The impact of China’s urea prices
China’s urea prices can have a significant impact on global fertilizer prices. Although the production cost of urea is on the higher end, as urea production uses a large source of nitrogen extracted using coal instead of natural gas, coal prices can have a significant impact on the cost of production. When coal prices fall, they make Chinese producers much more competitive, allowing them to increase their output. Higher output will negatively affect global urea prices—especially when the export taxes lower during the off-season (July to October).
Urea prices in China hit a new low
According to the China National Chemical Information Center, the average selling price of urea in China reached a new low of 1,697.8 renminbi per metric tonne on October 11. Although domestic farmers and higher coal prices had supported urea prices until March, urea prices have since fallen due to lower coal prices. Increased supply of coal from Australia and Indonesia, as well as slower economic activity in China, were primary factors driving coal prices down. Lower urea will also negatively impact ammonia prices, as the commodity is used to create urea.
Urea prices worldwide have been falling
That development has made 80% of Chinese producers that use coal to make fertilizers much more competitive in the global market. Domestic producers reacted by increasing their production. As urea prices in China have fallen, world urea prices are taking a hit, reaching as low as $320 per metric tonne recently, according to Green Markets.
Impact on fertilizer producers
While urea prices in China continue to make new lows, the momentum is stalling, as economic growth in China has picked up, supporting coal prices. With the end of China’s low-export tax season approaching (set to occur at the end of October), China’s urea price should rise over the medium term.
Higher urea prices will allow nitrogenous fertilizer producers such as CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Potash Corp. (POT), and Terra Nitrogen Company LP (TNH) to sell their products at higher prices, which will help with earnings and cash flow. This would be positive for the VanEck Vectors Agribusiness ETF (MOO) and stocks mentioned—if the market has already priced in low urea prices.