In the first three quarters of 2026, urea prices moved within a range before shifting lower.

Supply side: Production capacity continued to be added, with operating rates maintaining historic highs of 85%-90%, and output from January to August growing by over 7% year-on-year.

Demand side: Agricultural demand showed rigid growth, while industrial demand declined under the drag of the real estate chain.

Exports: After quota restart, actual export volumes fell far short of expectations due to dual constraints from export price caps and declining international prices.

Looking ahead to the fourth quarter of 2026 and 2027: On the supply side, capacity will reach 77.8 million tons in 2026 with net additions of approximately 3.5 million tons, and a further increase of about 2.41 million tons in 2027. Coal-based operating rates have already fallen from 88.77% in March to 80.10% in September, and cash flow pressure on fixed-bed and southwest gas-based facilities is beginning to materialize as production cuts in the fourth quarter.

Under the baseline scenario, 2026 production is estimated at 76.23 million tons (+7.2%), which would drop to 74.93 million tons (+5.4%) if production cuts are concentrated, with a neutral scenario of 77.15 million tons for 2027.

On the demand side, agriculture and other uses grew +3.7% year-on-year, compound fertilizer +2.3%, artificial boards +8.7%, and melamine +8.8%, with total domestic demand of 70.75 million tons (+4.3%), significantly slower than supply growth. Domestic demand is expected to fall back to 70.49 million tons in 2027, with surplus pressure coming primarily from production rather than demand.

Cost side: Rising energy prices are reshaping the urea cost curve. From January to September, Qinhuangdao 5,500 kcal low-sulfur coal rose from 689 yuan/ton to 985 yuan/ton (+43.0%), and Ordos Q5500 rose 53.0%. However, the weighted full cost of coal-based urea only rose from 1,418 to 1,562 yuan/ton (+10.1%). Across 144 facilities (74.30 million tons), full cost stands at 1,587 yuan/ton and cash flow cost at 1,320 yuan/ton, with a 267 yuan/ton depreciation buffer supporting "losses without production cuts."

Domestic industrial demand remains weak, with new housing starts and the national building materials and home furnishing prosperity index showing no significant improvement. However, export substitution demand provides support: in 2026, artificial boards (urea-formaldehyde resin) account for 5.98 million tons of urea demand (+8.7% year-on-year), and melamine accounts for 5.01 million tons (+8.8%). In 2027, under the drag of the real estate chain, growth rates are expected to fall to +2.3% and +1.8%.

Urea export quota policy continues, but "export price caps plus international urea prices falling sharply from March highs" have kept actual volumes far below expectations. Total exports in 2026 are projected at 4.54 million tons, down 7.1% from 4.89 million tons in 2025. In 2027, under the assumption of quota expansion, exports are estimated at 4.80 million tons, but the policy fulfillment rate is about 0.65-0.7, and port consolidation, customs declaration, and actual export are three stages that cannot be equated.

Overall, the supply-demand balance has shifted from a slight surplus (+410,000 tons) expected in the semi-annual report to a surplus of 940,000 tons in 2026, further expanding to 1.86 million tons in 2027 under the neutral scenario. Domestic and international price spreads remain, and export quota policy continues to restrict price convergence, but other fertilizers and furniture board exports indirectly drive urea substitution demand. The race between supply inertia and rising costs, as well as the game of export policy, remain the focus of market attention.

Risk warnings: Changes in export policy; the extent of coal and gas price catch-up increases; the impact of heating season gas price increases on production cuts at gas-based facilities.

Q3 2026 Market Review

In the third quarter of 2026, urea prices first declined then rebounded before falling back at quarter-end: since June, prices fell from 1,844 yuan/ton to a yearly low of 1,705 yuan/ton on July 17. Subsequently, rising coal prices strengthened cost support, and coupled with rising expectations for export quota implementation, prices rebounded to 1,822 yuan/ton on September 8. After the third batch of quotas landed in mid-September, positive factors were exhausted, downstream absorption was insufficient, and prices fell back to 1,758 yuan/ton by September 24.

1. Supply and Inventory: Daily output in Q3 remained near 22,000 tons/day in July. Entering August, coal prices continued to rise and coal-based profits narrowed. Under full cost accounting, approximately 34% of national capacity was loss-making (about 95% for anthracite fixed-bed facilities). Some facilities reduced loads for maintenance, daily output fell to 20,000-21,000 tons/day, and operating rates edged lower from Q2 highs. Corporate inventories accumulated continuously in June-July and peaked in mid-July, with high inventories suppressing prices to the yearly low of 1,705 yuan/ton on July 17. In late August, corporate inventories turned from rising to falling, port inventories accumulated then destocked, and after the inventory inflection point was confirmed, prices stabilized and rebounded.

2. Costs: From late July, coal prices continued to rise, coal-based profits narrowed and the cost center shifted upward, which was the main support for the price rebound after August and an important trigger for maintenance load reductions and falling daily output from August. In September, coal prices held firm at highs, and cost support marginally weakened.

3. Export Policy: Exports continued under quota management. The third batch of voluntary quotas landed in mid-September (possibly exceeding 1.5 million tons). Rising expectations drove price rebounds, and after implementation, positive factors were exhausted. In late September, India's RCF re-tendered 1.7 million tons, providing tail support for quarter-end prices.

4. International and Macro: Middle East tensions periodically pushed up international energy and fertilizer prices. International urea prices shifted upward and export profit margins expanded. However, domestic downstream procurement was mainly need-based, limiting price upside, and prices came under pressure and fell back at quarter-end.

Capacity Continues to Be Added, Operating Rates Remain at High Levels

Urea capacity is in an expansion cycle. Currently, China's urea industry remains in a phase of new capacity deployment growth since 2020, primarily using new coal gasification processes to gradually replace outdated capacity. New facilities have advanced processes and lower energy consumption, but since 2026, the coal price center has clearly shifted upward, and cost support is transitioning from "gradually declining" to "rising again," amplifying the cost disadvantage of outdated capacity. In the first three quarters of 2026, approximately 3.1 million tons of new capacity was commissioned, about 1.55 million tons was eliminated, with net additions of approximately 1.55 million tons. Full-year 2026 net additions are expected at approximately 3.5 million tons, with year-end capacity reaching 77.8 million tons (operating basis). A further 2.41 million tons will be added in 2027, reaching 80.21 million tons by year-end, and the expansion cycle is not yet over.

New Capacity Continues to Be Deployed, Some Outdated Capacity Exits

In June 2023, the National Development and Reform Commission and four other departments issued the "Industrial Key Area Energy Efficiency Benchmark and Baseline Levels (2023 Edition)," which serves as the direct basis for current elimination work. This document added the urea industry as a key area and clearly stipulated that existing urea production facilities with energy efficiency below benchmark levels should in principle complete technological upgrades or be eliminated by the end of 2026. This set a clear final deadline for elimination work. In the first half of the year, replaced fixed-bed process capacity reached 1.15 million tons, and the fixed-bed process share fell to approximately 15.5%. According to new capacity commissioning plans, projects under construction total 13.168 million tons (25 sets), with 670,000 tons (2 sets) about to be commissioned. After item-by-item verification, some are equivalent replacements, park integration, or relocation substitutions. Under balance sheet accounting, net additions for 2026 are approximately 3.5 million tons and a further 2.41 million tons in 2027. The current facility table shows that in the past three years (2024-2026), a cumulative 16 urea facilities with total capacity of 6.49 million tons have been eliminated (2.34/2.55/1.60 million tons by year), and outdated capacity clearance continues.

Gas-Based Urea Faces Significant Cost Pressure

In 2026, urea spot prices remain significantly above the cash flow cost of fixed-bed facilities, while natural gas-based urea facilities continue to hug the full cost line. The US-Iran conflict in March significantly reduced stable international natural gas supply, with UK natural gas futures prices surging over 80% at one point. China's natural gas import dependency remains at 40%. Although international gas prices have now fallen back, they remain approximately 30% above pre-conflict levels. Based on a 144-facility model, the weighted full cost for gas-based urea is 1,720 yuan/ton and cash flow cost is 1,450 yuan/ton. For southwest gas-based facilities, cash flow cost is 1,562 yuan/ton, and a heating season gas price increase of 0.30 yuan/cubic meter would push them into cash losses.

Urea enterprise operating rates have fallen from highs, with maintenance affecting output. In Q1 2026, urea profits were reasonable, and operating rates remained at absolute highs near 90% for an extended period. Since Q2, energy cost pressure emerged, factory maintenance increased, and Q3 operating rates fell further. Coal-based operating rates dropped from 88.77% in March to 80.10% in September, with national daily operating rates at approximately 80.7%. Gas-based full cost is approximately 1,720 yuan/ton (excluding tax, corresponding to approximately 1,875 yuan/ton including tax). Export quotas are tilted toward gas-based enterprises, so short-term operating rates will not drop significantly, but the heating season gas price increase in Q4 is the main trigger for production cuts.

2026 Urea Production Growth May Reach 7.2%

Urea operating rates have passed the March high and entered a marginal decline channel, so production growth will be less than capacity growth. Based on urea capacity commissioning plans, enterprise shutdown plans, and historical maintenance patterns, 2026 urea production is expected to grow approximately 7.2% year-on-year to 76.23 million tons. If Q4 fixed-bed and gas-based losses materialize into concentrated production cuts, output may fall to 74.93 million tons (+5.4% year-on-year).

If Urea Profits Decline Sharply Leading to Production Scenarios

In 2026, global energy prices showed roller-coaster movements due to geopolitical situations. Although crude oil prices have fallen back to pre-conflict levels, the price center for natural gas, the primary feedstock for international urea production, has clearly shifted upward, and gas-based urea facilities will continue to face cost pressure. Under the 144-facility model, a gas price increase of 0.30 yuan/cubic meter would expand cash flow loss-making capacity from 3.33 million tons to 10.44 million tons.

Rising Energy Prices Reshape the Urea Cost Curve

Based on item-by-item calculations of 144 operating facilities (74.30 million tons/year), the national weighted full cost is 1,587 yuan/ton and weighted cash flow cost is 1,320 yuan/ton, with a 267 yuan/ton depreciation and amortization buffer between them. Under full cost accounting, the loss-making share is 34.3% (25.48 million tons), while under cash flow accounting it is only 4.5% (3.33 million tons). This is the economic foundation that allows "losses without production cuts" to persist.

Coal Prices Up 40%, Coal-Based Costs Up Only 10%

More than half of coal-based capacity uses bituminous coal new gasification with provincial pithead prices and group long-term contract prices, decoupled from market spot prices such as Qinhuangdao. Therefore, the 43%-53% increase in spot coal prices did not fully translate into costs, with coal-based weighted full cost rising only 10.1%. This also means that once pithead prices and long-term contract prices catch up, there remains significant room for cost increases that has not yet been released.

Full Cost Loss-Making Share at 34.3%, but Cash Flow Loss-Making Share at Only 4.5%

The 267 yuan/ton depreciation and amortization buffer between full cost and cash flow cost determines the boundary of "losses without production cuts": if coal prices rise another 200 yuan/ton, the full cost loss-making share jumps from 34.3% to 73.6%, while the cash flow loss-making share only moves from 4.5% to 8.0%. However, a gas price increase of 0.30 yuan/cubic meter adds only 4.2 percentage points to the full cost loss-making share, but pushes the cash flow loss-making share to 13.9% (10.44 million tons) in one move, with gas-based facilities accounting for 7.11 million tons (5.79 million tons in four southwestern provinces and 1.32 million tons in Hainan) directly entering cash losses. The tax-inclusive market price of 1,734 yuan/ton is the line for full cost loss-making share exceeding half, 1,702 yuan/ton is the line for cash loss-making share breaking 10%, and 1,577 yuan/ton is the comprehensive production cut line for breaking 20%.

Operating Rates Marginally Declining, 2027 Production Neutrally Revised Down to 77.15 Million Tons

Since March 2026, coal-based operating rates have fallen from 88.77% to 80.10% (-8.67 percentage points, -3.17 percentage points after deseasonalization, -6.34 percentage points annualized). The spread between small granular ex-factory prices and anthracite lump coal delivered prices has narrowed from 770.4 yuan/ton to 367.0 yuan/ton (-52.4%). Every 100 yuan/ton decline in the spread corresponds to a 0.79 percentage point decline in deseasonalized coal-based operating rates.

Seasonal Divergence in Ammonium Sulfate, Ammonium Chloride, and Compound Fertilizer Exports

Export seasonality: ammonium sulfate and ammonium chloride peak from March to July, compound fertilizer from April to August, corresponding to overseas spring planting and Southern Hemisphere stockpiling. In 2026, there was clear divergence: January-July ammonium sulfate exports were 11.479 million tons (+4.4%, continuing to set new highs), ammonium chloride 1.283 million tons (+1.6%, with July alone at 59,000 tons, a three-year low), and compound fertilizer 405,000 tons (-88.7% year-on-year, binary compound fertilizer nearly zero), due to differentiated tightening of export policies.

Impact of 2026 Export Policy Adjustments on Urea Demand

In 2026, export controls expanded from urea to ammonium sulfate, ammonium chloride, and compound fertilizer, with three channels tightened simultaneously, causing nitrogen to flow back domestically and directly and indirectly bearish for urea demand. Compound fertilizer was most directly affected: phosphorus-containing compound fertilizer export declarations were suspended from March 14 to August 31, with January-July exports down 3.184 million tons year-on-year, dragging urea industrial demand by approximately 600,000 tons based on a unit consumption of 0.20. Ammonium sulfate was included in legal inspection on July 16, with July exports down 27% month-on-month to 1.307 million tons, costs up 30-80 yuan/ton, and backflow substituting for urea. Ammonium chloride has been under quota self-discipline since June, combined with lower FOB prices, with July exports at 59,000 tons, a near three-year low, as enterprises increased blending ratios to suppress urea. Combined, the three items dragged urea demand by approximately 600,000 tons in January-July. On September 1, phosphorus-containing compound fertilizer exports resumed under "license + quota" management, with a full-year net impact of approximately 600,000-800,000 tons.

Rising International Grain Prices Expected to Boost Agricultural Demand

Grain planting area and production continue to rise. From 2020 to 2025, grain planting area resumed growth, and grain production repeatedly hit new highs. The central government requires grasping grain and important agricultural product production, stabilizing grain planting area, exploring the establishment of an inter-provincial horizontal benefit compensation mechanism between grain production and sales areas, and strengthening farmland use control through measures such as returning forests to farmland, intercropping, and contiguous farmland consolidation to tap area potential. The "New Round of One Trillion Jin Grain Production Capacity Improvement Action Plan (2024-2030)" sets a target of adding over one trillion jin of national grain production capacity by 2030 through variety improvement and integrated planting technology (such as dense planting technology and integrated water and fertilizer management). Corn and soybeans are the main target varieties, and their per-unit yields need significant improvement.

Increased Corn Planting Brings Urea Demand Growth

Grains (corn, wheat, and rice) are China's main food crops. In recent years, corn planting area has increased significantly, rice planting area has slightly decreased, and wheat planting area has remained relatively stable. In terms of per-unit yield, corn's improvement has also been most significant, with 2025 corn yield per unit increasing 10.0% compared to 2017. According to agricultural product income compilation data, urea required per unit land area for corn is approximately 10% more than for rice. Converting 1,000 thousand hectares from rice to corn would bring an additional 16,300 tons of urea application.

Agriculture's Systematic Leap from "Scale Expansion" to "Connotative Development"

As the opening year of the 15th Five-Year Plan in 2026, China's agricultural policy, while continuing to prioritize "three rural" work, shows a profound transformation toward systematic, precise, and technology-driven approaches. The Central Document No. 1 and the National Development and Reform Commission's supply guarantee and price stabilization notice serve the "New Round of One Trillion Jin Grain Production Capacity Improvement Action" and the "Store Grain in Land" strategy. Specific measures such as high-standard farmland construction, saline-alkali land treatment, and "non-grain" farmland control will directly or indirectly bring marginal growth in urea usage. For example, saline-alkali land treatment converts marginal land into effective farmland, bringing clear incremental demand for urea. Therefore, although long-term fertilizer efficiency per unit area will improve, the guarantee of farmland area and the goal of increasing per-unit yield ensure stable to increasing agricultural urea demand.

2026 Agricultural and Other Demand May Continue to Grow 3.7%

In recent years, international conflicts have continued, and the world grain market has been imbalanced in supply and demand, so China has placed greater emphasis on agricultural production. Since 2020, farmland area has resumed year-on-year growth. Through returning forests to farmland, prohibiting abandonment, and ensuring grain cultivation, effective planting area has increased. High-standard farmland construction and border area planting growth have also brought urea demand per unit land. Overall, 2026 agricultural and other demand is estimated at 49.09 million tons (+3.7% year-on-year), and 2027 is basically flat (49.01 million tons).

2026 Compound Fertilizer Demand May Grow 2.3%

Considering that international fertilizer market prices remain elevated, ammonium sulfate and compound fertilizer exports are large and growing faster than urea, compound fertilizer exports may grow more. Combined with steady domestic agricultural demand growth, 2026 compound fertilizer demand for urea is estimated at 10.66 million tons (+2.3% year-on-year). In 2027, affected by export declines, it will slightly decrease to 10.26 million tons (-3.8%).

Industrial Demand Generally Weak, Real Estate Difficult to Recover, but Export Demand Expected to Increase Significantly

After the Spring Festival, melamine prices rebounded rapidly, with gains reaching 45% compared to pre-holiday levels. After profit improvement, production also grew significantly by approximately 30%. Melamine and urea-formaldehyde resin demand is highly correlated with the real estate industry. Currently, new housing starts remain unsatisfactory, and the national building materials and home furnishing prosperity index has not improved significantly. Domestic demand remains weak. International urea prices have risen significantly, melamine export profits have grown substantially, driving rapid growth in export demand. Market trading activity has increased, factory inventories have declined rapidly. Prices were at low levels for an extended period in 2025, with some factories touching cost lines and operating rates at low levels, providing a foundation for significant increases.

Board Export Demand Growth Significant

Geopolitical factors have pushed up international energy prices, and conflicts have affected nearly 30% of global seaborne urea trade. Artificial board exports, which had already grown significantly since 2025, are growing further as export profits improve. However, limited by generally average furniture profits, the possibility of continued significant export growth is relatively low. Attention should be paid to whether furniture export profits can recover.

2026 Melamine Demand May Grow 8.8%

Currently, real estate demand still shows no signs of improvement, but international demand has strengthened since Q2, although it fell back somewhat in H2. Export substitution demand remains. 2026 melamine demand for urea is estimated at 5.01 million tons (+8.8% year-on-year). In 2027, growth is expected to fall to +1.8%.

2026 Urea-Formaldehyde Resin Demand May Increase 8.7%

2026 urea-formaldehyde resin (artificial board) demand for urea is estimated at 5.98 million tons (+8.7% year-on-year). In 2027, dragged by the real estate chain, growth is expected to fall to +2.3%.

Export Policy Repeated Game-Playing

India Capacity Continues to Be Deployed

Indian fertilizer plant commissioning progress is typically delayed, and geopolitical conflicts will severely affect urea raw material supply and costs. India's natural gas import dependency is as high as 50%, and natural gas processes account for over 90% of India's existing urea capacity. Geopolitical conflicts have reduced natural gas supply to fertilizer plants by 30%. The Talcher project was 72.97% complete as of August 2026, with commissioning postponed to December 2027. The NIPU-2026 policy was approved by the cabinet in July.

India Tender Situation

India's cumulative tenders in 2026 totaled 9.148 million tons, of which approximately 1.6 million tons were supplied by China in the August RCF round. India's urea import demand may increase.

Other Countries' Urea Capacity Continues to Grow

In 2026, new urea capacity outside China and India is expected at 4 million tons.

Export Potential Profit Margins Remain Large

Since March, under geopolitical influence, international urea prices have risen nearly 50%. However, due to strict export policy restrictions, Chinese urea was not exported until export quotas were re-approved at the end of May. Export prices remained restricted, and after international urea prices fell sharply, exports were slow to ramp up.

2026 Export Volume Finely Regulated

After domestic urea prices declined in 2025, export policy was relaxed in the form of quotas, with full-year exports of 4.89 million tons. In 2026, quotas were gradually released, with the third batch releasing approximately 1.5 million tons in mid-September. However, due to export price caps and international urea prices falling sharply from March highs, full-year exports are estimated at 4.54 million tons (-7.1% year-on-year). In 2027, under the quota system, exports are estimated at approximately 4.80 million tons.

Balance Sheet

In 2026, domestic new capacity continues to be deployed, with year-end capacity reaching 77.8 million tons and net additions of approximately 3.5 million tons. However, operating rates have passed the March high, and Q4 losses at fixed-bed and gas-based facilities may materialize into production cuts. Current baseline (no production cuts) output is estimated at 76.23 million tons (+7.2% year-on-year), and under loss-condition production reduction scenarios at 74.93 million tons (+5.4% year-on-year). On the demand side, agricultural and other demand grew 3.7%, compound fertilizer 2.3%, artificial boards 8.7%, and melamine 8.8%, with total domestic demand of 70.75 million tons (+4.3%), significantly slower than supply growth. Exports are approximately 4.54 million tons, down 7.1% from 2025.

Annual Balance Sheet

Overall, the 2026 surplus is approximately 940,000 tons. In 2027, under the neutral scenario (operating rates revised down 6.5% year-on-year, exports raised to 4.80 million tons), production is 77.15 million tons and the surplus expands to 1.86 million tons. The negative feedback between the price center and operating rates has not yet been internalized, and is the most important variable to watch going forward.

Author: Kang Jian, Practicing Qualification No.: F03088041, Trading Advisory Certificate No.: Z0019583, Contact: kangjian@zjtfqh.com