China is arguably the most important country for the urea industry, accounting for 34% of global urea capacity and 10% of global trade in 2019. Chinese exports are also more influential than the volume alone suggests, as they supply the marginal tonnes to the market and as a result set the floor price of urea globally when the market is oversupplied.
While natural gas is the primary feedstock for nitrogen producers around the world, most Chinese nitrogen capacity uses coal (anthracite and bituminous) as feedstock, meaning it is exposed to China's increasingly strict policies around air pollution and the environment. In September 2019, analysts from CRU's nitrogen team conducted a tour of Chinese nitrogen plants in the provinces of Anhui, Sichuan, and Yunnan, to research how these policy changes are influencing urea output and future investments.
The nitrogen industry in China is undergoing a restructuring process. The strict environmental mandates outlined above are hitting high-cost, anthracite coal-based producers hardest. The regulations necessitate permanent capacity closures, idling of capacity during the winter heating season and significant capital investments to switch from fixed-bed gasification technologies to more energy-conserving technologies.
The strict environmental controls have incentivized new supply among the lower-cost, more efficient bituminous coal-based nitrogen producers, with Chinese 'marginal' urea exports expected to be increasingly supplied by these producers. These plants are lower down the cost curve and present downside risk to global urea prices. This insight highlights the key takeaways from CRU's site visits and our expectations for the Chinese urea market going forward.
More efficient low-cost coal, not natural gas, is replacing anthracite coal capacity
Fertilizer producers in China have come under increased scrutiny on emissions and pollution over the last five years. Despite lower commodity prices and a slowing of economic growth in China more recently, this scrutiny remains in place. The Chinese government has now implemented a range of policies affecting the nitrogen industry and producers are investing more to control their emissions. Permanent capacity closures are expected to accelerate in the near-term as a result.
Date: Nov 28, 2019