Sulfur: Structural Contest Between Collapsing Demand and Resilient New-Energy Demand

I. Market Review: From the 10,000-Yuan Peak to the 7,000-Yuan Threshold

The sulfur market experienced dramatic, roller-coaster volatility in 2026. Prices were only around 3,850 yuan/tonne at the beginning of the year, but rose steadily under the combined influence of geopolitical conflict, supply-demand imbalances and other factors. On June 10, mainstream granular sulfur prices at Zhenjiang Port exceeded 10,000 yuan/tonne. In August, the market turning point was confirmed. Prices edged down to 9,185.67 yuan/tonne at the beginning of August before entering a clear downward channel under the combined pressure of fading geopolitical premiums and collapsing downstream demand.

The decline accelerated significantly this week:

August 21: Granular sulfur at Zhenjiang Port was quoted at 8,700 yuan/tonne.

August 24: Prices fell to 8,300 yuan/tonne, down 400 yuan/tonne over three days.

August 25: Prices were quoted at 8,000 yuan/tonne, down another 300 yuan/tonne in one day, or 3.61%.

August 27: Sporadic negotiated prices for imported bulk granular sulfur along the Yangtze River coast fell to around 7,500 yuan/tonne, with the market average down more than 3.2% day on day.

August 28: Imported granular sulfur was around 7,500 yuan/tonne, down 1,200 yuan/tonne over four days, or as much as 13.8%.

From the 10,000-yuan peak to the 7,000-yuan threshold, sulfur prices gave back a substantial portion of the geopolitical premium in just over a month, marking the phased end of this round of “pulse-like” gains.

II. Core Logic Behind the Decline: Four Pressures Combine

(I) Marginal Easing of Geopolitical Risk Premiums: The “Trigger” for the Decline

The core driver of the sulfur surge was expectations of supply disruption caused by geopolitical conflict in the Middle East. Approximately 45% of global seaborne sulfur trade passes through the Strait of Hormuz. After US-Iran tensions escalated, navigation through the Strait was temporarily disrupted, sending international sulfur prices from their usual level of USD 80-90/tonne to above USD 1,000/tonne.

However, the marginal impact of geopolitical risks began to weaken in late August. The Middle East situation produced signals of a negotiated peace through mediation by Pakistan. Although the United States subsequently continued to call for economic isolation and a maritime blockade of Iran, no large-scale armed conflict occurred between the two sides while the memorandum of understanding was in force and approaching expiry. Market concerns therefore eased significantly.

There were also signs of international intervention. The United Nations announced on August 24 that it would establish a special task force focused on safeguarding fertilizer and raw-material shipping. Kazakhstan also lifted its export ban, and more than 132,000 tonnes of sulfur had been transported by rail to the port of Ust-Luga for export. The geopolitical premium shifted from “continued escalation” to “marginal easing,” triggering the current decline.

(II) Full-Scale Downstream Negative Feedback: The Core Driver of the Decline

If the fading geopolitical premium was the “trigger,” the deep collapse in downstream demand was the “core engine” driving prices lower.

The phosphate fertilizer industry has fallen into deep losses. Sulfur is a key raw material for phosphate fertilizer production, and phosphate fertilizers account for more than 55% of domestic sulfur consumption. Some domestic phosphate fertilizer producers have secured supply contracts, while alternatives such as smelting acid have also reduced demand for sulfur purchased on the open market. However, producers relying on externally purchased sulfur to produce sulfuric acid remain deeply loss-making. Overall phosphate fertilizer operating rates are low. The MAP industry's capacity utilization rate has fallen from its July peak to 52%, while DAP operating rates have continued to recover but remain at a low 43% year on year. Operating rates for small and medium phosphate fertilizer plants in Hubei are below 40%, and most producers have operated at low rates or suspended production periodically for one to two months.

The current period is normally a high-operating-rate period as producers prepare for autumn fertilizer demand. The market therefore views the current period as a further negative-feedback turning point for sulfur demand. Compound fertilizer producers further downstream also have low operating rates. As of August 27, capacity utilization in the compound fertilizer industry was only 34.11%. Although it had recovered somewhat week on week, market participants generally expected limited willingness to purchase raw materials because of inventory pressure. Overall, phosphate fertilizer producers are under severe pressure and their willingness to purchase high-priced sulfur has fallen to a low point.

Chemical downstream sectors are also weak. Sulfuric acid production, titanium dioxide and caprolactam producers have suspended operations amid continued losses, further reducing demand. The stalemate in the terminal market, in which producers do not want to produce while loss-making and users do not want to buy at high prices, continues to spread.

Stockpiling demand has contracted sharply. Earlier speculative sentiment gradually weakened as expectations of supply recovery grew and downstream demand failed to absorb supply. Combined with the market preference for buying on rises rather than declines, buyers at ports became increasingly cautious. Traders adopted a negative wait-and-see stance, speculative stockpiling largely disappeared, and traders lowered prices to facilitate sales, further amplifying the spot-market correction.

(III) Rising Inventories and Imported Arrivals Ease Supply Concerns

While downstream demand weakened, supply-side tightness expectations also gradually eased. Domestic refineries that had previously entered maintenance resumed operations one after another. Internationally, Russia revised and relaxed its sulfur export restrictions, allowing exports of 300,000 tonnes of low-grade technical sulfur. The market may therefore believe that the tightest point for supply has largely passed.

Port inventories recovered at the margin. National sulfur inventories at ports rose from the annual low of nearly 700,000 tonnes to 950,000 tonnes this week. Although inventories were still down more than 62% year on year, the marginal recovery disrupted the previous narrative of continuously declining inventories and tightening supply.

Imported sulfur arrived in bulk. In the early hours of August 20, 73,500 tonnes of sulfur directly purchased from the Middle East by Guizhou Phosphate Chemical Group arrived safely at Zhanjiang Port in Guangdong. This was the first shipment of mainstream Middle Eastern sulfur directly imported since the outbreak of the US-Israel-Iran conflict, and the largest and highest-value single Middle Eastern sulfur purchase contract since the group was established. The successful arrival of this large cargo indicates that outbound shipping channels for Middle Eastern sulfur are gradually recovering.

International contract prices also fell sharply. Kuwait Petroleum Corporation set its August sulfur FOB price at USD 865/tonne, down USD 85/tonne from USD 950/tonne in July. This was the largest price adjustment in the Middle East this month and further weakened expectations of cost-side support.

(IV) Substitution Effects Begin to Emerge

In the long term, high sulfur prices are forcing downstream industries to seek alternatives. The phosphogypsum decomposition unit at Guizhou Phosphate Chemical Group's Qiannan base produces sulfuric acid and cementitious materials. It can consume 1.4 million tonnes of phosphogypsum and produce 650,000 tonnes of sulfuric acid annually. Two phosphogypsum-based acid production projects are currently being built simultaneously. These projects could replace demand for more than 400,000 tonnes of sulfur. Although the substitution effect will take time to fully emerge, downstream companies have stronger incentives to accelerate technological substitution, further suppressing long-term sulfur demand expectations.

III. New-Energy Demand: A “Stabilizer” During the Decline and a Long-Term Source of Pricing Power

New-energy demand is an important structural variable in the current movement of sulfur prices.

(I) New Energy Is Rewriting the Sulfur Demand Narrative

Sulfur was long regarded as a by-product of oil and gas production, with prices mainly following the agricultural phosphate fertilizer cycle. That pattern is now being fundamentally disrupted.

Lithium iron phosphate: China's most important new-energy sulfur consumer. Sulfur is a key raw material for producing wet-process phosphoric acid, which is an upstream feedstock for iron phosphate. Lithium iron phosphate is an important driver of sulfuric acid demand in 2026-2027. China's power lithium-iron-phosphate battery shipments are expected to increase 32% in 2026 to 1,580 GWh, while energy-storage lithium-iron-phosphate battery shipments are expected to rise 67% to 1,015 GWh. New-energy lithium iron phosphate alone is expected to contribute an additional 900,000-1.4 million tonnes of sulfur demand in 2026.

Indonesia's hydrometallurgical nickel: The largest overseas variable in the competition for sulfur. Indonesia's mixed hydroxide precipitate is a key intermediate for cathode materials used in power batteries. Geopolitical conflict and the sharp rise in sulfur prices have materially reshaped the cost structure of Indonesia's hydrometallurgical nickel intermediates. Sulfur may have replaced nickel ore as the core cost item, with sulfur's share expected to rise sharply from 30% before the conflict to 47%.

The demand structure is undergoing a fundamental change. The surge in new-energy demand, combined with rigid demand from phosphate fertilizers and titanium dioxide, is transforming sulfur's downstream demand structure. Sulfur's value is no longer solely dependent on the main product. It is increasingly being driven independently by emerging demand from its own downstream industries.

(II) New Energy Remains Resilient During This Decline

The core contradiction behind the decline lies in traditional downstream sectors, while new-energy demand remains relatively strong.

In sharp contrast to the broad weakness of the phosphate fertilizer industry, new-energy demand has remained firm. Monthly operating rates for lithium iron phosphate have been around 80%, remaining high. Even though supply is relatively tight and traditional downstream buyers' willingness to purchase has fallen sharply, rigid demand from the new-energy sector remains. Based on incremental demand expectations, much of the market focus has shifted to energy storage. With energy-storage terminal IRR requirements as the benchmark, downstream negative feedback is centered on lithium carbonate. If lithium carbonate rises above 230,000-240,000 yuan/tonne, someone in the lithium battery chain will bear significant losses regardless of how much iron phosphate prices rise. If lithium carbonate is around 200,000 yuan/tonne while iron phosphate prices remain high, the two may move together and affect supply-chain margins. However, with lithium carbonate currently down to around 150,000 yuan/tonne, the market has greater tolerance for higher iron phosphate prices.

(III) Why Has New-Energy Demand Failed to Prevent the Price Decline?

If new-energy demand is so strong, why has it failed to stop sulfur prices from falling?

The main reason is the difference in market scale, which determines pricing power. Although new-energy demand is growing rapidly, it still accounts for only around 10% of total sulfur consumption. Phosphate fertilizers account for more than 55% and remain the dominant source of sulfur demand. When the phosphate fertilizer industry, which represents more than half of total demand, falls into deep losses and its operating rate is cut in half, incremental demand representing only one-tenth of total consumption cannot offset the decline.

New-energy demand also has its own concerns. China's power battery market remains constrained by the seasonal demand for electric vehicles and terminal consumption. In 2026, policy support shifted from stimulus to a floor, including a 17% reduction in funds for trade-in subsidies and a 50% reduction in purchase-tax benefits. Some vehicle models no longer meet the new thresholds. Daily applications for trade-in subsidies fell 20% year on year, reflecting the impact of demand pulled forward. The cycle of purchase-tax policy changes also brought demand forward.

China sold approximately 7.4 million new-energy vehicles in the first half of 2026, up 7% year on year, with average penetration of approximately 48%. Global new-energy vehicle sales were approximately 10.25 million units in the first half, with China accounting for more than 70%. However, domestic demand came under greater pressure in the second half. New-energy passenger-vehicle retail sales were 951,000 units in July, down 3.9% year on year, while wholesale sales were 1.446 million units, up 21.3%. Cumulative new-energy passenger-vehicle retail sales from January to July declined 12% year on year.

In sharp contrast to weak domestic demand, exports grew explosively. China's automobile exports reached a record 5.096 million units in the first half of 2026, up 65.3% year on year, including 2.355 million new-energy vehicles, up 120%. Cumulative new-energy vehicle exports from January to July reached 2.96 million units, up 72%. In July alone, new-energy passenger-vehicle exports reached 540,000 units, up 147.8% year on year and 8.1% month on month, accounting for 58.8% of passenger-vehicle exports.

The “weak domestic demand, strong exports” pattern in the new-energy vehicle market has two implications for sulfur demand. First, new-energy vehicle output is still expanding. Although domestic demand is under pressure, strong export growth supports overall production. As the core cathode material for power batteries, lithium iron phosphate continues to maintain high output and operating rates, sustaining rigid sulfur demand. Second, the slope of demand growth may slow. Temporary weakness in domestic demand means power-battery installation growth may fall short of expectations at the beginning of the year, reducing incremental demand for upstream lithium iron phosphate and sulfur. However, continued strong export growth and the approaching September-October peak season may provide marginal support to demand in the second half.

In overseas markets, high sulfur prices have directly affected the economics of Indonesia's hydrometallurgical projects. Sulfur prices above USD 1,300/tonne are expected to push hydrometallurgical spot cash flow into negative territory, while companies with unfavorable nickel-cobalt ratios may face negative cash flow at sulfur prices above USD 1,200/tonne. Every USD 1,000/tonne increase in nickel prices raises the acceptable sulfur price by USD 100/tonne. Cash-flow pressure may limit sulfur's upside elasticity. At the previous sulfur price of USD 1,200/tonne, hydrometallurgical projects would struggle to recover their investment after starting production, and expectations for some projects scheduled to start in 2027 may already be wavering.

IV. The Deeper Market Contradiction: The Contest Between Tight Supply and Collapsing Demand

The current sulfur market presents a seemingly contradictory but clear pattern: supply remains relatively tight, but weak demand has become the core contradiction determining prices.

On the supply side, the global sulfur supply-demand deficit is expected to exceed 5 million tonnes. Inventories fell from 2 million tonnes to 750,000 tonnes in 2026, greatly amplifying price elasticity. China's cumulative sulfur imports from January to July were only 2.6463 million tonnes, down 589,000 tonnes from the same period last year. Navigation through the Strait of Hormuz has not fully returned to normal, while supply disruptions remain from Russia's export ban, extended through the end of 2026, and Turkey's ban, extended through the end of the third quarter. Supply constraints have not been removed.

However, the collapse in demand is overwhelming supply tightness. Even when supply is not loose, prices lose support if no one is willing to take cargoes at current levels. Unless a new supply contraction stimulates speculative demand, it will be difficult to maintain high prices under the logic of negative terminal-demand feedback.

A notable structural feature is the severe split between domestic and overseas markets. Domestic spot prices continue to fall, while international sulfur offers remain firm, again creating an inverted relationship between domestic and overseas prices. Middle East geopolitical risks have not been fully resolved, and purchasing demand from overseas buyers is supporting international prices at high levels. China's sulfur import dependence is close to 50%, so high overseas prices will constrain the domestic price floor, limiting the scope for a sharp decline completely detached from overseas costs.

V. Outlook and Key Indicators to Watch

In the short term, sulfur prices may continue to fall through momentum, but overseas costs provide a floor and limit the scope for a sharp decline. The market's most prominent contradiction is currently the contest between bearish sentiment and import-cost support.

Key indicators include:

Phosphate fertilizer export policy: The phosphate fertilizer export ban expires on August 31. The market is watching whether exports can resume smoothly. If the export window opens, phosphate fertilizer operating rates may recover, directly boosting demand for sulfur raw materials.

Autumn fertilizer procurement: Once autumn fertilizer production and procurement begin, raw material restocking by compound fertilizer plants will create additional demand.

Port arrival schedules: Changes in imported arrivals will directly affect supply expectations.

Geopolitical developments: If the Middle East situation escalates again and further disrupts expectations of supply recovery, it may create another opportunity for a rebound in geopolitical premiums.

Overall, the sharp decline in sulfur prices this week resulted from the combined effect of fading geopolitical risk premiums and negative downstream-demand feedback. It also reflects the structural contradiction between collapsing traditional demand and resilient new-energy demand.

In the short term, prices still have room to fall further under the combined pressure of weakening sentiment, deep downstream losses and marginal inventory recovery. From a medium- to long-term perspective, however, sulfur's pricing logic has undergone a fundamental change.

On the one hand, the traditional market structure has been disrupted. The global sulfur supply deficit remains, and geopolitical uncertainty has not disappeared. Even if leading phosphate fertilizer and phosphate chemical producers adopt phosphogypsum-based acid production to reduce sulfur demand in the future, sulfur prices are unlikely to return to their previous low levels. The supply rigidity of sulfur as an oil and gas by-product, together with the pressure from the energy transition on by-product output, means that the old market equilibrium will be difficult to recreate.

On the other hand, new energy is reshaping long-term pricing power. As demand from lithium iron phosphate, ternary materials and other new-energy industries continues to expand, and as sulfur supply remains relatively rigid, the new-energy sector's share of sulfur consumption will continue to rise. The sulfur market is gradually moving from a “phosphate fertilizer cycle” toward a “new-energy cycle.” New energy will not only become the primary source of incremental demand, but will also reshape sulfur's pricing logic over the medium to long term.