Urea Market Cools After Running Hot as Supply-Side Momentum Slows

Coal and Urea Prices Weaken in Tandem

This week, the thermal coal market shifted from an accelerating surge toward a peak to an initial reversal at production origins. The previously severe negative margin on shipments to northern ports has narrowed substantially, inbound volumes have risen significantly and structural tightness has eased markedly. The two core factors that previously supported strong port prices, namely negative shipping margins and tight availability, are weakening simultaneously. The rise in port coal prices had already slowed noticeably by midweek.

More importantly, conditions changed at production origins. The price of 5,800 kcal/kg coal in Yulin fell by 20 yuan/tonne from the previous week to 870 yuan/tonne, while 5,500 kcal/kg coal in Ordos declined by 20 yuan/tonne to 820 yuan/tonne. Yulin recorded “a relatively large short-term price decline,” while in Ordos “users showed clear risk-avoidance sentiment, procurement continued to slow, mine-mouth inventories were stable to higher, and prices were reduced further to stimulate sales.” Although sellers at ports continued to support prices, “buyers showed declining interest in enquiries and applied increasing pressure for lower prices, further undermining sellers’ willingness to hold firm.”

The urea market weakened at the same time. By Friday, ex-factory prices for small- and medium-granule urea in Shandong had retreated to 1,720-1,800 yuan/tonne, while those in Henan had fallen to 1,750-1,800 yuan/tonne. In the futures market, the most-active contract closed at 1,802 yuan/tonne on September 11, down 21 yuan/tonne, or 1.15%, from its early-week high. The key message from this price signal is that the marginal cost support behind the recent coal-driven surge is weakening.

Assessing the Coal Price Decline: A Temporary Correction or a Trend Reversal?

Forecasting the urea market requires first determining the nature of the decline in coal prices.

In terms of drivers, the current decline is a result of the combined effects of policy signals and seasonally weaker demand. On September 7, the Economic Operations Adjustment Bureau of the National Development and Reform Commission convened a special meeting with the Xinjiang Development and Reform Commission, China State Railway Group and the Urumqi Railway Bureau. The meeting called for stabilizing Xinjiang coal production, strengthening transport capacity guarantees and increasing outbound shipments.

The practical significance of this policy signal is that, while safety-inspection restrictions have reduced supply in major production areas such as Shanxi, expectations of higher outbound Xinjiang coal shipments have opened a channel through the tight supply structure. Meanwhile, daily coal consumption at coastal power plants has entered its seasonal downward phase, power plants have slowed procurement, port arrivals have begun to increase and demand has weakened. The marginal supply-demand balance is therefore shifting from tightness toward equilibrium.

However, the extent of the coal price decline is also constrained. The resumption of production in Shanxi remains slow, only a limited number of mines in Qinyuan County have resumed operations, and routine safety inspections continue to restrict supply. In northern Shanxi, “supply-side support remains in place and the overall market is temporarily stable.” This indicates clear regional divergence at production origins, with Shaanxi and Inner Mongolia weaker while northern Shanxi remains stable. Although coal prices have risen rapidly, they “remain below the coal price corresponding to power plants’ cash-flow break-even level,” meaning that the core conditions for an abrupt policy reversal are absent.

Overall, coal prices are unlikely to return to the rapid upward trajectory seen in August in the short term, but conditions for a sharp decline are also lacking. The more probable scenario is a continued modest correction at production origins and a high-level stalemate at ports, with the overall coal price center fluctuating within 930-980 yuan/tonne. This assessment forms the baseline cost-side scenario for the urea outlook.

On the Supply Side: The Restart Window Is Opening and Daily Output Is Poised to Recover

Marginal changes on the supply side are the most direct force weighing on urea prices.

Daily urea output remained at a relatively low 193,000-195,000 tonnes this week, with the operating rate at approximately 82%, a relatively low level for the year. Concentrated maintenance was the direct reason for the decline in daily output, with multiple units in Henan, Shandong, Shanxi and Inner Mongolia shut down during August and September. However, plant operating schedules indicate that the restart window is opening. Based on currently reported shutdown and restart schedules, daily output could begin rising as early as next week, with supply expected to recover gradually thereafter.

This means that the point of maximum supply reduction and greatest tightness in the current cycle has passed. Marginal supply growth will directly weaken the protection that low daily output currently provides to prices. The temporary decline in daily output was an important supply-side factor behind the surge in early September. As that factor fades, price support will weaken accordingly, an expectation that the market began pricing in this week.

Inventories are characterized by a high overall volume but marginal destocking. Total producer inventories stood at 1.5629mn tonnes this week, down 112,800 tonnes from the previous week. Port inventories fell sharply by 302,700 tonnes, or 29.25%, to 732,300 tonnes, mainly because export orders accelerated cargo collection and shipments through ports. Rapid port destocking reflects positive progress in export execution. However, absolute producer inventories remain high compared with the corresponding historical period. Total inventories of 1.56mn tonnes are far from tight, although regional mismatches may occur.

On the Demand Side: Neither the Volume nor Composition of Autumn Fertilizer Demand Can Absorb High Prices

Weak demand has not changed materially.

Compound fertilizer capacity utilization was only 32.99%, down 1.19 percentage points from the previous week, with recent overall operating rates below the corresponding levels in previous years. Weekly urea demand among sampled compound fertilizer producers in Linyi, Shandong, fell by 21.36% to 810 tonnes. Shipments of finished compound fertilizer products have yet to improve significantly, operating-rate increases remain limited and urea procurement is restricted to small volumes.

The peak compound fertilizer production period may be delayed until around mid-September. Even if operating rates rise, autumn fertilizer demand is dominated by high-phosphate compound fertilizers, whose unit consumption of urea is far lower than that of high-nitrogen fertilizers used in summer. The quality and composition of demand are therefore also constrained.

The next minor peak fertilizer application season is expected from late September to early October, “but its geographical reach will be limited and its support for the market is expected to be weak.” Although industrial demand is supported by expectations of a peak season and favorable policies, most buyers are maintaining rigid-demand procurement because end-user demand remains insufficient.

The key conclusion on the demand side is that autumn fertilizer demand can provide only a marginal improvement, rather than a trend-driving increase. With urea prices at a relatively high level of 1,820 yuan/tonne, downstream buyers have neither sufficient willingness nor capacity to absorb the material.

Exports: Short-Term Support Remains, but Policy Uncertainty Is the Largest Variable

A subtle contradiction has emerged on the export side.

On the one hand, existing export orders are still being executed. Indian tender cargoes scheduled for September must depart by September 24. Accelerated port collection and shipments were the direct causes of this week’s sharp decline in port inventories. Contracted export volumes are therefore providing effective short-term demand support.

On the other hand, the policy direction for the third batch of export quotas remains unclear. Market rumours suggest that “because coal supply is currently unusually tight and exporting urea is equivalent to exporting coal, the issuance of the third batch of quotas has been suspended.” Although this report has not received official confirmation, the global market is “closely watching the issuance of China’s third batch of quotas,” and “buyers have no reason to act before receiving clear information.”

With coal prices elevated and fixed-bed urea units suffering heavy losses, the economic rationale for continuing large-scale urea exports is debatable. Exporting urea is effectively equivalent to exporting coal resources while domestic coal supply remains tight.

The direction of export policy will be the largest source of divergence between expectations and actual market conditions in late September. If quota issuance is suspended, export support for demand will fade rapidly. If quotas are issued as scheduled, export support could continue into October.

Overall, the simultaneous weakening of thermal coal and urea prices this week marks the end of the current cost-driven surge. The market’s central issue has shifted from how far costs can rise to how quickly supply will recover and how strongly demand can absorb it. With coal prices locked in a high-level stalemate, daily urea output poised to recover and export policy unresolved, weak and volatile urea prices remain the baseline short-term forecast. Market participants are advised to adopt a defensive strategy and closely monitor the pace of daily output recovery and export policy signals, the two variables with the greatest marginal influence.