The domestic urea market remains under pressure, with ex-factory prices currently ranging from RMB 1,520 to 1,650 per ton. This is a slight improvement compared to the previous low of 1,650 yuan, but the lowest price has now dropped to 1,500 yuan. Despite this downward trend, I don't believe the outlook for urea should be overly pessimistic.
Urea prices have been on a downward trajectory for several reasons. First, export performance has not met expectations. Earlier hopes were high after the export tariff was reduced to 15% in November and December, but the reality was quite different. International urea prices have continued to fall, and demand has remained weak. The FOB price in the Baltic Sea has dropped to around $200 per ton, while China’s urea exports are now priced at about $230, down nearly $20 from October’s $248. After accounting for tariffs and shipping costs, this translates to an equivalent domestic ex-factory price of just 1,520 yuan. Such low prices have led many companies to avoid exporting, creating a bottleneck that further depresses domestic prices. Retailers, fearing falling prices, are hesitant to buy, leading manufacturers to lower prices even more in hopes of selling out, thus forming a self-reinforcing cycle.
Second, distributors are taking a cautious approach to winter stockpiling this year. In addition to weak export demand, they are concerned about three key factors: policy uncertainty, unclear farmer demand for next year, and fears of overcapacity in urea production. Many dealers worry that if the government imposes price controls, it could severely impact their profit margins. This concern is not unfounded, as seen in 2005 when rising fertilizer prices hurt farmers’ incomes and reduced planting areas, which in turn decreased fertilizer demand.
Moreover, new urea plants are coming online, especially in regions with raw material advantages. Production capacity is expected to increase by about 5 million tons next year. At the same time, export restrictions will likely remain strict, pushing exports even lower than in 2005. This could worsen the supply-demand imbalance in the domestic market. Given these factors, most dealers are not optimistic about next year's market and are being careful with their inventory decisions.
However, despite the current price decline, I don’t think the outlook for urea should be oversold. About 70% of China’s urea consumption occurs between January and July, especially in March to July. Meanwhile, new urea plants are expected to come online mainly in the second half of next year. This means there won’t be a surplus in the domestic market from March to July next year, and there may even be a shortage. Even if supply and demand tensions rise later, the market will adjust naturally. If prices fall too much, producers may cut back or shut down, reducing actual output. In other words, the market itself acts as a balancing mechanism.
The reform toward a market-driven fertilizer system is the overall direction. New policies will also consider the interests of producers, distributors, and farmers. Demand for fertilizers is unlikely to drop significantly next year. So, while the current situation is challenging, the long-term outlook isn’t as bleak as it seems.
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