Which of Lin’s two coal-based olefin projects is more profitable?

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Which of the two coal-to-olefins projects in Yulin is more profitable? Author/Source: Date: 2017-09-08 Clicks: 10 On September 5, the China Petroleum and Chemical Industry Federation and the Dalian Commodity Exchange jointly organized a research mission on the petrochemical industry in the northwest region. On the first day, investigations were mainly conducted on two coal-to-olefins manufacturing companies in Yulin, Shaanxi, namely Shenhua Yulin Energy Chemical Co., Ltd. and China Coal Shaanxi Yulin Energy Chemical Co., Ltd. Through visits to the factory and warehouses as well as discussions, the relevant organizations involved in the investigation have drawn the following analyses and conclusions ； Shenhua Yulin Energy Chemical Co., Ltd., whose full name is Shenhua Shaanxi Methanol Downstream Processing Project, mainly consists of a methanol-to-olefins unit, an olefins separation unit, a polyethylene plant, a polypropylene plant, a power air separation unit, along with associated utility systems and auxiliary facilities. The main products are polyethylene with a capacity of 300,000 tons per year and polypropylene with a capacity of 300,000 tons per year. In 2016, the company produced 630,000 tons of polyolefin products, generating a profit of 120 million yuan ； From January to August 2017, a total of 413,000 tons of polyolefin products were produced. Production and sales model: The company’s business model involves purchasing methanol and producing olefins. The company sources methanol from areas within a 300-kilometer radius around its location, and the methanol production in this region is sufficient to meet the company’s needs. The purchase price of methanol is based on regional prices, with contracts typically having a one-year duration. In terms of the production process, 3.2 tons of methanol can be used to produce 1 ton of olefins. Based on the methanol price in northern Shaanxi on September 5th, which was 2430 yuan per ton, the cost of raw materials is approximately 7772 yuan per ton. The company sells olefins through a combination of online and offline methods. Online transactions use competitive bidding, while offline transactions rely on direct sales to key clients; each method accounts for 50%. The company produces based on sales demand, and is currently operating at full capacity. The company has its own wastewater treatment system for the recycling of water resources. China National Coal Group Shaanxi Yulin Energy & Chemical Co., Ltd. is a wholly-owned subsidiary of China National Coal Energy Corporation Limited (referred to as CNCC). It is responsible for the investment, establishment, operation, and management of coal, coal chemical, power, and railway-related projects carried out by the CNCC group in Shaanxi Province. It is also entrusted by CNCC to manage Inner Mongolia CNCC Yuanxing Energy Co., Ltd. The company has mainly built a 600,000 tons per year coal-to-olefins project, a 15 million tons per year Dahaize Coal Mine and coal washing project, a 5 million tons per year Hecaogou Coal Mine and coal washing project developed in partnership with Checun Coal Mine in Yan’an City, as well as coal mining equipment maintenance projects. The coal-to-olefins project is located in the Hengmei Chemical Industrial Park in Yulin City. With an estimated investment of 21.554 billion yuan, construction began in August 2011, and the plant started operating commercially at the beginning of 2015. In 2017, it was planned to produce 691,000 tons of polyolefin products, generating sales revenue of 5.27 billion yuan and a profit of 941 million yuan. Production and sales model: The company’s business model involves purchasing coal, converting it into methanol, and then using methanol to produce olefins. The company generally produces based on sales demand; when the olefin plants are operating at high capacity, it is necessary to purchase methanol from external sources in the short term. Although the company owns its own coal mines, these mines have not yet been put into operation and the coal produced there is not suitable for use; therefore, purchased coal is used in actual production. The coal purchase price is based on market rates in the surrounding area, with long-term contracts being the primary method of transaction, and settlements are made twice a month. The standard for purchased coal is 5,500 kcal; the calorific value of the actual coal purchased is higher than this standard, averaging around 5,800 kcal. The price of coal is based on the prices in the surrounding areas of Northern Shaanxi. Coal purchased is divided into two categories based on its use: raw coal and fuel coal, in a ratio of about 3:1. The purchase price of raw coal is around 405 yuan per ton, while that of fuel coal is around 380 yuan per ton ； 7.5 tons of coal are required to produce approximately 1 ton of olefin products, with raw material costs around 3,000 yuan ； The company states that coal accounts for about 40% of the total cost, which implies that the total cost is around 7,500. At present, the company’s olefin sales are primarily carried out through the traditional distributor model, with prices set in line with those in surrounding areas. The company produces based on sales demand. The company reports that the current average operating load rate is 108%, and production is less affected by the prices of raw materials and finished products. Regarding equipment maintenance, major repairs are generally carried out in accordance with the production plan, while minor repairs take market conditions into consideration to some extent. The company just completed a major overhaul in April and May, so there is likely to be no maintenance work in the near future. The company has its own wastewater treatment system, and it states that recent environmental inspections have had no impact on production; however, an increase in production costs cannot be ruled out. The company’s inventory fluctuates between 10,000 and 50,000 tons, with an average of 30,000 tons. The current inventory on site at the company is 20,000 tons, which is considered a low level. The company has approximately 15 more inventory locations elsewhere, and it is reported that the amount of inventory in these locations is roughly equivalent to that in the factory. Good profits provide strong support for high-capacity operation of coal-based olefins. 1. The coal chemical industry in the Northwest has seen rapid development in recent years, and its market share in the polyolefin market has been increasing steadily from year to year. Based on the findings from the visits, both companies have strong capabilities for expanding their industrial chains in the future. As the supporting infrastructure for raw materials and the processing systems become more advanced, the production costs per unit for these companies will decrease, thereby enhancing their market competitiveness. At the same time, their brand impact will also gradually become more evident. 2. The sales of both companies are under the unified sales management of the group company. Shenhua Yulin’s sales model has shifted from the previous online bidding approach to one in which online and offline transactions each account for 50% of sales. Starting in August this year, a new sales channel for large customers was introduced, with some aspects of the traditional sales model being reinstated. China Coal Yulin continues to use the traditional distributor model. 3. The inventory levels in the manufacturing facilities of both companies are relatively low; during the inspection, it was found that the goods stored accounted for roughly half of the available storage capacity. Additionally, both companies have warehouses in other locations, but the inventory levels there are not high either. Therefore, the polyolefin market is currently characterized by low inventory levels at both the upstream and downstream stages. 4. The coal-to-olefins process mainly consists of two steps: coal-to-methanol and methanol-to-olefins. Methanol, while serving as an intermediate product in the coal-to-olefins process, is also a commodity with significant price fluctuations and active trading. Therefore, whether to have its own coal-to-methanol facility has become an important factor affecting the profits of polyolefin companies. For Yulin Shenhua Energy Chemical Company, since it does not have its own methanol production facilities and instead purchases methanol from methanol-producing enterprises within a 300-kilometer radius at market prices, the efficiency of its operations is largely determined by the price of raw methanol. Currently, the factory’s production process consumes around 3.2 tons of methanol per ton of polyolefin produced. At the market price of methanol in northern Shaanxi on September 6, which was 2,430 yuan per ton, the raw material cost amounts to approximately 7,772 yuan per ton. For China Coal Shaanxi Yulin Energy & Chemical Co., Ltd., which has coal-to-methanol production facilities, it purchases coal from local coal mines at market prices; approximately 7.5 tons of coal are required per ton of polyolefin produced. Based on the price range of 400–500 yuan per ton for thermal coal in northern Shaanxi, the raw material cost amounts to around 3,000 yuan per ton, resulting in a significant cost advantage. 5. The enterprises are operating at full capacity; according to investigations, the production rate of both companies has reached 110% of their capacity. The main reason for this is the substantial profits resulting from rising prices of polyolefins. Additionally, with the arrival of the peak sales period, inventory needs to be cleared more quickly, which requires an increase in production and supply. In the case of China Coal Yulin, production needs to be increased urgently as it has just completed maintenance work.