OREANDA-NEWS. After a short-lived late spring rally, the US urea market is focusing on the imminent startup of new domestic and international capacity and its impact on prices.

Nola urea trade in June showed that the market can quickly decouple from production costs and the prices paid by importers. Traders caught short, logistics issues and relentless demand from end users caused bids to rise day after day. But when applications of fertilizer stopped, so did the bidding.

Before the spring rally finished urea prices had rebounded from the sub-$260/st fob Nola spring low to a brief high of $380/st fob Nola in mid-June. Prompt-loading urea prices held above $350/st fob Nola for all of June, but the rally reflected a temporary shortage, not a sustainable shift in fundamentals.

Prompt prices in July retreated to the same level as late-third quarter loading barges, near $290/st fob Nola, hastened lower by faltering demand abroad including in Brazil.

Carryout stocks from the 2015 spring season, once feared to be a risk for prices heading into summer, were ultimately limited. Fertilizer year imports for 2014-15 should be less than 500,000t above the prior year after being more than 1.1mn t ahead in the July-February period. The surplus compared to last year was likely consumed by rice acres back in July 2014.

But even with stocks largely depleted and a near 15pc rally in corn since the June lows improving farm economics, buyers are cautious about the urea price outlook for the balance of 2015 and the 2016 planting season as capacity additions in the US and abroad loom. The potential merger of CF and OCI might dampen the effect of increased capacity on prices.

The most impactful of this new production will be an expected additional 1.1mn st/yr from CF's Donaldsonville, Louisiana, nitrogen complex, expected in the third quarter. That supply equates to over a panamax-and-a-half per month of urea coming online at a time of limited consumption.

Then in 2016, another near 3mn st/yr of expected urea production will come online at various plants in the US, further reducing reliance on offshore product. How quickly imports scale back is unknown, particularly as international capacity is also increasing.

New plants in Algeria, Saudi Arabia and Indonesia will yield a net capacity increase of nearly 4.5mn t/yr by the end of 2015. Egypt has new facilities ready to produce if the country can secure gas supply. And there are more modern facilities in China displacing older, coal-fired plants.

New supply, both in the US and abroad, will result in the eventual shutdown of higher cost capacity. But in the interim, as the market finds its new equilibrium, prices are vulnerable.