With low oil prices, is coal-based olefins truly profitable?

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Judging from the opinions in the coal chemical industry in recent years, aside from the methanol-to-olefins plants located in coastal areas that are operating at a loss due to rising methanol prices, those in the northwest region that have access to local coal resources are generally able to function satisfactorily despite low oil prices. But what is the actual situation? Whether a coal-based olefins project is profitable largely depends, in general terms, on crude oil prices and the operating costs of the enterprise. Let’s analyze them one by one below. Oil prices: Since the second half of 2014, crude oil prices have dropped significantly from over $100 per barrel to a range of $40–$55 per barrel, where they have remained stable. http://img.yf116.cn/image/img/20170801/15635436322.jpg Key operational data for major enterprises: Falling oil prices directly suppress the prices of polyolefins, resulting in a significant decline in the profitability of coal-based olefin production projects. However, according to the company’s public information, in 2016, Pucheng Clean Energy, Shenhua Baotou, Yanchang China Coal, and China Coal Group Yulin all achieved solid profits. http://img.yf116.cn/image/img/20170801/15775442748.jpg From January to June 2017, these 3 companies continued to maintain the good performance they had shown in 2016. http://img.yf116.cn/image/img/20170801/158175449787.jpg The figure below shows the financial performance indicators of Shenhua Baotou Coal-to-Olefins project from 2012 to 2016. Looking at the trend in crude oil prices, its profitability declined year by year as crude oil prices fell, but it still managed to maintain a certain level of profit. http://img.yf116.cn/image/img/20170801/159155455534.jpg Analysis of net profit: With low oil prices, is the coal-based olefins industry truly as prosperous as shown in the chart above? From an analytical perspective, there are two points that need to be discussed: First, the coal price for enterprises? Second, the three types of expenses for a company? Taking Shenhua Baotou as an example: Coal prices: According to Shenhua Group’s 2016 annual report, the price of coal used for its coal chemical operations is significantly lower than the prices of coal used in the market and for power generation. Based on a coal consumption of 6.9 tons per ton, and using the price difference of 84 yuan per ton from 2016, the cost difference for coal is 579.6 yuan per ton. In other words, the company sacrificed profits from coal in order to save coal-based olefins. For more details, see: \"Market Research Report on Coal-to-Olefins\", 2017 edition: http://img.yf116.cn/image/img/20170801/1510165461617.jpg. The profit figures disclosed by coal-to-olefins companies in their public reports do not specify these three types of costs; generally, they refer to gross profit, which does not include such costs. According to the cost model analysis by the \"China Information Chemical Industry Research Institute\": when the coal price is 237 yuan per ton, and without taking into account the income from the project’s by-products, if the three types of costs exceed 1,019 yuan per ton, the enterprise will not be profitable. With the coal price set at Shenhua’s weighted average price of 317 yuan per ton, and without taking into account other revenues such as those from by-products of the project, if the three types of costs exceed 459 yuan per ton, the company will not be profitable. Of course, whether a coal-based olefins company can be profitable depends not only on crude oil prices but also on factors such as the company’s location (which affects shipping costs), coal prices (as they represent the cost of raw materials), the proportion of own capital available (which influences financial expenses), the utilization of by-products (which is related to revenue), and the product structure of polyolefins (since different varieties have significantly different selling prices).