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Urea prices may return to weakness in the first quarter of 2024
The upward momentum of urea prices in November has slowed down, and the volatility of futures prices has significantly decreased. It is expected that by the end of 2023, due to the tight supply of urea itself, the demand for composite fertilizer procurement and winter reserves will support the bottom, and the downward space for urea prices may be limited. However, in the medium term, urea prices may return to weakness in the first quarter of 2024.
According to the seasonal pattern of previous years, after October each year, urea demand is in the off-season, and urea prices should have fallen. However, starting from October 2023, urea prices have remained at a high level. The main reason is that the export volume remained high in September and October, resulting in extremely low inventory levels in upstream factories, which was at the lowest level compared to previous years. The speed of upstream inventory accumulation was also slower than in previous years, and the inventory in the middle and lower reaches was not effectively replenished, making prices easy to rise but difficult to fall during the low demand season.
For the future market, we believe that there is relatively limited downward space for urea prices before the end of 2023. From the supply side, the urea head unit in Southwest China started to shut down in December, involving a production capacity of about 2 million tons and a shutdown time of 40-50 days. Therefore, there is a marginal decrease in supply, and the daily production pressure is not significant. At that time, it may return to the daily production level of 160000 tons. From the demand side, although there have been changes to the rules of light storage, with the storage capacity increasing from 50% and 100% in the previous two months to 40% and 70%, reducing the centralized procurement pressure in November and December, the demand for urea reserves will only be delayed and will not disappear. Therefore, the demand for winter fertilizer preparation and procurement from December to January next year may be more concentrated. In addition, after receiving downstream payments, compound fertilizer enterprises have a rigid demand for urea procurement in order to produce compound fertilizer products. Starting from mid November, compound fertilizer factories in Shandong and Henan regions have been gradually purchasing urea. The operating rate of compound fertilizer has rebounded significantly, and demand continues to support the price of urea. From the perspective of inventory, it is expected that the accumulation rate of inventory in upstream factories will continue to be slow in the future, despite good factory receipts and sustained downstream demand.
We have learned from our preliminary research that inventory in the middle and lower reaches is not high, significantly lower than in 2022 compared to the same period last year, and inventory is only one-third of the level in previous years. The main reason is that since 2020, due to the impact of the epidemic, coal prices and the Russia-Ukraine conflict, urea prices have fluctuated significantly every year, leading downstream dealers not to reserve too much in the off-season. They are worried that by the time of spring ploughing the next year, the peak season of urea prices will not be prosperous, and the price of urea with high reserves in the early off-season will fall, with no significant income. They basically choose the safe operation mode of "follow in, follow out", So the low inventory in the middle and lower reaches leads to an increase in the elasticity of urea prices.
We believe that urea prices may return to weakness in the first quarter of 2024. On the one hand, the production of new urea plants has not yet ended. For example, Henan Yanhua has a high probability of starting production with 800000 tons per year, and new plants have been put into operation in Shaanxi and Shandong. At that time, the daily production of urea may rise to the level of 190000 tons. Coupled with the release of off-season reserves, the pressure on supply remains. On the other hand, domestic urea exports have been affected by policies, and the legal inspection period has been extended to 60 days starting from November. Next year, a quota system will also be implemented for exports. Therefore, under the background of urea supply guarantee in the spring of 2024, it is difficult to increase exports again, and international prices have begun to decline. Domestic export profits have not improved, and domestic traders will not choose to export.
In the medium term, with the return of high daily urea production and the gradual accumulation of downstream inventory, it is difficult to increase exports, and urea prices may once again turn into a downward trend.
According to the seasonal pattern of previous years, after October each year, urea demand is in the off-season, and urea prices should have fallen. However, starting from October 2023, urea prices have remained at a high level. The main reason is that the export volume remained high in September and October, resulting in extremely low inventory levels in upstream factories, which was at the lowest level compared to previous years. The speed of upstream inventory accumulation was also slower than in previous years, and the inventory in the middle and lower reaches was not effectively replenished, making prices easy to rise but difficult to fall during the low demand season.
For the future market, we believe that there is relatively limited downward space for urea prices before the end of 2023. From the supply side, the urea head unit in Southwest China started to shut down in December, involving a production capacity of about 2 million tons and a shutdown time of 40-50 days. Therefore, there is a marginal decrease in supply, and the daily production pressure is not significant. At that time, it may return to the daily production level of 160000 tons. From the demand side, although there have been changes to the rules of light storage, with the storage capacity increasing from 50% and 100% in the previous two months to 40% and 70%, reducing the centralized procurement pressure in November and December, the demand for urea reserves will only be delayed and will not disappear. Therefore, the demand for winter fertilizer preparation and procurement from December to January next year may be more concentrated. In addition, after receiving downstream payments, compound fertilizer enterprises have a rigid demand for urea procurement in order to produce compound fertilizer products. Starting from mid November, compound fertilizer factories in Shandong and Henan regions have been gradually purchasing urea. The operating rate of compound fertilizer has rebounded significantly, and demand continues to support the price of urea. From the perspective of inventory, it is expected that the accumulation rate of inventory in upstream factories will continue to be slow in the future, despite good factory receipts and sustained downstream demand.
We have learned from our preliminary research that inventory in the middle and lower reaches is not high, significantly lower than in 2022 compared to the same period last year, and inventory is only one-third of the level in previous years. The main reason is that since 2020, due to the impact of the epidemic, coal prices and the Russia-Ukraine conflict, urea prices have fluctuated significantly every year, leading downstream dealers not to reserve too much in the off-season. They are worried that by the time of spring ploughing the next year, the peak season of urea prices will not be prosperous, and the price of urea with high reserves in the early off-season will fall, with no significant income. They basically choose the safe operation mode of "follow in, follow out", So the low inventory in the middle and lower reaches leads to an increase in the elasticity of urea prices.
We believe that urea prices may return to weakness in the first quarter of 2024. On the one hand, the production of new urea plants has not yet ended. For example, Henan Yanhua has a high probability of starting production with 800000 tons per year, and new plants have been put into operation in Shaanxi and Shandong. At that time, the daily production of urea may rise to the level of 190000 tons. Coupled with the release of off-season reserves, the pressure on supply remains. On the other hand, domestic urea exports have been affected by policies, and the legal inspection period has been extended to 60 days starting from November. Next year, a quota system will also be implemented for exports. Therefore, under the background of urea supply guarantee in the spring of 2024, it is difficult to increase exports again, and international prices have begun to decline. Domestic export profits have not improved, and domestic traders will not choose to export.
In the medium term, with the return of high daily urea production and the gradual accumulation of downstream inventory, it is difficult to increase exports, and urea prices may once again turn into a downward trend.
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