Surge in production driving urea prices down
As output remains elevated and supply excessive, urea prices in China have been falling since March, when prices were around 2,200 RMB (renminbi) per mt (metric tonne). As of September 3, prices were at 1,658 RMB per mt—equivalent to $265 per mt. Notably, urea prices tend to rise from November to April, as domestic farmers make most of their purchases for annual plantation, which leads typical price declines from July to October. During these price decline months, the off season occurs and taxes lower.
US wholesale prices have followed Chinese urea prices
The ~25% fall in urea price in China mirrors similar price declines for US wholesale urea prices. With wholesale urea prices at the US Gulf Granular Barge currently at $309 per mt, we can say prices in the United States have been adjusted accordingly to an extent. Prices for urea in China tend to be less volatile as the government tries to keep prices stabler and lower than the world’s average via export policies. When prices rose close to 2,500 per mt on May 12, for example (an equivalent to $400 per mt), wholesale urea prices in the United States and the prices major fertilizer companies were selling at stood at ~$550 per mt.
A possible bottom ahead for Chinese urea prices
As we approach November, we could start to see urea prices bottom as farmers in China start purchasing fertilizers for next year. The slower declines we’ve seen over the past few weeks are quite a positive sign. With domestic coal prices looking to fall from $114 per mt to possibly $90 per mt, since the total cost of coal shipments from Australia currently stands at $77 per mt the coal and $13 per mt for the shipping, coal prices have basically fallen 29%. If coal prices find a base around the current level, then urea prices may have only a little room to fall further. This also means that wholesale urea and ammonia prices in the United States will probably stop falling soon.
Worldwide urea prices may not jump that much
Some may argue that the end of the low export tax season and the return of farmers purchasing fertilizers during the first few months of next year could push prices up, and that the marginal producer will go back towards Eastern European producers’ costs. While that has indeed happened before (in 2012, for example, when prices of urea outside China shot up), it hasn’t happened so far this year. This means there’s enough Chinese capacity at current capacity to keep fertilizer prices low. A bounce in coal prices could push wholesale urea prices back up, but world wholesale prices will likely stay low for a while given increased Chinese capacity, US prices still having some room to fall, and the assumption that coal prices aren’t going to bounce back soon.
© 2013 Market Realist, Inc.
But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.