Alleged price monopoly! **NDRC: Severe penalties imposed on Ordos, Yili, Junzheng, Tianyuan, and Yinglite

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Alleged price monopoly! **NDRC: Severe penalties imposed on Ordos, Yili, Junzheng, Tianyuan, and Yinglite. On September 7, several listed companies including Tianyuan Group (002386, SZ) and Yinglite (000635, SZ) were fined by the NDRC for alleged price monopolies in the PVC sector. So, why are multiple companies taking the risk of being accused of price monopoly at the same time? Is the industry starting to recover? Speaking about the fines imposed this time, an analyst who has long studied the PVC industry said that the amount of these fines serves as a warning to the relevant companies as well. It is suspected to be related to price monopolies and the high concentration of enterprises in the PVC industry. The reason for the joint price increases by PVC manufacturers also shifted from self-help measures prior to 2015 to the impact on market supply and demand after 2016. The industry believes this will serve as a warning; the successive fines imposed on PVC companies have drawn significant attention. On September 7, both Tianyuan Group and Yinglite received a **pre-notification of administrative penalty from the National Development and Reform Commission**; Tianyuan Group was fined 16.0181 million yuan, while Yinglite was fined 7.9155 million yuan. On September 8, a subsidiary of Ordos (600295, SH) was fined 19.3755 million yuan, while a subsidiary of Ely Green Energy (600277, SH) was fined 20.6098 million yuan. On September 9, Junzheng Group (601216, SH) also issued a statement stating that due to alleged violations related to the formation and implementation of price-fixing agreements in its PVC sales during 2016, the company was fined 29.478 million yuan by the National Development and Reform Commission – a amount equivalent to 1% of the company’s market sales revenue from PVC products in 2016. Regarding the reasons behind the alleged price monopoly, the aforementioned industry analyst said it is related to the high degree of concentration among companies in the PVC industry. With the implementation of capacity reduction measures and related policies, a large number of small and medium-sized enterprises have exited traditional cyclical industries such as PVC over the past five to six years, leading to a significant increase in industry concentration. The trend toward consolidation within the PVC industry will become increasingly evident. In an environment of high industry concentration, it is possible for companies to raise prices together, which could then constitute price monopoly. However, the aforementioned analysts also noted that the reasons for PVC companies to raise prices together vary. Before 2015, it was mainly an act of \"self-rescue\" aimed at \"keeping each other warm\" due to the sluggish state of the industry ； And since 2016, it has been more influenced by market supply and demand. Regarding the fines imposed this time, the analyst said that the amount of these fines represents a certain percentage of the companies’ own revenue; such high fines are not common in the PVC industry. This serves as a strong warning to the relevant companies, demonstrating the clear stance of the authorities. Following the imposition of this fine, the relevant companies will be more cautious when setting prices. There has been a shift in supply and demand. It is worth noting that behind those several hefty fines lies evidence of changes in the PVC industry as well. Reporters from the Daily Economic News analyzed the annual reports and related announcements of various listed companies and found that from 2011 to 2017, the gross profit margin of PVC-related products showed an overall upward trend. For example, Zhongtai Chemical (002092, SZ) had a gross profit margin of 16.44% for PVC resin in 2011, 22.91% in 2015, and 32.36% in the first half of 2017. Its revenue from PVC also increased, rising from 5.241 billion yuan in 2011 to 8.433 billion yuan in 2016. Junzheng Group’s gross profit margins for PVC in 2014, 2015, and 2016 were 22.76%, 23.74%, and 34.26% respectively. However, not every listed company’s PVC performance shows a straight upward trend. Hongda Xingye (002002, SZ) had PVC gross margin rates of 33.87%, 30.63%, and 29.07% in 2015, 2016, and the first half of 2017, respectively. Compared to the relatively stable gross margin over the past three years, the gross margin for Hongda Xingye’s PVC sheet and plate business in 2011 was -0.12%. In the first half of 2017, Tianyuan Group’s gross margin for PVC was 2.25%, compared to 3.5% in the same period of the previous year. In fact, the recovery in PVC prices is also somewhat related to the entire basic chemicals industry. A research report issued by Great Wall Securities states that in the first half of 2017, the overall revenue growth rate of the basic chemicals industry was 42.33%, while the overall gross profit margin was 20.74%. Although this figure saw a slight decline compared to the first quarter, it remained at a high level for the past 7 years. The analyst who has been studying the PVC industry for a long time mentioned to reporters that the current rise in PVC prices is due to changes in the supply and demand balance. From 2011 to 2015, the entire PVC industry remained in a state of low levels and continued to show weakness ； Since 2016, as the efforts to reduce production capacity have taken effect, a situation of supply falling short of demand has emerged, which has led to an increase in prices for enterprises as well. The aforementioned analyst also mentioned that increasingly stringent environmental policies are affecting PVC prices as well. Ruida Futures also analyzed that, due to environmental regulations, the operating rate of calcium carbide is restricted, keeping prices firm and providing strong support for PVC costs. PVC inventory remains low, supply is tight, and some ex-factory prices continue to rise. Regarding the price trend of PVC, Galaxy Futures analyzes that some companies still have pending orders at present, with low inventory levels; in the short term, they will mainly focus on fulfilling previous orders. Meanwhile, due to environmental inspections, some companies continue to suspend production. In September, companies such as Yinglite, Yidong Dongxing, and Inner Mongolia Ely have maintenance plans, which suggests that the overall market supply is unlikely to increase. It is expected that PVC market prices will remain volatile at high levels in September, with a possibility of further increases. Source: Daily Economic News -