China丨Hot weather continues, fertiliser companies shut down in Sichuan and Chongqing

As the hot weather continues in Sichuan and Chongqing, local fertiliser companies will continue to shut down after experiencing 10 consecutive days of power restrictions.

A few days ago, the restrictions of power supply in Sichuan was extended from the 5th to the 10th, which was originally scheduled to end at 24:00 on August 25. But at present, chemical enterprises in Sichuan are still in the state of power limitation and shutdown.

"The construction will not start tomorrow, because the high temperature weather continues. We expect production can start from next week."  A staff from fertilizer company told.

Recently, power restrictions have triggered an almost complete shutdown of urea plants in the Sichuan and Chongqing regions, as well as their downstream compound fertilizer plants. A research report expects that if all urea plants in the region stop, the impacted daily production will be around 18,000 tons.

Fertilizer enterprises resumption delayed again as high temperatures persist

Staff from Sichuan Lutianhua said that production will be shutdown in September every year for maintenance, and the company has adjusted to bring forward some of the maintenance work due to the high temperature and power restrictions. 

During the first round of power limitation, Lutianhua announced that all the production units in Naxi District of Luzhou will be shut down on August 15, 2022. During the shut down period (from 0:00 on August 15,2022 to 24:00 on August 20, 2022), the urea output will be reduced by about 35,000 tons and the methanol output will be reduced by about 10,000 tons. It is expected that the net profit attributable to the listed company will be reduced by about 30 million yuan.

Subsequently, the second round of power rationing required an extension of 5 days. A compound fertilizer producer in South China said that recent company data showed that in August, the company's production and sales were both 0, and its income was also 0. This should be the situation commonly faced by the chemical industry in Sichuan. For downstream enterprises, they are also worried about the price rise caused by the disruption of the supply side.

"All my upstream and downstream customers have stopped working," an agrochemical company told reporters. For local fertilizer traders, the heat and power cuts have mainly affected the transportation, with many transportation lines suspended due to safety concerns, resulting in the accumulation of goods on corresponding branch lines.

However, the impact on orders was not significant. One reason for this is that the fertiliser industry has a practice of entering into long term orders and,although the physical properties of fertiliser products will change at high temperatures, the chemical properties will not and will not affect their use.Therefore, short-term factors will not have an impact on orders.

Recently, Sichuan Provincial Economic and Information Department and State Grid Sichuan Electric Power Company issued Urgent notice on extending the scope of implementation of power to the people by industrial enterprises, which expanding the implementation of power to the people by industrial enterprises in 19 cities (autonomous prefectures) of the province (except Panzhihua and Liangshan).

Sichuan Meifeng Chemical Industry Co. Ltd., another fertilizer enterprise in the province, also announced on August 16 that due to the shortage of power supply, the company and its chemical fertilizer and compound fertilizer branchs (the production base is located in Deyang economic and Technological Development Zone) will temporarily stop production from 12:50 on August 15, andit is expected that the production will stop until 24:00 on August 20. The suspension is expected to affect urea production of about 15,000 tons and compound fertilizer production of about 0.6 million tons.

According to the announcement, Sichuan Meifeng Chemical said that the company's current product inventory is relatively adequate and the temporary suspension of production affected by the power supply will not have amaterial adverse impact on the operating results.

Supply contraction pushes up fertilizer prices

At present, the electricity restriction in Sichuan has accumulated for 10 days,causing the spot price of urea in the low demand season to rise slightly.

According to Everbright Futures statistics, the current urea spot market atmosphere has further improved, with prices in various regions increasing by 10~50 CNY/ton. 

The industry generally believes that the short-term power limitation in Sichuan has limited impact on urea price. Industry experts pointed out that in the later period, with the relief of high temperature weather, the daily output of urea may rise, and the demand volume of autumn fertilizer market is relatively limited, so the supply and demand of urea may still tend to be loose, and the space for price rise is relatively limited.

Specifically, on the demand side of urea, there was a lot of shutdown in the downstream industries of urea such as melamine in Sichuan and Chongqing last week, which led to a significant drop in the demand for urea industry. Some local compound fertilizer enterprises reduced the operation load of compoundfertilizer due to the low season of fertilizer demand, thus ensuring the normal production of other products. As of August 18, the startup rate of China's compound fertilizer industry was 22.83%, and the start up rate of melamine industry was 49.81%, both of which were at the lowest level in recent years.Therefore, the demand of urea downstream industry was limited or exceeded the supply side.

On the supply side, according to the analysis of CCB Futures,the gas head unit still has centralized shutdown due to power limitation in Sichuan,but the coal head unit over hauled in the early stage has centralized production resumption plan at the end of August, and the daily urea output remains at thelow level of 138,600 tons.

It is worth mentioning that in the international urea market, due to the recent energy shortage and the high priceof natural gas, the cost of nitrogen fertilizer plants in Europe keeps rising,which may lead to plant closure and supply contraction. Global chemical fertilizer prices have risen sharply and the gap between Chinese and foreign prices is widening. In the second half of the year, the economic operation ofthe fertilizer industry is still facing a series of unstable and uncertain factors.