Over the past two years, urea has been in high demand in the market, and all major urea producers have enjoyed strong profits. This has led many companies to rush into expanding their production capacity by building new urea plants. Some are using natural gas as a 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 a unique competitive advantage, investing further in urea production should be done with caution.
China’s annual urea consumption is approximately 30 million tons. Even if we anticipate a slight increase over the next decade, it likely won’t exceed 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-ton Shanxi project, our total capacity will surpass domestic demand within the next ten years, leading to a surplus.
Looking at the current urea market, although sales have been smooth and prices have remained relatively high, the situation isn't one of shortage. In fact, production exceeds sales, with about 1 million tons of urea being exported annually. Another key factor is that some domestic companies—especially former oil giants—have not yet joined the industry group. These firms are transitioning from oil-based to coal-based production and are expected to resume operations soon. This will further increase China’s urea output, putting more pressure on sales.
While China can export urea, it relies heavily on low production costs and low transportation expenses. Currently, China’s exports don’t fully benefit from these advantages. Even future new facilities may not achieve the same cost efficiency. In Southeast Asia, the landed cost of Chinese urea is still not competitive compared to products from Russia or the Middle East. Although China’s export tax rebate policy has helped boost exports, this advantage is gradually fading. Moreover, key markets like Vietnam are planning to build large fertilizer plants, which will start operating around 2005. This could lead to a loss of these markets and make exports even more challenging. Therefore, there’s little reason to expect a significant growth in China’s urea export market in the near future.
For smaller or newer expansion companies, there might be some short-term advantages, allowing them to outcompete others and gain market share. However, such competition is intense and unsustainable. From the past 20 years of China’s nitrogen fertilizer industry, we’ve seen that such fierce competition often leads to long-term losses for even the dominant players.
In conclusion, the current urea market is profitable, but it’s important to remember that good times won’t last forever. If, in the future, production capacity becomes severely excessive and the export market remains limited, it could lead to a serious crisis. Companies must think carefully before making large investments in this sector.
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