Over the past two years, urea has been a hot commodity in the market, with all major producers enjoying strong profits. This has led many companies to rush into expanding their production capacities by building new urea plants. Some are using natural gas as feedstock, while others rely on coal. These projects are large-scale and require significant investment. However, I would like to remind these companies: China’s urea market is already saturated. Unless they have unique competitive advantages, investing in new urea capacity should be done with caution.
China’s annual urea consumption is around 30 million tons. Even if we project a slight increase over the next decade, it's unlikely to surpass 35 million tons. The existing production capacity is already close to this level. Adding the 800,000-ton Hainan plant currently under construction and the 2 million tons from Shanxi, our total capacity will likely exceed demand within the next ten years, leading to overcapacity.
Looking at the current urea market, it’s true that sales have been smooth and prices have been high over the past two years. However, this doesn’t mean there’s a shortage. In fact, production has consistently exceeded sales, with approximately 1 million tons of urea exported annually. Another key factor behind this situation is that some domestic companies—especially former oil giants—have not yet joined the industry group. These firms are switching to coal-based production and are expected to resume operations soon, further increasing supply and intensifying market pressure.
While China can export urea, this depends on low production costs and low transportation expenses. Currently, China’s urea exports don’t fully benefit from these advantages. Even future new facilities won’t necessarily have such cost advantages. In Southeast Asia, the landed cost of Chinese urea isn’t particularly low, and it still lacks price competitiveness compared to Russian and Middle Eastern urea. Although China’s export tax rebate policy has helped boost exports, this advantage is gradually fading. Additionally, key export markets like Vietnam are planning to build large fertilizer plants, which will start operating in 2005. As a result, China may lose these markets, and export challenges will grow significantly.
For new or smaller expansion projects, there might be some short-term advantages, allowing them to outcompete others and gain a foothold. But this kind of competition is ruthless and not advisable. Looking back at the past 20 years of China’s nitrogen fertilizer industry, such intense competition has often led to long-term losses, even for dominant players.
In conclusion, the current urea market is profitable, but it’s important to remember that good times won’t last forever. If overcapacity becomes a problem and the export market remains limited, it could lead to a serious crisis. Companies must think carefully before making new investments.
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