Gas supply shortage hits Chinese urea producers

A shortage of natural gas supplies has forced some ammonia and urea producers in southwest China to halt production, potentially removing as much as 6pc of total Chinese urea output from the market.

China's biggest natural gas supplier state-owned CNPC yesterday notified producers in the region to halt production because of a lack of gas supplies.

The producers that are most affected by the shortage are Sichuan Tianhua, Yuntianhua, Lutianhua, Jianfeng and Sichuan Meifeng.

CNPC has asked Yuntianhua to halt production of ammonia and urea, producers said. Yuntianhua, which has 760,000 t/yr of urea capacity, is planning to stop production of both products by the end of December.

Lutianhua, which has urea capacity of 900,000 t/yr, and the 1.32mn t/yr capacity producer Jianfeng have also been told to prepare for a full shutdown, although they have not been given a timeline to halt production.

The 500,000 t/yr urea producer Meifeng has stopped one ammonia and urea plant and is planning to halt operations at another by the end of December. Tianhua, which has urea capacity of 520,000 t/yr, will also be affected by the gas supply shortages.

Operating rates at gas-based urea plants are averaging 67pc across China. A full shutdown all five affected producers would reduce urea output by around 8,000 t/d, equivalent to 6pc of daily urea production in China as a whole.

Supply shortages have pushed natural gas prices sharply higher in Yunnan province, from 1.53 yuan/m³ (23¢/m³) in November to Yn1.86/m³ now, an increase of nearly 22pc, market participants said. Prices have risen by 12pc since 1 December alone. This has sent urea production costs in the region up by Yn200/t.

The gas supply tightness sent urea prices higher by Yn30-60/t in southwest China today. The January urea futures contract on the Zhengzhou commodity exchange increased by Yn40/t to Yn1,780/t today.

China's domestic prilled urea prices were stable at Yn1,760-1,800/t ex-works in major exporting areas including Shandong and Hebei, equivalent to $286-292/t fob before trader margins.

Major buyer India's MMTC concluded its latest tender at $286.50/t cfr east coast, making Chinese cargoes uncompetitive. Low expectations for the tender prices have pressured Chinese exporters to cut their own prices. But the gas supply shortage may keep urea prices firm for the next couple of months.