In early September, urea futures prices staged a sustained rebound, driven by the combined effect of three bullish factors: stabilizing coal prices, an increase in plant maintenance, and the consolidation of cargo for Indian tenders. As of the close on September 10, the price of the main urea futures contract stood at 1,804 RMB/ton, marking a cumulative rebound of approximately 7% from the low recorded at the end of August. Notably, this rally was accompanied by a significant rise in open interest; the main contract's open interest surged from around 142,000 lots in mid-August to 265,000 lots, reflecting a marked increase in market trading activity compared to August. In the short term, the stabilization of coal prices, the consolidation of cargo for Indian tenders, and the commencement of autumn fertilizer stockpiling are expected to collectively support a firm trend in futures prices.

New Capacity Additions Weigh on Long-Term Valuation

Supply is tightening at the margin in the short term. As of September 6, daily urea output stood at 194,600 tonnes, remaining below the 200,000-tonne mark for several consecutive days; while August production totaled 6.32 million tonnes, representing a year-on-year increase of 6.58%. The pullback in daily output is primarily attributed to increased plant maintenance and operational issues. Additionally, the sharp rise in coal prices has widened losses for facilities using fixed-bed gasification processes, leading some enterprises to anticipate production cuts; this supply-side factor provides some price support. However, from a medium-term perspective, domestic urea capacity is set to expand by approximately 5.61 million tonnes in 2026—a year-on-year increase of about 8%. Notably, 2.97 million tonnes of new capacity are scheduled to come online between October and December, accounting for 53% of the year's total capacity additions. Specific projects include the Yingcheng Xindu 520,000-tonne/year plant (commissioned in late June), the Dushanzi Petrochemical Tarim 800,000-tonne/year plant (producing on-spec product in August), the Henan Xinlianxin 800,000-tonne/year plant (commissioned in September), and the Hebei Zhengyuan Hydrogen Energy 520,000-tonne/year plant (expected to launch in October); consequently, long-term supply pressure remains significant.

Exports and inventory restocking are driving marginal growth.

Domestic demand is currently in a transitional lull. Large-scale agricultural fertilizer application has yet to begin; the capacity utilization rate for compound fertilizers stands at just 34.18% with no significant seasonal rebound yet in sight, while manufacturers' finished-product inventories have accumulated to 806,600 tonnes. The operating rate for melamine is 54.14%, with lackluster demand from downstream industries such as panel manufacturing, and the production-to-sales ratio in key regions has mostly hovered between 45% and 60%. Overall, actual demand-side absorption capacity remains limited, with urea producers holding only 5-6 days' worth of advance orders.

Marginal changes are primarily driven by two factors: first, the gradual commencement of base fertilizer stocking for autumn-sown wheat, raising the possibility of concentrated inventory replenishment by distributors; and second, the opening of an export window—specifically, an Indian import tender for 1.7 million tonnes announced in late July resulted in final deals totaling approximately 1.78 million tonnes, with significant participation from Chinese suppliers. As all shipments must be loaded by September 24, the demand for consolidating cargo at ports is driving down port inventory levels. Meanwhile, market rumors regarding the imminent issuance of a third batch of export quotas are further fueling export expectations. Given the current high inventory levels, exports remain a crucial channel for diverting supply; consequently, the pace of cargo consolidation at ports leading up to the shipping deadline will be the key marginal variable for the market in September.

Current urea inventories at manufacturers stand at 1.6757 million tonnes—a historical high—marking a slight week-on-week increase of 0.28%. The destocking process has stalled, exerting downward pressure on price elasticity. Apparent consumption in August reached 5.52 million tonnes, up 7.54% year-on-year. This indicates that overall demand is not weak; rather, the core issue lies in the fact that the growth rate of supply is outpacing that of demand.

Rising costs are a key driver of the current market rebound. Driven by higher coal prices, the overall cost curve for coal-based urea production has shifted upward, intensifying operational pressure on fixed-bed process plants. If coal prices remain strong, cost support will continue to be a significant factor; however, should this cost-support logic weaken, market pricing will likely revert to being driven by high inventory levels. According to data from Longzhong Information, as of September 3, the theoretical profit margins for sampled urea enterprises were as follows: losses for the coal-based fixed-bed process widened to 270 RMB/ton; the coal-based new gasification (coal-water slurry) process swung from profit to a loss of 55 RMB/ton; and losses for the gas-based process expanded to 311 RMB/ton.

According to calculations based on Longzhong Information data, the total production cost for the natural gas-based urea industry in Southwest China ranges from 1,800 to 1,850 RMB/ton, with local enterprises' profits hovering around the break-even point. Following facility upgrades, actual costs for certain enterprises in Jincheng, Shanxi, are projected to decrease by 10% to 20%. Coal procurement methods vary among enterprises; the estimated total cost is 1,800-2,100 RMB/ton for fixed-bed processes and 1,550-1,650 RMB/ton for modern coal gasification processes, corresponding to profit levels in the range of -300 to 100 RMB/ton for enterprises in key regions.

Looking ahead, the core dynamic in the urea market is a tug-of-war between supportive factors—rising costs, favorable export prospects, and anticipated demand for autumn fertilizer stockpiling—and the reality of oversupply driven by high inventories, the commissioning of new production capacity, and weak domestic demand. In the short term (September), stabilizing coal prices, demand for export-related port consolidation, and the start of autumn stockpiling are expected to support a firm market trend. However, this rally is merely a transient rebound rather than a reversal of the overall trend. If, following the completion of shipments for India's September tender, the reduction in producer inventories falls short of expectations—compounded by the resumption of operations at existing plants and the coming online of new capacity—urea prices remain at risk of a subsequent pullback.

Regarding futures hedging strategies, compound fertilizer manufacturers and trading firms can build "virtual inventory" or initiate long hedges in batches during market dips; producers should focus on opportunities for short hedges to gradually lock in production profits. However, risks must also be considered, such as changes in export quota policies, a decline in coal prices, a faster-than-expected resumption of production facilities, and autumn fertilizer stocking falling short of expectations.

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