Has a Policy Floor Emerged for Urea?

The urea market mainly fell first and then rose this week. After the second batch of quotas was confirmed last Friday, weekend market follow-up sentiment was relatively low, with most participants waiting to see Monday’s futures reaction. However, futures opened with rapid position increases and downward pressure. The core logic was still the issue of positive news being exhausted. Short funds believed that after all short-term positive factors had been discussed, the market would start trading the reality of delivery pressure. But midweek, an industry symposium released a policy-support attitude that exceeded market expectations. Futures sentiment reacted quickly, short funds again exited to avoid risk, forming a strong rebound. The market also saw many interpretations that a policy floor had appeared. However, in the face of high inventory, high supply, and weak demand fundamentals, the market remained relatively calm after the initial excitement, and futures again rebounded to the parity range before choosing to fluctuate and wait. If the policy floor has been confirmed, where is the market bottom?

From the response of futures and spot markets, futures prices rebounded sharply from low levels with position reductions, but mainly repaired discounts. The spot market also stabilized and recovered, but performance was relatively average. Some producers still lowered prices to collect orders, and afterward most producers stayed stable, while a few raised prices slightly by 10-20 yuan. The market is temporarily characterized as sentiment repair rather than a fundamental reversal.

In sharp contrast with the warmth from policy, urea fundamentals remain weak. Current urea enterprise capacity utilization is as high as 90.28%, and industry daily output is stable above 210,000 tonnes. Planned output for the whole of August is about 6.7 million tonnes, nearly 9% higher than the same period in previous years. Planned maintenance units in early August are limited, earlier maintenance units are restarting one after another, and supply remains abundant.

In terms of inventory, total urea enterprise inventory has reached 1.6661 million tonnes, a record high for the same period in history, with inventory accumulating for three consecutive months. In just one week, inventory increased by 47,500 tonnes. Port inventory was 197,400 tonnes. Previous data as of July 29 showed enterprise inventory at 1.6186 million tonnes, up 5.67% month on month. Current inventory levels are already close to historical extremes.

On the demand side, the market is currently in the late-summer agricultural gap period, and autumn fertilizer preparation has not fully started. Compound fertilizer operating rates are only around 32%. Autumn fertilizer formulas mainly use high-phosphate fertilizers, theoretically limiting urea consumption. However, given current high phosphate fertilizer prices, nitrogen fertilizer has a certain cost-performance advantage. At the same time, this also makes overall raw material procurement enthusiasm at compound fertilizer enterprises low. With their own finished-product inventory pressure still present, the extent of operating rate recovery may also be relatively limited. Industrial downstream sectors such as melamine and boards have flat orders and only scattered purchases as needed. Urea enterprise presale order days are only 4.29 days and are still declining month on month. Average production-sales rates in mainstream regions have only recovered to 61%, with significant regional differentiation.

Further breaking down the signals released by the symposium, the main points that exceeded expectations centered on supply-side adjustment, marginal easing of export policy, and active market entry by reserve and circulation enterprises. This meeting can be said to be the first time the industry proposed implementing the spirit of “anti-involution.” Even though bulk commodities as a whole saw a vigorous anti-involution rally last July, it only indirectly boosted urea futures sentiment, and the industry itself did not mention exclusive policy expectations. This year’s response at the current stage is a precise diagnosis of the industry’s difficulties. However, it is still mainly a call for self-discipline, hoping enterprises will voluntarily reduce capacity to improve supply-demand relations. Whether leading enterprises will actively give up market share remains questionable. After all, those responding to the call may be rewarded, but there is no stated penalty for not responding. At a time when the industry is generally producing at a loss, voluntary shutdowns and production cuts give up not only market share but also determine whether enterprise cash flow can continue. At the same time, how the “supporting reward” mechanism will be designed and where the funds will come from are also market focuses. Whether enterprises respond to the call with voluntary maintenance or load reduction will be an important signal of supply-side improvement. Before that, the market may be more inclined to see passive elimination on the supply side as the more realistic path.

Second, on exports, expectations were also raised for improving inspection efficiency and opening port inspection. But since export guidance price adjustments and new quotas have already been implemented, there is temporarily no higher policy expectation space. With the release of the second batch of quotas and easing in the Middle East situation, international market prices have also come under pressure and fallen again, while expectations of shrinking export margins are suppressing room in the domestic market. In the short term, the global market is basically watching how India’s tender price lands and guides the market. Finally, there is also a call to encourage middle-market participants to actively enter the market. From a market perspective, purchasing or reserving goods in a low-price off-season range can indeed help reduce procurement costs and ease concentrated purchasing pressure before fertilizer use, making market prices run more smoothly. But from an enterprise perspective, early reserve purchases also increase warehousing and financing costs. And because diverted purchases reduce the later concentrated procurement rally, early purchases may face higher costs without later profit from price increases. The scale and pace of the new national commercial fertilizer reserve year have not yet been clarified. The actual strength of reserve funds entering the market to support prices, as well as the procurement willingness of circulation and compound fertilizer enterprises, will determine whether the structural contradiction of “upstream inventory accumulation and low middle/downstream inventory” can be eased.

This week’s symposium was a key meeting held against the backdrop of continued industry losses, continued capacity expansion, and high inventory pressure. The six points of consensus worked simultaneously from four dimensions: price, exports, supply, and reserves, drawing a “policy floor” for the market. However, a policy floor does not equal a market bottom. In the face of high inventory, high supply, and weak demand fundamentals, the market still needs substantive signals such as export volume, supply contraction, and reserve implementation to be fulfilled one by one before moving from sentiment repair to trend reversal. In the short term, market attention is focused on India’s tender price and autumn fertilizer demand, two relatively realistic expectation points. But given that the larger cyclical contradictions have not changed, the market may still find it difficult to become overly optimistic.