SunSirs: Daily Urea Output May Plunge; Signs of Price Decline Emerge

Recently, the urea market has largely remained firm, but judging by the recent price adjustments at some individual enterprises and the gradually leveling market premium, signs of a price decline are beginning to emerge. However, whilst industrial demand is falling, urea supply is also set to tighten significantly in the short term. So, will the market stabilize and strengthen again, returning to a firm trend?

Daily Output May Plunge in the Short Term

Earlier this month, three to five enterprises had scheduled maintenance, leading to a slight decline in daily output from its peak levels; overall daily production remained above 210,000 tons, with the short-term impact on supply being relatively limited. However, several additional enterprises have recently announced maintenance plans. Over the next week to ten days, it is expected that six to seven enterprises will halt production for maintenance, whilst the maintenance schedules for a few others remain to be confirmed. If all these plans are implemented, as illustrated in Figure 2, daily urea production could drop sharply in the short term from over 220,000 tons to around 205,000 tons. This daily output level is expected to be on par with the same period in previous years. Consequently, expectations of a tightening in short-term supply will intensify, significantly strengthening the positive support for market prices.

Limited impact on medium-term production

Based on current maintenance schedules, combined with production cuts due to temporary plant malfunctions, preliminary estimates suggest that average monthly urea output for May and June will be approximately 6.5 million tons. As May has one more day than April, output will see only a slight month-on-month decline; year-on-year, however, growth will shift from a significant increase to a modest one. Overall, the concentrated shutdowns for maintenance in the short term are having a relatively strong impact on the market, but from a medium-term perspective, the overall supply of urea remains ample.

Limited regional overlap among plants undergoing maintenance

Looking at the details of the maintenance schedule, this round of maintenance primarily involves five plants in the main production areas, with only a few facilities in peripheral regions such as Inner Mongolia and Xinjiang participating. Furthermore, the maintenance schedules for some plants in these peripheral areas have not yet been finalized.

Taking into account the agricultural calendar in each region, the main production areas are unlikely to face an influx of supply from peripheral regions in the short term. Coupled with the contraction in local supply, this can to some extent offset the pressure caused by weakening industrial demand. Considering regional price differentials, pre-wheat harvest demand for summer fertilizer, and the support from industrial procurement, the downside potential for urea prices is currently limited, and the pressure for a market correction may be delayed.

Overall, the sharp short-term drop in daily urea production has, to some extent, alleviated the current supply-demand imbalance and cushioned the downward trend in prices. Over the coming week, close attention should be paid to the actual implementation of plant shutdowns for maintenance. As there remains a degree of rigid industrial demand, a short-term increase in agricultural demand could lead to minor localized rebounds. However, overall, with export prospects currently unclear and market demand limited, pressure is expected to resurface in early to mid-June once maintenance-shutdown plants resume production, provided there is still no news regarding exports.

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