A strong start to 2015 for Chinese urea exports looks to have kick-started a price war among producers of the fertilizer which bodes ill for profitability prospects, Societe Generale said, trimming its outlook for the sector.



China's urea exports soared 181% year on year to a "very high" 1.68m tonnes in January, led by a surge in shipments to India, but with volumes heading to the US up 56% at 180,000 tonnes, SocGen said.



The "sharp increase" in shipments "suggests a rebound in urea production" in China, and follows the revamp of the country's export tariffs to a flat levy, from a previous system of alternating tariffs designed to ensure sufficient domestic urea supplies at times of greatest need.



However, the bank declined to raise a forecast of a 29% rise to 17.5m tonnes in China's full-year urea exports – and even warned of the potential for a downgrade.



'Intense competition'



The caution reflects the reaction of urea producers in other geographies to the strong Chinese shipments, with "intense competition" prompting drops of $25-40 a tonne in prices.



"We see this potentially representing a first move towards making Chinese urea unviable," SocGen analyst Rajesh Singla said, noting the pressure on costs from relatively high prices of anthracite coal for producers using it as their main energy source.



Indeed, the lower prices could break down the price discipline which has held between China's urea manufacturers using anthracite coal, responsible for some 42% of capacity, and the 27% which use thermal coal.



"If the thermal coal-based producers continue to face resistance in gaining market share, we believe they could push down the floor" that Chinese manufacturers have stuck to.



'Contagion effect'



The price war could provoke some damage to urea groups elsewhere too, if China's huge exports in January have mopped up some demand that would more usually occur in the spring.



"We believe that given such high exports from China… spring demand may not provide much support [to prices] as we could see a contagion effect from higher Chinese exports spreading across the global nitrogen market," Mr Singla said.



While remaining "neutral" on shares in nitrogen producers, SocGen said that it now had "a negative bias", albeit with currency weakness underpinning relatively favourable view of stock in Norway's Yara International and Russia-based Acron.



"The direction of coal prices in China will be crucial, as it could affect the intensity of price war," the bank added.





agrimoney