SunSirs: China's Urea Market Likely to See Continued Fluctuation in Q3

According to China chemical news, the domestic urea market experienced a fluctuating downward trend in the first half of 2026, driven by the pressure of continuously released new production capacity. Although the government timely relaxed urea export restrictions in late May to alleviate pressure, international prices retreated due to easing tensions in the Middle East and weak demand, thereby narrowing profit margins for exports. As of June 30, the average domestic urea price stood at RMB 1,834.90 per ton. Entering July, while the downside potential for the market was capped by the gradual release of demand for top-dressing fertilizers (such as for corn), any rebound remained sluggish due to the dual pressure of high daily output and high inventory levels.

High Inventory Levels Weigh on the Market

Supply-side pressure was the primary issue facing the market in the first half of the year. Domestic urea production capacity continued to rise in 2026; data indicates that total urea output for the year is projected to reach 76.5 million tons, a year-on-year increase of approximately 6.2%. Meanwhile, plant operating rates remained consistently high, with daily domestic urea output reaching 217,100 tons as of June 26. New capacity is concentrated primarily in resource-rich regions like the Northwest, utilizing low-cost coal-water slurry gasification technology. Consequently, even amidst low industry profit margins, companies show little willingness to halt production, keeping existing supply levels high.

Demand, conversely, remained weak. While essential agricultural demand persisted, operating rates for compound fertilizer producers trended downward throughout the first half of the year. The slow release of end-user demand limited the consumption of raw material urea, failing to provide effective market support. Although export quotas were relaxed toward the end of the second quarter, falling international prices and price guidance limits slowed export shipments, preventing any significant relief of domestic inventory pressure. Data shows that as of June 24, total urea inventories at domestic enterprises stood at 1.1336 million tons, a month-on-month increase of 4.4%.

Currently, urea enterprises face a structural contradiction: order volumes appear decent on the surface, yet the actual flow of goods is severely insufficient. With weak downstream absorption, the penetration of goods into downstream markets has slowed significantly; large volumes of stock are backing up in the mid- and upstream distribution stages, unable to flow smoothly to end-users. This has caused inventory pressure at the factory level to accumulate and rise, making the need for destocking increasingly urgent.

Export Outlook: High Hopes Followed by a Decline

Adjustments to export policies have been the biggest variable in this year's urea market, though changes in the international landscape have somewhat dampened the potential benefits. While export quotas were finalized in late May—raising market expectations—international prices subsequently fell in June.

Factors such as declining international demand, easing tensions in the Middle East, a narrowing price gap between domestic and international urea, and frequent low-price bids from India have resulted in meager export profits for enterprises, repeatedly delaying expectations for a surge in export volumes.

A fertilizer company executive noted that the actual returns from this round of exports have been limited, failing to effectively offset earlier operational pressures. Data shows that total profits in the nitrogen fertilizer manufacturing sector stood at approximately RMB 2 billion—a 75% year-on-year drop—with a sales profit margin of just 1.0% and 47.1% of enterprises operating at a loss. Operational pressures showed no significant relief in 2026, even with the addition of new production capacity.

Future developments in export policy—specifically whether export guidance prices will be adjusted and by how much—will be key variables influencing short-term market trends.

Q3: Continued Weak Stability

As the market entered the traditional summer top-dressing season in July, demand for corn fertilizer in North China and the Huang-Huai region, alongside rice fertilizer needs in the south, saw a concentrated release. While this provided one of the few sources of support for the spot market, overall performance remained sluggish. Although downstream demand offered some support, it was insufficient; combined with slow export orders, this led to a cautious market sentiment and a lack of aggressive purchasing.

Regarding costs, the prevailing average delivered price for anthracite is currently RMB1,150 , while that for gasification-grade bituminous coal is RMB 900. Analyst Wang Fei believes that fixed-bed production processes are currently operating at a loss, while coal-water slurry processes yield only meager profits. The rigidity of these costs means factories have little appetite for further significant price cuts at current levels. Multiple analytical agencies predict that the domestic urea market in the third quarter will likely experience narrow fluctuations with a bearish bias, characterized by insufficient upward momentum and limited downside potential. While underlying demand for agricultural top-dressing provides a floor, the issue of supply-demand imbalance will resurface if export volumes fail to increase significantly before mid-July—especially as agricultural demand wanes after August. The current prices are approaching the cost thresholds for some coal-based producers, creating an incentive for factories to support prices; additionally, scheduled maintenance at certain facilities during the third quarter may briefly alleviate pressure from peak supply levels.

Notably, the pace of export execution is the pivotal factor influencing price trends in the third quarter. If export policies prove favorable, the combination of domestic demand and surging exports could drive a temporary strengthening of the market; conversely, if exports proceed at a standard pace, upstream producers will face mounting pressure, and the domestic market will likely reflect typical off-season conditions.

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