Overcapacity has hurt urea prices Ammonium chloride is emerging as an opportunity for Chinese producers
Ammonia and urea prices have fallen since 2014 while ammonium chloride prices have increased. IHS Chemical cites oversupply in urea markets worldwide, which is pressuring urea prices; competition between China and the Middle East for a share of exports to Asian markets; and the emergence of an independent market for ammonium chloride despite the low urea price environment.
Traditionally, the prices of urea and ammonium chloride—each product a nitrogen fertilizer—have tracked one another with urea trading at a premium because of its higher nitrogen content and suitability for a wider variety of crops.
However, urea and ammonium chloride prices began decoupling in about 2014, IHS Chemical data show. At about this time, urea prices strengthened and ammonium chloride prices weakened, but urea prices soon started to decline again. “When urea prices fell again in 2015, however, ammonium chloride prices—on a nitrogen basis—did not follow. This is a new situation, and we are only starting to analyze what factors underpin it,” says Ryan Monis, fertilizer consultant at IHS Chemical.
Shale favors a switch in raw material advantage
The capital investments in urea have traditionally followed low energy prices. When China had a cost advantage in terms of its coal prices—compared with natural gas in North America and Europe—the country invested heavily in urea, resulting in capacity closures in Europe and North America, IHS Chemical data show.
The prominence that shale gas has gained in North America, particularly the United States, has since 2007 lowered gas prices in that region. On an energy-price level, carrying out chemical investments in the United States is now than in China, IHS Chemical says. Shale gas has spurred investment across various commodities in the United States, including urea. Meanwhile, investments in urea projects in China have been slowing.
Shifting trade flows?
This means that the United States, previously a net importer of fertilizers, is becoming self-sufficient and that China’s urea producers can no longer rely on North American markets as an outlet for their exports. This has pushed Chinese producers to find other export markets. India and Southeast Asia present opportunities, although urea originating in China faces competition in these markets from other low-cost energy regions, specifically the Middle East.
Urea overcapacity and competition for export sales have been behind the downward pressure on urea prices worldwide. The pressure is more intense for Chinese producers of urea because investments in new capacity have been significant in China during the past decade, despite the recent slowdown in projects.
Ammonium chloride emerges as opportunity
In China, ammonium chloride is a by-product of soda ash production via the Hu process. Ammonium chloride may have a lower nitrogen content and historically a lower price than urea, but it is more soluble in water.
Ammonium chloride does not tend to travel far because its nitrogen content is too low and because of the product’s chloride component. Most crops cannot tolerate chlorine. This makes ammonium chloride uniquely suitable for the Chinese fertilizer market, particularly for the southern rice-producing provinces. So most of the ammonium chloride produced in China is consumed domestically. Only 5–10% is exported to Asian countries, such as Malaysia and Vietnam, that need low-cost nitrogen to grow rice and, to some degree, palm trees for producing palm oil.
Soda ash prices have also declined, but when analyzed in combination with ammonium chloride, a new trend emerges. “Soda ash producers in China would normally sell ammonium chloride and add that to their financial position. But because soda ash prices have gone down, producers don’t have an incentive to drop their ammonium chloride prices, particularly if there is a market for it. This is a unique situation,” Monis says. “As long as there is demand and a market for the product, domestically and increasing in Asia, there is no incentive to drop ammonium chloride prices. This is adding support to ammonium chloride prices.”