In early July and early August, we released a series of strategic reports, namely "Two Mountains Are Singing Against each other" and "All sorts of things that can't be returned", and proposed that "the external demand is basically flat, inflation expectations are turning, and the urea September contract is slightly overestimated, the urea September contract that was empty in the previous period can be held, and the intervention can continue near the new high". During this period, the main change in the supply and demand pattern of urea at home and abroad was that the supply and demand at home and abroad gradually changed from tight balance to balanced state: after the COVID-19 epidemic spread in various countries last year, the double effects of global urea supply reduction and demand increase made urea enter a super tight balance state, and in January this year, it fermented to a state close to the gap between supply and demand, which made the domestic urea export on the right side of the capacity cost curve increase significantly year-on-year, and correspondingly, the domestic urea price continued to lead the international urea upward trend;

recently, with the global urea supply recovering slightly and the demand is basically flat, the pattern of urea supply and demand tends to be balanced, especially in the context of domestic urea demand reduction, the inflection point of supply and demand comes earlier, and the demand for autumn fertilizer has basically returned to the rhythm of previous years before it started. Based on the emergence of the inflection point of supply and demand pattern, the domestic urea price continued to fluctuate at a high level, and the price only returned to the previous high before the fourth bidding date, without a significant new high; After entering August, with the delay in printing the bid and the low demand in most parts of the northern hemisphere as a whole, the urea spot began to loosen, and the prices in various places fell by 1-15 yuan/ton. In the first half of July, urea futures mainly closed to the spot, and the basis converged from 5 yuan/ton to 25 yuan/ton, roughly returning to a reasonable level; In the second half of the month, urea futures fluctuated with the spot high level, and after entering August, it also weakened by 1 yuan/ton.

At present, domestic urea is in the stage before the demand for autumn fertilizer starts, but the demand for spring fertilizer in China has dropped year-on-year, and the demand for nitrogen in autumn fertilizer is less, so the current price is greatly tested. However, the variables of strong/weak supply and demand are still there, mainly from external demand as in the first half of the year. Looking forward to the urea autumn fertilizer market, we should first look at the expected fulfillment of domestic demand, then look at the degree of external demand relay, and finally look at whether the tight pattern at the cost end can be sustained. Specifically, the main favorable factors of urea at present are that domestic agricultural demand is about to start, domestic industrial demand is good, external demand is still there, sales are good, and enterprise storage capacity is low; The main negative factors are the continuous accumulation of inventory and the absolute high price and profit. On the whole, the current high spot valuation of urea is driving better, and higher prices need a better supply and demand pattern to match; In terms of strategy, the empty contracts in September in the early stage can be closed one after another, while the valuation of January contracts is normal, so it is recommended to wait and see.

First, it starts from domestic demand: from "increasing the quantity without increasing the price" to "decreasing the price without decreasing the price"

As can be seen from Figure 1, the apparent domestic consumption of urea in the first half of 22 increased by 9% compared with that in 219, and the export was basically the same in the same period, which made the apparent consumption growth rate of urea in the first half of the year lower than that in China. In the case of a large increase in demand, the spot prices of urea and synthetic ammonia continued to be depressed after the beginning of March 22 (see Figure 2 and Figure 3). In addition to the cost collapse factor caused by the sharp drop in energy prices, the main reason for the deviation between quantity and price is that domestic devices are on the far right side of the global capacity cost curve. When the gap between supply and demand caused by supply reduction and demand increase does not need the most expensive domestic devices to fill it on a large scale for the time being, The high start-up and high daily output of domestic urea plants (see Figure 4) are interpreted as an oversupply situation in the later period. Based on the above pessimistic expectations, the domestic urea price and demand situation have formed a situation of "ice and fire".

this year is similar to last year, and there is also a deviation between quantity and price: in the first half of the year, the apparent domestic consumption decreased by 6%, while the spot price of urea increased by 5%, and during the period from December 22 to the first quarter of 221, there was a rare situation that the domestic price increase lagged behind the international price increase. "Reducing the quantity without reducing the price" stems from the fact that domestic urea plants have become an important force to fill the international supply and demand gap after the international supply and demand gap has gradually fermented, so the domestic supply not only needs to match the domestic demand, but also needs to bear part of the international demand; Therefore, although there is a reduction in domestic demand, but the reduction is far less than the increase in international demand, the domestic supply and demand pattern is even more tense, and after forming a substantial number of exports at the end of the first quarter, it has once again become the leader of the international price series.

At present, China is at the node before the demand for autumn fertilizer starts, and the supply and demand situation is gradually recovering from the downturn. On the supply side, there are still many new devices planned to be put into production in the medium and long term, but the progress is disturbed by policies and other factors, and there is great uncertainty. At present, many projects are postponed; At present, the daily output is 155, tons, and there is still 1% room for short-term supply; On the whole, there is a certain redundancy in supply during autumn fertilizer period. There is a differentiation in demand. The demand for autumn fertilizer is similar to that for spring fertilizer, and there may be a reduction of about 5%. Industrial demand is expected to maintain normal growth under the condition of good profits; On the whole, there is a certain pressure on domestic demand during the autumn fertilizer period, especially in the recent urea plant, the number of days of pre-harvest and the ratio of production to sales both hit a new low in the year, which is 2-3 weeks later than last year's demand start. The details are as follows:

At the beginning of this year, the urea production capacity expanded for the first time in the past five years. However, after the first quarter, a number of projects originally planned to be put into production in the second quarter were passively postponed, so the daily output of about 2,-3, tons was increased by adding new devices, and the supply ceiling was limited, which was still around 17, tons. The operating rate and daily output of urea plant rebounded rapidly after centralized maintenance (see Figure 4) and returned to the previous average; However, the number of days in advance and the ratio of production to sales did not rise synchronously (see Figure 5), which continued the trend of weakening since the beginning of June and continued to hit a new low in the year. Generally speaking, there are two uncertain factors in the current supply. The first is when the inflection point of the pre-receipt and the stronger ratio of production to sales will appear and whether it can be maintained in the high boom zone; The second is whether the domestic urea plant can continue to operate in the upper limit of daily output if the demand for autumn fertilizer is good after two years of high-load operation.

the domestic agricultural demand of urea is analyzed in the annual report "the heavy weapon of the country, which has been strengthened for a long time". It is predicted that the intensity of agricultural demand in 221 will be between 219 and 22, which is closer to the value in 22. According to the actual data, with the steady growth of domestic industrial demand, the domestic apparent consumption of urea in the first half of 219 -221 was 24.3 million tons, 26.2 million tons and 25 million tons respectively, that is, the agricultural demand in 221 was weaker than expected in the annual report. Although the demand was between 219 and 22, it was closer to the level in 219. Therefore, it is expected that the demand for autumn fertilizer of urea will be consistent with that of spring fertilizer this year, with a reduction of about 5% year-on-year. As can be seen from the supply and demand situation of compound fertilizer in Figure 6, compound fertilizer continues to be in a state of low start-up and low inventory when the increase of raw materials such as nitrogen, phosphorus and potassium is much greater than that of finished compound fertilizer. The apparent consumption in the first half of the year is higher than that in 219 but lower than that in 22, which indirectly confirms that the domestic demand for chemical fertilizer this year is less than that in 22.

Compared with the agricultural demand, the industrial demand of urea continues to exceed expectations, in which the price of melamine has increased by 2% since the National Day last year, and the gross profit has continued to be above 4, yuan/ton (see Figure 7); Stimulated by high profits, the operating rate of melamine factory has been at an extremely high level for nearly five years. Dynamically, the high profit situation of melamine is difficult to sustain, but it can still maintain a reasonable profit with a high probability, mainly because the domestic melamine production capacity accounts for about 7% of the world, and the foreign demand gap itself is solved by domestic products. The recovery of foreign supply in the later period has little impact on melamine exports.

The demand for wood-based panels is weak. In the long term, the output of wood-based panels has entered a period of low growth, with the growth rates of 1.3%, 3.2% and 3.2% from 218 to 22 respectively, and the annual demand for urea has increased by about 3, tons. In the medium term, the real estate data weakened month by month. From January to July this year, the new construction slowed down while the completion accelerated, which made the growth rate of the construction area of the stock decline, corresponding to the decline in the base of the demand for wood-based panels; In the short term, the real estate industry is still subject to policy constraints, which can be indirectly confirmed by the operating conditions of real estate companies and the performance of capital markets. Generally speaking, wood-based panels will maintain a stable growth pattern with a high probability, but the growth rate is lower than that of melamine. Based on the situation of melamine and wood-based panels, it is expected that the industrial demand for urea will maintain a positive growth.

To sum up, there is 1% room for domestic supply of urea during the autumn fertilizer period, and the domestic demand is weaker than that in 22, so it is not too difficult to maintain the balance between supply and demand. The variable that may break the balance still comes from external demand, which is the biggest X factor that has promoted the development of the market since the third quarter of last year.

Second, it is obvious in external demand: from "increasing marginal effect" to "decreasing marginal effect"

Compared with the deviation between domestic demand and price, external demand and domestic price remain the same: in the second half of 22, compared with the second half of 219, exports increased by 6, tons, and spot prices increased by 12%; The first half of 221 increased by 7, tons compared with the first half of 22, and the spot price increased by 5% (see Figure 2). In addition, it can be seen that in the second half of 22 and the first half of 221, the price increase of urea shows great difference when the export increment and growth rate are roughly similar, showing a state of "increasing marginal effect". It can also be seen from the bidding situation of the fourth bid printing in 22 (see the yellow area in Table 2) that when the domestic supply of urea became the last line of defense of the global urea trade system, that is, the proportion of domestic supply increased greatly, the global supply redundancy of urea dropped to a very low level, the supply-demand pattern entered a super tight balance state, and the price elasticity began to increase rapidly. By the end of 22, with the increasingly tight supply of goods, the international urea supply and demand pattern will further ferment to a soft gap state, that is, the price needs to be greatly increased to match the continuous increase in demand. During the one-month period from the end of December 22 to the end of January 221, the international urea price rose by 33%, while the domestic urea price passively followed up, only rising by 14%. As the price difference between domestic and foreign markets continues to widen and the printed price continues to be higher than the market price, domestic urea exports increase rapidly, which alleviates the gap between international urea supply and demand, and at the same time, makes domestic urea supply and demand change from a wide balance to a tight balance (see Figure 1). Since the beginning of April, the inventory of enterprises has continued to decline, and the supply in the domestic market has become increasingly tight, rising by 4% from the end of January to the beginning of August, which is higher than the 32% increase of international urea in the same period.

where is three finally? Spot price/profit high vs basis high

Recently, the prices of energy and some chemicals have dropped in different degrees: the downward trend of energy prices is mainly due to the narrowing of the gap between supply and demand caused by the decrease of travel demand in South and Southeast Asia, while the downward trend of prices of daily necessities and durable goods directly facing terminals such as polyester and polyolefin is mainly due to the seasonal weakening of demand; In the future, the gap between supply and demand of energy will be further narrowed, which will put pressure on energy prices, while most chemicals have different levels of peak season expectations, and there is room above the price. At present, compared with other chemicals, urea has a higher profit. From the time dimension and its own vertical comparison, the profit of urea processes is also at a high level. Considering that the absolute price of urea spot is also extremely high in recent 1 years, the spot valuation of urea is high, and there is a large room for price and profit compression; However, the high price and profit of urea are reasonable in the case that the production schedule at home and abroad is less than expected, and there is a temporary lack of compression motivation; The return of valuation in the later period may be due to factors such as the downward trend of energy prices, lower-than-expected external demand and higher-than-expected expansion of foreign production capacity.

The urea futures contract partially corrects the overestimation of spot by high basis. Recently, the basis of each contract has dropped from high to medium high, with the basis in September near 22 yuan/ton and in January near 36 yuan/ton. In view of the fact that the contract basis in July is near 16 yuan/ton, it is expected that the convergence space of the contract basis in September is limited, while the basis in January still has a large convergence space. The path of basis regression in the early stage is that futures converge to spot, but the probability of convergence from spot to futures is higher now: the main factor that determines the convergence path is whether the increase of external demand can make up for the decrease of domestic demand. If external demand is delayed, the domestic supply will remain loose, and the spot will move closer to futures in the future, and the basis will be repaired by weakening prices; On the other hand, if domestic exports are needed to make up for the international gap again, the future futures will move closer to the spot and repair the basis by strengthening the price.

this article is from yongan futures.