Futures enable innovation; urea industry braves the wind and waves
2023/10/16
1、 The role and status of fertilizers
Fertilizer mainly includes elements such as nitrogen, phosphorus, potassium, calcium, magnesium, and sulfur. Fertilizer is an efficient nutrient that can provide nutrients for crop production, improve crop and soil nutrient levels, and increase agricultural productivity. Fertilizer originated in Europe and was a product of the Industrial Revolution.
There are three main aspects of fertilizers:
Firstly, fertilizers improve soil fertility. Since the application of chemical fertilizers, the national cultivated land has shifted from a large area of nutrient scarcity to nutrient enrichment. The increase in nutrient element content significantly increases soil productivity.
Secondly, fertilizers help increase grain production. Since the founding of the People's Republic of China, the grain yield per unit area has quadrupled, with the contribution of fertilizers accounting for about half. Many experiments have shown that stopping the use of chemical fertilizers (and not using farmhouse fertilizers) can reduce crop yields by half or even more within three years.
Thirdly, fertilizers have also improved the quality of agricultural products. Fertilizer directly increases the content of nutrients in agricultural products. Since the founding of the People's Republic of China, the protein content of wheat has increased from 9% to 13%. Considering the effect of increasing production, about half of the global protein comes from fertilizers.
From this, it can be seen that fertilizers play an irreplaceable role in food security and nutritional health, providing precise nutrients, promoting the healthy development of plants, and helping farmers grow high-quality and nutritious food.
Fertilizer is not only a source of food, but also an important source of human nutrition.
Since the introduction of fertilizers in 1800, their application in agricultural production has greatly driven grain production and met the basic needs of human survival and development. The invention and use of fertilizers have promoted the development of agricultural production, with about half of China's grain production coming from fertilizers. It can be said that the application of fertilizers has opened a new era in agricultural history.
Any substance applied to the soil or sprayed on the aboveground part of a crop, which can directly or indirectly supply nutrients to the crop, increase crop yield, improve product quality, or improve soil properties and fertility, is called fertilizer.
In a narrow sense, chemical fertilizers refer to fertilizers produced by chemical methods; In a broad sense, chemical fertilizers refer to all inorganic fertilizers and slow-release fertilizers produced in industry.
In 1773, French chemist Ru è re obtained a white crystalline substance while evaporating human urine, hence the name urea.
From the perspective of particle size, urea can be divided into large, medium, and small particles. Currently, the main urea circulating in the market are small particle urea (0.85mm-2.80mm), medium particle urea (1.18mm-3.35mm), and large particle urea (2.00mm-4.75mm). Urea with larger particle sizes is collectively referred to as urea pellets, and there is very little market circulation. Small and medium-sized granular urea is mainly used for field application, compound fertilizer production, and industrial fields, accounting for about 80%, while large granular urea is mainly used for compound fertilizer production. Small and medium-sized particles and large particles of urea have different uses and cannot be replaced;
From the perspective of the source of urea raw materials, urea can be divided into coal based urea and gas based urea. Due to the basic situation of having more coal, less oil, and less gas in China, coal based urea accounts for 78%, while natural gas based urea accounts for 22%.
From the perspective of quality grade, urea can be divided into excellent and qualified products, based on the various indicators in the national standard for urea (GB/T 2440-2017): total nitrogen (N) content, biuret content, moisture content, etc. In the current market, the common high-quality agricultural products are urea with a nitrogen content of>46%, while qualified products are urea with a nitrogen content of>45%.
From the perspective of usage, urea is mainly divided into two categories: agricultural and industrial, with direct application and processing of compound fertilizers in agriculture; In industry, it is mainly used for the production of urea formaldehyde resin, melamine, and cyanuric acid, and can also be used in fields such as feed additives and fine chemicals.
Agricultural applications:
Urea is a neutral quick acting fertilizer that can be directly applied or processed into a compound fertilizer with phosphorus and potassium fertilizers before being applied to crops. Urea is an organic nitrogen fertilizer that does not leave any harmful substances in the soil and has no adverse effects after long-term application. However, urea will produce a small amount of biuret during the production process. When the biuret content exceeds 1.5%, it is prone to the phenomenon of "burning seedlings" and cannot be used as seed fertilizer, seedling fertilizer, and foliar fertilizer. Urea needs to undergo the action of urease in the soil to hydrolyze into ammonium carbonate or ammonium bicarbonate before it can be absorbed and utilized by crops. Therefore, urea should be applied 4-8 days before the fertilizer requirement period for crops.
Industrial applications:
In terms of industry, urea is mainly used to produce urea formaldehyde resin, melamine, and cyanuric acid.
(1) Urea formaldehyde resin: Urea formaldehyde resin is a late stage thermosetting resin formed by the condensation of urea and formaldehyde under the action of a catalyst (alkaline or acidic catalyst), and then under the action of a curing agent or auxiliary agent, it is insoluble and insoluble. Urea formaldehyde resin is the main adhesive in the wood industry both domestically and internationally. It has been widely used due to a series of advantages such as high bonding strength, fast curing, good operability, low production cost, and abundant and easily available raw materials. In addition, urea formaldehyde resin can also be used for products with low requirements for water resistance and dielectric properties, such as patch panels, switches, machine handles, instrument shells, knobs, daily necessities, decorations, mahjong tiles, toilet covers, and can also be used for the manufacturing of some tableware.
(2) Melamine: Melamine uses urea as the raw material and requires approximately three tons of urea to produce one ton of melamine. Urea undergoes a boiling reaction using ammonia as a carrier and silica gel as a catalyst at a temperature of 380-400 ° C. It first decomposes to produce cyanic acid and further condenses to produce melamine. Melamine resin is synthesized by condensation polymerization of melamine and formaldehyde, which can be used in the plastic (8053, 21.00, 0.26%) and coating industries, as well as as as as an anti crease and anti shrink treatment agent for fabrics. Its modified resin can be used as a metal coating with bright color, durability, and good hardness. In addition, it can also be used for sturdy and heat-resistant decorative sheets, moisture-proof paper and gray leather tanning agents, adhesives for synthetic waterproof laminates, fixing agents or hardeners for waterproof agents, etc.
(3) Cyanuric acid: Mix urea with ammonium chloride, polymerize to produce, and consume 1.75 tons of urea per ton of product. Used for synthesizing chlorinated derivatives, commonly used for synthesizing new bleaching agents, fungicides, or herbicides, as well as for chlorine stabilizers, disinfectants, and detergents in swimming pools; It can also be directly used for nylon, polyester, flame retardants, and cosmetic additives. In addition, urea can also be used as a feed additive and has applications in the fields of medicine and cosmetics.
The development process of urea in China: Currently, China is the world's largest producer and consumer of fertilizers. While meeting its own fertilizer supply, it can also export to foreign countries, which is a very remarkable thing. The growth of the fertilizer industry has provided a solid foundation for the sustained and rapid development of China's agriculture and national economy.
After the establishment of the People's Republic of China, fertilizers were a key strategic resource guarantee, and even in difficult times, the growth of fertilizer usage did not stop. Fertilizer production is a highly resource-dependent industrial system, which is extremely difficult for developing countries with weak industrial foundations. Before the 1980s, 40% of China's chemical industry investment, 50% of high-quality smokeless lump coal, 30% of imported natural gas, and over 60% of imported sulfur resources were used for fertilizer production. In order to improve the storage and transportation capacity of fertilizers, the country has also built dedicated railway lines, transmission lines, railways, and dock warehouses for large and medium-sized fertilizer plants.
At present, China's urea production technology and equipment are at the forefront of the world. From 2010 to 2015, China's urea industry developed rapidly, and in 2016, China's urea production capacity and output reached their peak, resulting in severe overcapacity. Since 2015, the preferential policies for urea production, transportation, and taxation have been abolished, resulting in a significant decline in industry profit levels. Coupled with rising coal costs and environmental pressures, some enterprises have been restricted in operating, and the industry's operating rate has continued to decline. Backward production capacity (old production capacity using anthracite as raw material) has gradually withdrawn, and the production raw material structure has also been continuously adjusted, with an increasing proportion of production capacity using non anthracite as raw material.
With the gradual clearance of excess production capacity in the market, further maturity of the industrial chain, continuous progress in production processes, rebalancing of supply and demand, and steady development of the market.
2、 Urea futures promote industrial development
Characteristics of the urea industry:
1. Seasonal demand for continuous production on the supply side.
As mentioned earlier, urea is an industrial production product, with gas as the main upstream raw material and continuous production at the supply end. After 2016, there was a significant reduction in supply due to environmental impact during the autumn and winter seasons. However, with production improvements, the impact is currently not significant. During the heating season, the supply of gas head processes usually contracts until the end of the heating season, while the larger proportion of coal head supply is stable, fully meeting demand.
Urea production profit
About 70% of urea downstream is used for agriculture, direct application, and compound fertilizer application. Therefore, the seasonal fluctuations in demand mainly follow the changes in agricultural demand. Simply summarized, April October is the peak season for agricultural demand, and after October, domestic demand decreases and gradually shifts to exports. From November to December, fertilizer reserves are stored in winter until before spring plowing.
On the other hand, there is a certain correlation between agricultural demand and agricultural product prices. When agricultural product prices are high, urea prices and surface demand show a year-on-year high.
Industrial demand has shown an overall stable characteristic, with downstream terminals mainly used in the construction and real estate industries, which have shown weak stability in recent years.
2. Separation of production and sales requires a stocking cycle downstream.
The distribution of urea production capacity in China is not balanced. Domestic urea production capacity is first concentrated in areas rich in coal and natural gas resources, such as Xinjiang, Inner Mongolia, Shanxi, and other regions. Secondly, it will be distributed in conjunction with the demand for urea in major grain growing provinces. According to statistics, the urea production capacity in North China is the most concentrated, accounting for about 28%; Next is the East China region, accounting for approximately 24%; The third region is the northwest region, accounting for 20%. The fourth is the Central China region, accounting for 13%; The fifth southwest region, accounting for 9%.
Northeast, South China, and Southwest belong to the concentration areas of domestic demand, and the mismatch between supply and demand regions determines the trade flow of urea. The main outflow areas of urea trade are Inner Mongolia, Shanxi, Shaanxi, Xinjiang, and Henan; The main inflow of trade is concentrated in Hubei, Guangdong, Guangxi, Shandong, and Northeast provinces, and the separation of production and sales leads to the need for downstream stocking time and consideration of the seasonal characteristics of logistics.
Industry demands:
Based on the above industry characteristics, the core demand of the upstream industry is to further expand its scale by ensuring profit margins. However, the prices of raw gas and products fluctuate greatly with market fluctuations, resulting in significant fluctuations in production profits. After the listing of urea futures, upstream enterprises can lock in production profits through hedging, providing protection for daily production and operation. At the same time, they can also obtain some excess profits when the basis strengthens.
In terms of scale expansion, the futures market is equivalent to adding a sales channel for upstream enterprises. When market demand is weak, spot goods can be sold through warehouse receipt delivery. At the same time, basis sales can also be used to replace buy and sell at a fixed price, reducing the price risk borne by both buyers and sellers, and thereby improving sales performance.
For downstream, the convenience and economy of procurement are the main demands. After the listing of urea futures, it has also added new channels beyond spot purchases for downstream procurement, optimizing the procurement structure through buying and hedging, and enhancing the bargaining power of buyers and sellers.
Therefore, the listing of urea futures first provides relevant business entities such as upstream and downstream enterprises and storage companies with means and tools to discover prices and avoid risks, and stabilizes the profitability level of enterprises. Secondly, an efficient and standardized futures delivery system helps guide the industry to optimize pricing models, improve product quality and warehousing logistics levels, and promote industrial structure adjustment and transformation and upgrading. In addition, farmers and agricultural cooperative organizations can not only directly or indirectly use urea futures to avoid risks, but also use the "insurance+futures" method to lock in planting costs in advance, protect farmers' profits, and deepen the service effect of the futures market on agriculture, rural areas, and farmers.
The futures market can interact with the spot market. With futures trading, producers and sellers have an additional channel to know in advance the supply and demand situation at a specific time in the future. If it can be comprehensively summarized and evaluated with other information, it can provide a more comprehensive understanding of various necessary information for future procurement, sales, transportation, storage, etc. This also means that the products and services ultimately obtained will be better.
In summary, the listing of urea futures has significant four promoting effects on industry development:
1. Price discovery. Due to the large number of participants in futures trading, they all trade at the most suitable price they believe, so futures prices can comprehensively reflect the expectations of both supply and demand parties regarding the supply and demand relationship and price trends at a certain time in the future. This price information increases market transparency and helps improve resource allocation efficiency.
2. Avoiding risks. In recent years, the fluctuation of urea spot prices has become more severe, especially for production enterprises, which have been greatly affected. The mature practice in the same industry abroad is to fully utilize the derivative market to avoid risks, lock in costs and benefits, and hedging is a good means to avoid risks.
3. Compete for international discourse power. At present, the global urea production capacity is about 230 million tons, with a production volume of 175 million tons. Currently, China's urea production capacity is about 74 million tons, accounting for about 32%. However, there is still a lack of price influence that matches the scale in the international market. The listing of urea futures helps to enhance our pricing ability for product prices.
4. It has a significant helping effect on winter storage. The urea market has a short peak season and a long off-season, with significant price fluctuations. It is basically one of the most volatile varieties among fertilizer products, and both urea manufacturers, distributors, and users face certain market risks. Especially the annual winter storage, it is a major test for urea manufacturers and distributors, whether to self store or hand over to distributors for winter storage, when to start winter storage, what price is suitable for winter storage, and how much winter storage is. These factors make urea manufacturers and distributors ponder and put in a lot of effort every year.
After the listing of urea futures, the dilemma of storing urea in winter will be improved. Because the futures price for the coming year is displayed there, although this price is not necessarily equal to the actual spot price at that time, it has a significant guiding effect on our winter storage, and winter storage will be much easier.
In summary, the listing of urea futures provides strong guarantees and good support for the healthy and orderly development of the industry. How can different participants in the industry better utilize it for their own benefit?
1. The upstream production enterprises of urea have both sources of goods and funds. Participating in urea futures operations can consider the following aspects: (1) actively introducing talents, learning and gradually mastering futures knowledge; (2) Actively apply for urea exempt products and factory warehouses; (3) Timely seek cooperation with futures companies, participate in futures investment when the opportunity is ripe, and use derivatives such as over-the-counter options and hedging to lock in costs and returns to avoid overall market risks for the enterprise.
2. Compound fertilizer production enterprises, artificial board and other downstream industries: Urea is one of the most important raw materials for composite fertilizer and artificial board enterprises. To hedge the price risk of raw materials, derivative markets such as over-the-counter options and hedging can be used during the same period of raw material spot procurement to avoid hedging the price risk of enterprises. You can also directly purchase raw materials through the futures market to lock in the cost and benefits of compound fertilizers in advance.
The sheet metal industry is also the main downstream user of urea, and the amount of urea used in sheet metal production is relatively large. Like manufacturers in Hefei, sheet metal manufacturers can also lock in the production costs and benefits of sheet metal in advance by participating in urea futures trading.
3. Trading enterprises: Trading enterprises and urea production enterprises generally establish a stable supply and demand relationship, but currently, most domestic urea enterprises only accept orders with a production capacity of about a week. To meet export demand, trading enterprises can first lock in prices and appropriate sources of goods in the port delivery warehouse through the futures market, to avoid delaying delivery and export shipping schedules; Joint production enterprises are attempting to establish a price fund mechanism to hedge price risks through tools such as futures companies' urea over-the-counter options, and to stabilize the operation of trading enterprises.
4. Private owners or private futures investors in the fertilizer industry: Private owners or private futures investors in the fertilizer industry will be the most active group in urea futures because the spot price of urea is too transparent, with high investment and low profits. In order to maximize corporate profits, private owners or private futures investors in the fertilizer industry must be cautious when entering the market after familiarizing themselves with the laws of the urea futures market. The speculative risk in the futures market is much greater than that in the spot market. Therefore, it is recommended that private business owners should follow the principle of prudence in entering the market, allocate their enterprise investment and financial structure reasonably, and avoid blind investment. Futures speculation should be combined with spot prices to study the rules of futures prices.
In summary, the stable operation of urea futures after its listing has presented different dimensions of value and significance to different participants. At the same time, it has reduced business risks, promoted the healthy and orderly development of the industry, and provided strong guarantees for stable production and supply to further serve agriculture, rural areas, and farmers.
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