Nitrogen+Syngas 371 May-Jun 2021
31 May 2021
The outlook for urea
UREA MARKETS
The outlook for urea
Although the urea market has weathered the pandemic relatively well, a significant amount of new capacity is due to come on-stream in the next year or so, and could keep prices depressed unless more Chinese capacity closes.
The urea industry is dominated by several large national markets which between them represent the majority of global consumption; China, India, the United States and Brazil between them consume 75% of the world’s urea. China, India and the US are also the three largest producers, but outside of those countries, Russia and the CIS and the Middle East are major producing and exporting regions.
China
China remains the largest producer and consumer of urea in the world. In 2019 it consumed 37% of all of the 176 million tonnes of urea produced globally. This status came as a result of a concentrated attempt by central government to ensure self-sufficiency in both food and nitrogen fertilizer production. The result of this was however massive overcapacity in urea production and over-application of urea by farmers. From the 13th Five Year Plan (2015-2020), the Chinese government reined back on the country’s breakneck industrialisation and began a process to shift form a primarily industrial-based economy to a more consumer-based one, as well as placing a new focus upon the environment. This has had a momentous effect upon the country’s urea industry, as both production and consumption have fallen. According to IFA figures, Chinese urea production peaked in 2015 at 82 million t/a, and by 2019 this had fallen to 67.8 million t/a. Consumption likewise peaked in 2013 at 73.6 million t/a, and by 2019 had fallen to 64.9 million t/a.
On the supply side, there has been a wave of closure of older, less efficient urea capacity. Most of China’s urea is based on coal gasification as a feedstock, and newer, larger and more advanced and energy efficient plants are geared towards being able to run on cheaper bituminous coal rather than more expensive anthracite.
On the demand side, agricultural consumption of urea continues to fall as farmers attempt to be more sophisticated in their application of fertilizer and nutrient use efficiency increases. At the same time, though, industrial consumption is rising, especially for diesel exhaust treatment, and urea-formaldehyde and urea-melamine resins, and over the next few years new industrial demand is expected to roughly balance falls in agricultural demand, keeping Chinese urea demand relatively constant.
China is still building new urea plants; over 9 million t/a of new capacity is due on-stream out to 2025. However, at the same time older capacity is still closing; CRU estimates that over 11 million tonnes of Chinese urea capacity will close over the same period, for a net contraction of 2 million t/a. Coupled with relatively static demand, this means that Chinese urea exports are continuing to fall. China’s overcapacity meant that it had become the largest exporter in the world, peaking at 13.7 million t/a of exports in 2015. This fell to 2.4 million tonnes in 2018, before bouncing back to 4.7 million t/a in 2019 and 5.5 million t/a in 2020. Strong buying from India has helped tempt Chinese sellers into the international market. This year the number is expected to be down, to around 3-5 million t/a due to stronger domestic agricultural indicators.
India
India is the second largest consumer of urea in the world, with demand totalling 31.2 million t/a in 2019. India, like China, had a policy of self-sufficiency in urea production dating back to the ‘Green Revolution’ of the 1970s and 80s, but unlike China, this lapsed in the mid-1990s as naphtha and natural gas prices rose and along with them government subsidies. The expense of running plants off naphtha led to almost all of India’s urea plants being converted to run off natural gas during the 1990s, but shortages of gas supply, especially at times of high power demand, often meant that plants were unable to run at capacity. Lack of gas also forced an effective moratorium on new urea capacity which has only recently been reversed as India built more LNG import terminals. Indian domestic urea production plateaued at 20-22 million t/a, and consequently imports have had to make up the difference, turning the country into the world’s largest buyer of urea. Imports reached 7.5 million t/a in 2019, and government figures show that for the 2019-20 fertilizer year, ending in March 2020, imports reached 9.1 million t/a. Full year figures for 2020-21 are likely to be even higher, and for calendar 2020 are estimated at 11 million t/a.
“Indian capacity will be some of the highest cost urea production in the world.”
Under nationalist prime minister Narendra Modi, India has decided to reverse this trend and in 2017 set itself the target of returning to self-sufficiency in urea production via an ambitious $8.7 billion plan to build several new state-owned urea plants and encouraging new private sector developments. Two private sector initiatives led to Chambal Fertilizers and Chemicals building a new 1.27 million t/a urea plant at its Kota site near Gadepan, which was commissioned in January 2019. However, Matix Fertilizers and Chemicals, which built a new 1.27 million t/a plant in West Bengal to operate using coalbed methane from nearby coal seams, was unable to operate it due to the coal seams not generating as much gas as anticipated. Matix is now expected to come onstream this year, following completion of a pipeline link to an LNG import terminal.
Meanwhile, the five government plants, also all 1.27 million t/a of urea capacity, and all but one of them due to operate on imported LNG, are nearing completion and start-up, after some delays due to the covid pandemic. The first, at Ramagundam, began pilot operations in February 2021, and the second, at Gorakhpur, is due to begin production by July this year. The Barauni and Sandri plants are both due for completion by December 2021. The fifth plant, however, at Talcher, which will use coal gasification, has faced difficulties, with engineers from EPC contractor Wuhan Engineering unable to travel due to covid and a strained diplomatic atmosphere with China. Completion is still ostensibly set for 2023, but almost certain to slip.
Even so, the four gas-based plants, together with Matix could add 6.4 million t/a of new capacity this year and next, in theory reducing India’s import requirements by a corresponding amount. However, India’s demand for urea is projected to continue to increase, and could rise by 4 million t/a by 2025.
Because it runs on imported LNG, Indian capacity will also be some of the highest cost urea production in the world.
Brazil
Brazil is the world’s second largest importer of urea, and this figure has been growing due to shutdowns of domestic capacity. Brazilian imports of urea were 6.7 million t/a in 2020, over 1 million t/a up on 2019, with the last of Petrobras’ three domestic urea plants, the 660,000 t/a unit at Araucaria, being idled in January 2020 as part of cost-cutting measures in the financially challenged company. At the same time, demand continues to increase at 4% year on year as Brazilian agriculture expands.
Petrobras had been hoping to find a buyer for Araucaria, and also its part-completed urea plant at Tres Lagoas, which was to have a capacity of 1.2 million t/a when operational, using gas piped across the border from Bolivia. However, in spite of some interest from Russia’s Acron, amongst others, no sale has been agreed, and for now Brazil is importing all of its urea requirements.
Iran
Supply out of Iran is a source of uncertainty in the 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. Under the Trump administration the US withdrew from an international deal over Iran’s nuclear programme and re-imposed sanctions, making exports of urea from Iran more difficult and completion of several urea plants currently under construction more difficult. In spite of that, the Lordegan urea plant, with a capacity of 1.1 million t/a, began producing urea in late 2020, taking Iranian urea capacity to 7.9 million t/a, and Iran still sells urea to Brazil, Turkey, and some to India and China. However, any new deal and/or substantial lifting of sanctions by the Biden administration could see considerable additional urea available from Iran.
Rising capacity
Outside of China, India and Iran, there are also a number of new urea plant projects due to come onstream in the next year or so. In Nigeria, Dangote is in the process of commissioning the second of two 1.3 million t/a urea trains, and Indorama Eleme is completing a second 4,000 t/d (1.3 million t/a) urea plant due to come onstream in 2021-22.
In Russia, Metafrax is building a new 570,000 t/a urea plant at the company’ Gubakha site, using CO2 from the nearby 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, for a potential 3.8 million t/a of urea capacity by 2023.
Outside of Asia, Brunei Fertilizer Industries is also due to complete a new 1.3 million t/a urea plant this year, and there are some other capacity increments at places like Koch’s Enid plant in the US. In total, somewhere around 24 million t/a of new urea capacity is due to come on stream between 2020 and 2025, albeit balanced by those 11 million t/a of closures in China. Set against this net 13 million t/a of new capacity, demand is expected to rise by 13 million t/a over the same period, with India, Africa and South America (especially Brazil) projected to be the fastest growing areas. In theory this means that over the next five years capacity and demand are likely to be balanced, and the continuing effects of the covid epidemic could continue to push back the start dates of a number of projects, potentially tightening the market over the longer term. However, much of the capacity start-ups are front loaded towards the beginning of the period, and could depress urea markets over the next year or so. The large volumes coming from Nigeria in particular could unbalance markets in the short term.
New regulations
As has been reported by our sister publication Fertilizer International, one wrinkle in the picture for urea could be the impact of proposed new environmental regulations in Europe and the UK, which include specifying the coating of urea with inhibitors. Germany has already moved ahead with this, and the UK government is consulting on it with farmers. If this became a Europe-wide move, it could lead to a significant decline in urea consumption. Coating urea with an inhibitor can increase costs to farmers by e40/ tonne, without benefiting yield, a rise that could prompt them to make the switch to nitrate-based fertilizers instead.
