Urea: After the Export Story, What Comes Next?

This week, China's domestic urea market continued to fluctuate amid a tug-of-war between market news and fundamentals, with prices rising first and then retreating.At the end of last week, market sentiment was sharply boosted by the positive news that the export guidance price had been fully removed. Order intake increased significantly among producers in major regions, while some plants suspended order-taking, held back cargo, and slightly raised ex-works quotations.Affected by this, urea futures opened sharply higher with a large gap on Monday. The previous pessimism that price restrictions would prevent a real export window from opening faded, and the market began to trade on expectations that concentrated export execution would ease pressure on the domestic market.However, the rally lasted only one day. As rumors of low prices in India’s tender emerged and news followed that the association had reinstated a minimum price limit for exports to India, market sentiment cooled rapidly. Export flows narrowed again, wait-and-see sentiment strengthened across the industry, and prices came under pressure once more. Further news regarding adjustments to export price limits continued to disturb the market, but the market response has clearly become less sensitive.

At present, the repeated changes in export rules are undoubtedly the main factor affecting the urea market. However, the core logic may still lie in fundamentals. Judging from recent futures market movements, export-related news has been traded for quite some time. Although the detailed rules have changed repeatedly, the total export volume has not changed. This has largely capped the upside room for urea prices.The market has already priced in the most optimistic export expectations. At this stage, even if more export-related news emerges, prices are unlikely to break above the previous high of RMB 1,900/mt, unless the total export quota is further increased or subsequent export batches are announced.

Returning to the current trading logic, export expectations can only be viewed as bottom support. The short-term focus is whether actual exports and domestic demand can resonate and thereby improve the supply-demand balance.Given that there are no new changes on the supply side for now, the high-supply issue remains unresolved in the short term. The market can only wait for a recovery in summer fertilizer demand.From mid-to-late June, demand for corn base fertilizer in North China and the Huang-Huai region will start intensively. In July, southern rice areas will enter the peak topdressing season, and agricultural demand will reach its annual peak.Based on theoretical agricultural demand estimates, June agricultural demand is expected to be around 2.8-3.5 million metric tons, while July agricultural demand is expected to be around 2.0-2.8 million metric tons. Actual usage may be affected by weather and other factors, but the overall scale should not differ significantly. If the peak value is combined with total export volume, demand could reach approximately 6.5 million metric tons. This represents the highest theoretical estimate before the domestic demand peak from now until the end of July.However, considering the continued downward trend in the international market and the sharp cooling of Middle East tensions this week, actual export volume is likely to fall short of expectations. As a result, from mid-June to the end of July, average daily demand may be around 140,000 metric tons. That said, actual fertilizer demand will not be evenly distributed day by day, nor will procurement occur evenly. Therefore, staged concentrated demand is the key point being traded by the market.On the industrial demand side, compound fertilizer operating rates remain relatively low. The earlier high operating rate had largely front-loaded summer fertilizer stocking, and the current focus is mainly on inventory digestion. Although operating rates declined slightly this week, they remain relatively high compared with previous years and are basically close to the level seen in the same period last year. If inventories cannot be reduced effectively, producers may cut prices to compete for market share, which could squeeze direct agricultural urea consumption to some extent.Other industrial demand remains largely stable, with no significant changes and limited expectations for meaningful incremental demand. Based on maximum monthly rigid industrial demand of around 2.5 million metric tons, average daily industrial demand from mid-June to the end of July is estimated at around 80,000 metric tons.

Combining agricultural demand, industrial demand, and exports, comprehensive average daily demand is close to 220,000 metric tons. Although this is a theoretical maximum, it does point to a tight supply-demand balance, which deserves attention.In actual demand terms, after considering various factors, it is still unlikely that the overall supply-demand structure will be fully reversed. However, if staged concentrated demand breaks out, it could create a strong pulse effect in the market.Whether prices will rise sharply will also depend on the inventory buffer held by midstream participants and whether speculative demand enters the market. What is clear is that, given the relatively low visible inventories among upstream producers in core production and sales regions, market sentiment is likely to be affected. It would also be common to see producers suspend order-taking and raise prices during such periods. At that time, the emotional response in the futures market will still need to be watched closely.

In summary, from the perspective of the physical industry, it is reasonable for participants to procure while waiting for concentrated demand to start. However, under the pressure of the overall supply-demand imbalance, the core logic in the futures market remains to wait for peak-season demand to top out before positioning for short opportunities. After all, agricultural demand will decline rapidly after August, and the off-season nature of the September contract may not improve effectively without new export quota news.In addition, macro factors should also be monitored. Internationally, whether the United States and Iran ultimately sign an agreement remains a key issue, and the first public remarks by the new Federal Reserve Chair next week will also attract global attention. Domestically, attention should be paid to whether new policy signals are released around next week’s Lujiazui Forum and ahead of the important economic meeting at the end of July, potentially creating macro-driven support for market movements.