Nitrogen+Syngas 381 Jan-Feb 2023
31 January 2023
China and the urea market
CHINA
China and the urea market
Covid, demographics and a shift from an industrial to a consumer-led economy have stalled China’s previously breakneck growth, with a potential impact upon all commodity markets, including fertilizer. At the same time, Chinese export restrictions have overheated the urea market.
China remains the largest producer and consumer of urea in the world. In 2021 it consumed 33% of all of the 150 million tonnes of urea produced globally. Historically China has tried to ensure self-sufficiency in fertilizer production, particularly nitrogenous fertilizers. Initially this was based on ammonium bicarbonate production, but beginning in the 1980s China switched wholesale towards coal-based urea production. Urea now accounts for half of all nitrogen fertilizer application in China. This concentration on urea also left China with a large overhang of unproductive or marginally productive capacity, which has turned the country into a swing producer in spite of large-scale capacity closures over the past few years. At the same time it also became the largest exporter of urea in the world. But while urea sustained China through the boom years of the 1990s and 2000s, its exports have fallen significantly since 2015, and last year faced major government export restrictions for half the year.
China’s economy
After China began to open up and reform its economy in the 1980s, GDP growth averaged over 9% per year for a sustained period. The country grew rapidly, with hundreds of millions lifted out of poverty. China also became the workshop of the world, its industry coming to dominate many sectors. But since the beginning of the 2010s, the period of high growth based on investment, low-cost manufacturing and exports seems to have run its course. One of the key constraints has been demographic; in 1980 China began its ‘one child’ per couple policy, which has rapidly slowed the growth of the country’s population, but has meant since the start of the 21st century that fewer people are entering the labour force at the same time that the number of retirees increases. Industrial and commodity markets have also become saturated, with no further room for growth, and the government has begun to shift policy from investment towards consumption, and made efforts to tackle issues such as pollution and carbon emissions.
The impact of covid has been another major factor. China’s GDP officially grew by 6.0% in 2019, but this dropped to 2.2% in 2020 as the country became ground zero for the covid epidemic and instituted draconian lockdowns that seemed to control the disease within China. As a result the economy bounced back to 8.1% growth in 2021, but last year saw the return of new, more virulent strains that led to prolonged lockdowns in many major cities which were only lifted late in the year due to increasing public protest. China’s GDP is estimated to have grown by just 3.0%. It is expected that, following the relaxation of covid lockdowns, China’s economy will return to stronger growth this year – 4.6% according to the OECD. But the country also faces significant structural issues, including a large overhang of debt, especially private debt, and a moribund housing market that has been swamped by over-building, regulatory tightening that led to a liquidity squeeze for developers, and mortgage boycotts by owners of homes still under construction.
Agriculture
China feeds 20% of the world’s population with just 7% of the world’s arable land. However, this has created its own issues
in terms of overapplication of fertilizer, degradation of soil and nitrate pollution. Belatedly the government has begun to tackle this by encouraging farmers to be more sophisticated in their application of fertilizer to balance nutrient requirements and increase efficiency of nutrient use. Fertilizer consumption was officially capped in 2020 and it is intended that it will fall, although in fact consumption had been falling before that. Chinese farming has faced increasing costs over the past decade, in terms of both land, labour and, more recently, fertilizer and other inputs and this has helped crimp consumption. There is also a move towards more enhanced efficiency nitrogen products as well as organic fertilizer and soil amendments. In 2022, the impact of the war in Ukraine drove up fertilizer prices and this is believed to have had an impact on urea consumption.
But while agricultural consumption of urea continues to slowly decline, this is balanced by rising industrial consumption of urea for diesel exhaust treatment, urea-formaldehyde and urea-melamine resins etc. Urea consumption peaked in 2013 at 59.3 million t/a, and dropped to around 50 million t/a by 2017, where it has roughly remained since then. In 2021 consumption was 49.7 million t/a.
Coal prices
Feedstock pricing and availability is also an issue for Chinese producers. Around 20-25% of Chinese urea capacity uses natural gas as a feedstock, which is virtually unavailable during winter because it is required for power generation. Coal prices have also been rising, eroding margins, and coal has occasionally not been available at any price. Government targets for Chinese states to reduce CO2 emissions means that some state governments such as Inner Mongolia and Shanxi are also forcing local urea plants to run at lower rates or not at all.
The impact of the Ukraine war has been to disrupt supplies of coal from Russia because of inability to access the SWIFT global payments system, which has also contributed to high coal prices in China in 2022.
Urea production
In addition to falling domestic consumption and high feedstock prices, Chinese domestic urea producers have also faced the government’s attempt to crack down on polluting industries. In some ways this has been beneficial for the urea industry as a while, with older and less efficient plants closing down to be replaced by larger, more efficient plants, often based on bituminous coal rather than more expensive anthracite. Stricter regulations on emissions have also resulted in accelerated closure of older capacity. Chinese urea production fell from just over 70 million t/a to 55 million t/a in 2021.
Covid, conversely has had little effect on urea production. Indeed, urea operating rates actually increased in 2022, from an average of around 56% to 66% by the end of December. IFA assessed Chinese urea production for Q1-Q3 2022 to be up 15% on 2021 figures.
New plant construction continues in China. Stamicarbon recently announced that it would license the largest plant that it had ever constructed in China, at 3,790 t/d (1.25 million t/a). The plant will produce a mixture of prilled urea (1,560 t/d), granular urea (1,100 t/d) and diesel exhaust fluid (DEF), as well as having a large melamine side stream which will take 1,130 t/d of urea.
Exports
China’s surplus of urea meant that during the 2000s and into the 2010s it was the largest exporter in the world, with exports reaching 13.7 million t/a in 2015. However, although consumption has declined, production has declined faster, leading to exports dropping rapidly, to just 2.4 million t/a in 2018, before settling back at around 5 million t/a in 2019 and 2020. But fears over high domestic pricing have meant periodic restrictions on exports by the Chinese authority. During the 2010s this was achieved by a quota system which restricted exports to certain months of the year when domestic demand was low in order to try and keep domestic production at home at times of high international prices, when it can be more profitable for Chinese producers to export than serve the domestic market.
In July 2021, China began asking major urea and ammonium phosphate producers to stop selling abroad. Three urea producers in Shanxi, Hebei and Shandong were asked by the government to suspend applications for China Inspection and Quarantine Certificates. This was followed up in October 2021 by announcement that China would be carrying out “inspections on import and export chemical fertilizers strictly under the latest regulations,” according to a notice from the National Development and Reform Commission (NDRC). The effect was to limit or even suspend exports of some fertilizers, especially phosphates, to ensure domestic supply. Even so, Chinese urea exports were around 5.3 million tonnes in 2021, comparable with figures for 2019 and 2020.
The export restrictions have continued into 2022 and have had a marked effect on urea exports. Q1 urea exports were 303,000 tonnes and Q2 exports were 421,000 tonnes. There was a pick up in Q3 as China relaxed some of the restrictions on a temporary basis in order to serve some large Indian urea tenders, and Q3 export figures shot up to 849,000 tonnes, but even so, this represents a 65-70% decline on 2021 figures overall. Exports from January-September totaled 1.57 million tonnes, as compared to 4.0 million tonnes for the same period of 2021. South Korea and Pakistan have also been major recipients of Chinese urea according to customs data.
In spite of last year’s higher production, it is anticipated that export restrictions will continue into 2023. On December 29th 2022, China’s Customs Tariff Commission of the State Council said that tariffs on some commodities would be “adjusted” in 2023. It is expected that this means that restrictions will continue for 1H 2023 out to July.
Urea pricing
Chinese policy continues to have a major impact on fertilizer pricing. The export restrictions in July and October 2021 caused urea prices to almost double, and in spite of some rises caused by the Ukraine war and interruptions to Russian exports, urea prices have not reacted as badly to the war as they did to the interruption in Chinese supply. Fortunately some factors have mitigated against this during 2022, including new capacity which has helped ease tightness in the market. Around 3.8 million t/a of new capacity came onstream outside China during 2022, and another 3.2 million t/a is expected in 2023, and 2.2 million t/a in 2023.
Likewise, fertilizer consultancy Profercy notes that where it is available, Chinese urea has often been offered at some of the most competitive levels, for example in Indian purchasing tenders. In the most recent IPL India purchasing inquiry (for shipments to 5th December), up to 320,000 tonnes is due to be shipped via 5-6 trading companies, with netback prices in the mid-$620s/t f.o.b. China.
