How Does the "Coking Coal Surge" Affect Urea Market Sentiment?

The urea market strengthened in stages this week. On the supply side, expectations of maintenance shutdowns and output reductions provided support, making the market more cautious and convinced about the prospect of policy-supported production cuts. On the demand side, marginal improvement emerged: the domestic autumn fertilizer season is approaching, compound fertilizer plants show signs of increasing operating rates, and expectations for industrial demand during the traditional September-October peak season have improved, supporting overall domestic demand expectations. On the external demand side, domestic port accumulation accelerated after the conclusion of India's tender. This diverted domestic supply and eased pressure on upstream producers. Producer inventories finally showed an inflection point downward this week, although the decline remained limited. The sharp increase in port inventories also requires attention as to whether these volumes can be shipped out smoothly. Therefore, although market prices are rising, sentiment has not improved decisively and gains remain limited. Overall, from relatively low valuation levels, both spot and futures markets have priced in a phased expectation of lower supply and higher demand because of marginal two-way supply-demand improvement, resulting in a stable but firmer trend.

 

Beyond these two factors, another indirect factor may also have supported urea futures sentiment: the sharp rise in coking coal futures, which indirectly strengthened the market's expectation of higher costs for coal chemical products. Although coking coal is not a direct cost for the coal chemical industry, it is a representative coal-sector futures product. Thermal coal prices have also remained relatively firm recently, so market linkage does exist.

 

 

Since early August, coking coal futures have experienced a rapid and significant rise. The most-active 2701 coking coal contract was quoted at around 1,580 yuan/tonne, up approximately 22% from its early-month low of 1,300 yuan/tonne. Spot prices strengthened in tandem, with Shanxi premium coking coal quoted at 1,860 yuan/tonne and Mongolian No. 5 raw coal at the Ganqimaodu border crossing quoted at 1,433 yuan/tonne. A gain of as much as 300 yuan/tonne in a short period made coking coal one of the most closely watched futures products this month.

 

On the supply side, multiple tightening factors were the key driver. Under stringent safety inspections, many coal mines in Shanxi remain shut, while output at operating mines is generally at low levels. A total of 192 Shanxi coal mines, with combined capacity of 260 million tonnes, have suspended production at some point since May 22, and 72 mines remain shut. Futures had previously declined because the market excessively priced in production-restart expectations and delivery dynamics. When actual restarts fell short of expectations, prices first underwent an oversold correction, followed by a range of new disruptions. For example, the 15th Five-Year Plan for coal created policy expectations; new fatal accidents at coal mines in Hunan intensified safety inspections; news of proposed coke price increases expanded market expectations; and Mongolian coal customs clearance fell by nearly half due to diesel shortages, environmental restrictions and border crossing failures, tightening available supply. Low inventories across the chain further amplified price elasticity and intensified fund-driven trading in coking coal futures. With near-month supply tight, the cost of technology coal warehouse receipts, previously a key tool for short sellers, also rose sharply. Speculative demand as longs and shorts competed for limited supply further intensified spot tightness, creating a spiral rise in spot and futures prices. The near-month short-squeeze logic has made coking coal pricing irrational, and the risk of a strong spillover into downstream products requires attention.

 

Thermal coal also traded relatively firmly, although its increase was clearly more moderate. The average Bohai Rim price for 5,500 kcal thermal coal was quoted at 717 yuan/tonne, while the CCTD Bohai Rim thermal coal spot reference price for 5,500K coal was 864 yuan/tonne. On the supply side, strict safety inspections in the Yulin region, together with maintenance and mining-face relocation, resulted in more mine shutdowns and generally tight market supply. National raw coal output in July fell 10.1% year on year, while production restarts continued to lag expectations. However, after rail freight rates on certain routes were reduced recently, volumes entering ports improved. End users became less active in inquiring about high-priced coal, and signs of a slight pullback appeared in the latter part of this week, although prices remain relatively high overall.

 

The simultaneous rise in coking coal and thermal coal originates from the same safety-inspection policy-driven contraction in coal supply across the industry. Coking coal rose more sharply because of its resource scarcity and higher concentration of production regions, while thermal coal followed more moderately with support from peak-season demand.

 

 

Coal-based production accounts for nearly 80% of domestic urea capacity. The simultaneous strength in coking coal and thermal coal is transmitted to the urea market through two channels: costs and sentiment.

 

Path One: Direct Cost Increase

 

Coal is the primary feedstock for urea production. Higher thermal coal prices directly raise production costs for coal-based urea producers. Recently, prices for gasification bituminous coal and anthracite lump coal have remained firm, further narrowing urea producer margins. Fixed-bed producers have entered losses. Based on actual delivered coal prices, the full cost for modern gasification-bed producers is around 1,500-1,600 yuan/tonne, with profits of approximately 80-200 yuan/tonne. Fixed-bed producers have full costs of around 1,830-1,950 yuan/tonne, with losses of approximately 150-280 yuan/tonne. Strong coal price gains raise the production-cost floor for coal chemical products.

 

Path Two: Linked Improvement in Sentiment

 

Strong performance in the coking coal sector often ignites bullish sentiment across the coal chemical chain. After a Shanxi coal mine accident in May, the limit-up move in coking coal directly led urea futures to open higher and trade with volatility. The continued sharp rise in coking coal in this round has likewise supported urea sentiment by lifting cost expectations and repairing overall valuations in the coal sector. Combined with urea's own support from maintenance shutdowns and exports, coal strength has further heightened concerns over higher coal chemical production costs.

 

 

1. Margin Compression Forces Production Cuts

 

Sustained strength in coal prices directly compresses urea producer margins. Fixed-bed producers are currently operating at a loss, while gas-based producers also face cost pressure. If coal prices remain high while urea prices cannot rise in tandem, the range of loss-making producers cutting output may expand further, creating a self-correcting mechanism for urea supply in the medium term.

 

2. Contest Between Cost Support and Loose Supply-Demand Fundamentals

 

The current urea market remains in an ongoing contest between rising costs and loose supply-demand fundamentals. On the one hand, strong coal prices raise the production-cost floor for urea and provide underlying price support. On the other hand, high daily output, high inventories and weak domestic demand continue to constrain upside room. Cost support acts more as a floor than a driver: it can prevent a sharp decline, but it is difficult to push prices substantially higher under loose supply-demand conditions.

 

3. Fundamental Differences From the Coking Coal Rally

 

The coking coal rally is a trend driven by a hard supply shortage, compounded by disruptions from fund-driven futures trading. Thermal coal has risen moderately with support from safety inspections and peak-season demand, while the urea rebound reflects a weak-balance repair supported by maintenance expectations and exports. Although the three markets have certain links, their underlying supply-demand fundamentals are fundamentally different, so the strength of sentiment linkage remains limited.

 

 

The simultaneous sharp rise in coking coal and thermal coal has supported the urea market through higher costs and sentiment resonance. Strong coal prices have directly raised production costs for coal-based urea and reinforced producers' willingness to support prices. Strong performance in the coking coal sector has also improved bullish sentiment across the coal chemical chain.

 

However, in the current urea market, cost transmission is more of a price floor than a driver. The core contradiction of strong supply and weak demand has not been materially reversed. High daily output, high inventories and weak domestic demand continue to limit upside potential. In the short term, urea is expected to maintain a relatively firm but volatile pattern under the combined influence of maintenance shutdowns, export orders and higher costs. However, the height of the rebound remains constrained. Attention should focus on the implementation of maintenance-related output cuts, the pace of export order fulfilment, and signals of marginal demand improvement from the start of autumn fertilizer procurement.

 

Ultimately, the "fire" of higher coal prices has reached urea's cost side, but the "ice" of urea's loose supply-demand balance has not yet melted. With these opposing forces intertwined, urea is more likely to remain range-bound than undergo a trend reversal.