeline of new urea plant completions more difficult. Iran produced 6.1 million tonnes of urea in 2018, of which it exported 4.2 million tonnes, mostly to India. However, exports for 2019 dropped to 2.6 million tonnes, with India essentially out of the market, and Iran forced to rely on swap deals with Turkey and Brazil. The start-up of the 1.1 million t/a Lordegan urea plant in Iran this year makes Iran’s export dilemma all the more acute.
Rising capacity
In addition to new capacity in China and India, there are a number of new urea plants, many of the export-oriented, in other parts of the world. Nigeria has seen considerable new project development, with Indorama Eleme constructing a second 4,000 t/d (1.3 million t/a) urea plant due to come onstream in 2021-22, and Dangote adding 2.5 million t/a of urea capacity in two trains at its Lekki site near Lagos. The first of the two urea trains is currently in commissioning, and the second is expected to be operational early next year.
Russia and central Asia are also seeing new urea plant construction. In Russia, methanol producer Metafrax is building a new 570,000 t/a urea plant at the company’ Gubakha site, using CO2 from the methanol plant as part of the feed. TogliattiAzot is constructing a third, new 726,000 t/a urea plant at Perm, and KuibyshevAzot is adding a new 540,000 t/a urea plant at Togliatti. EuroChem has announced plans for a 1.32 million t/a urea plant at Kingisepp near St Petersburg, and Shchekinoazot is building a new 660,000 t/a plant in the Tula region. These five will add another 3.8 million t/a of urea capacity by 2023.
Elsewhere in the CIS, the gas-rich countries in Central Asia are also looking to monetise gas via petrochemicals, especially where gas export pipeline options are limited, or subject to Gasprom tariffs. Uzbekistan’s new 580,000 t/a urea plant at Navoi is due on-stream in 2021, and the country is now looking at another new fertilizer complex at Samarkand, while Azerbaijan’s SOCAR is planning to build a second 660,000 t/a urea train at its existing site.
Outside of Asia, Brunei Fertilizer Industries is also due to complete a new 1.3 million t/a urea plant next year, and there are some other capacity increments at places like Koch’s Enid plant in the US. In total, somewhere around 17 million t/a of new urea capacity is due to come on stream between 2019 and 2023, even excluding China, where new capacity is likely to outpace closures.
Demand is expected to rise by 10 million t/a over the same period, with India, Africa and South America (especially Brazil) projected to be the fastest growing areas. This leaves a considerable excess of new capacity. Covid has delayed many new projects, and caused some production dislocation, which may mitigate against this in the short term, but in the longer term it is likely to mean low prices – with Chinese bituminous plants the floor price setters – and probably some shutdowns of marginal capacity. Indian imports will fall as domestic capacity comes on-stream, but perhaps not to the extent that the government hopes, as demand continues to rise. Brazil, meanwhile, is likely to become an even more important buyer. The restriction of Iranian capacity by sanctions may help the market for now, but that could also be another major bearish factor should a new US administration take a different tack from 2021.
