How Chinese producers affect nitrogenous fertilizer supply (Part 2 of 3)
(Continued from Part 1)
Operating rate rises as China becomes more competitive
Historically, the expense of using coal to produce nitrogen-based fertilizers has kept Chinese firms away from increasing production, because they would have had to sell the fertilizers at a loss. As a result, operating rate (capacity utilization) in China has been lower than the rest of the world, with an average operating rate of ~77.5%. But the relative cheapness of coal has made Chinese producers much more competitive in the global market. Encouraged by the lower coal prices, Chinese manufacturers have increased output this year, with their operating rate hitting as high a 90% in April.
Utilization rate falls due to increased capacity
While the utilization rate fell recently, the rise was due to new capacity additions more than cutbacks in production. This can become problematic if this new capacity starts pumping out urea and further floods the market with new supply. As CF Industries Holdings Inc. (CF) explained it its earnings presentation, world utilization rate is expected to decline over the next few years, primarily because of new capacity additions in China.
Surge in production driving urea prices down
As output remains elevated and supply excessive, urea prices have been falling since March, and had recently broken below 1,700 renminbi per metric tonne. They last stood at 1,678 on August 6. Notably, urea prices tend to rise from November to April, as domestic farmers make most of their purchases for annual plantation, which precedes price declines from July to October. During these price decline months, the off season occurs and taxes lower.
Continue to Part 3