The disparity in benefits among modern coal chemical industries is widening, but the prospects for coal-to-oil and coal-to-ethylene glycol remain relatively optimistic

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The gap in profitability among modern coal chemical enterprises is widening, but the prospects for coal-to-oil and coal-to-ethylene glycol remain optimistic. Author/Source: Date: 2018-06-21 Clicks: 23 As annual and quarterly reports of listed companies are released, the performance records of coal chemical enterprises are gradually becoming available. It can be observed that since 2017, traditional coal chemical companies have generally achieved performance beyond expectations, whereas those in the modern coal chemical sector have seen growth that falls short of expectations. The gap between successful and less successful companies has continued to widen, resulting in a stark contrast in their performance. According to analysis, the main factors that truly affect project performance are the overall decline in domestic refined oil prices, the continuous rise and high levels of coal prices, as well as the persistently high tax burdens. 　　The performance of traditional coal chemical industries generally exceeded expectations. On April 19, Shanxi Coking Co., Ltd. released its operating results report for the year 2017. In 2017, the company achieved operating revenue of 5.995 billion yuan, and a net profit attributable to the shareholders of the listed company of 91.92 million yuan, representing year-on-year increases of 48.46% and 107.89% respectively. The company’s financial results released on April 26 showed that from January to March this year, it generated operating revenue of 1.802 billion yuan and net profit attributable to shareholders of the listed company of 343 million yuan, representing year-on-year increases of 49.29% and 2,543.53% respectively, indicating continued strong growth. 　　In 2017, Shandong Luxi Chemical Co., Ltd. achieved operating revenues of 15.762 billion yuan and net profits attributable to the shareholders of the listed company amounting to 1.95 billion yuan, representing year-on-year increases of 43.96% and 671.95%, respectively. Other companies that also delivered results exceeding expectations included Shaanxi Heimao Coking Co., Ltd., Shanxi Yangmei Chemical Industry Co., Ltd., and Shandong Hualu Hengsheng Chemical Co., Ltd. Even Shanxi Sanwei Group Co., Ltd., which was facing delisting due to consecutive losses, managed to turn things around in 2017 – the company achieved annual revenue of 2.29 billion yuan, and its net profit attributable to the shareholders of the listed company reached 106 million yuan, a surge of 115.72% on a year-on-year basis. 　　Among the unlisted traditional coal chemical enterprises, Shaanxi Weihe Coal Chemical Group Co., Ltd. achieved sales revenue of 2.14 billion yuan in 2017 and a profit of 12.6 million yuan, managing to turn a loss into a profit. In the first quarter of this year, WeiHua Group achieved a profit of 16.58 million yuan, exceeding the total profit for the entire previous year. In 2017, Shaanxi Shanjiao Chemical Co., Ltd. achieved operating revenues of 7.305 billion yuan and profits of 190 million yuan, reversing the situation from previous years when it suffered losses in the hundreds of millions of yuan. In 2017, Shaanxi Beiyuan Chemical Group achieved main business revenue of 9.1 billion yuan and profits of 1.249 billion yuan. In the first quarter of this year, the company’s production of polyvinyl chloride, caustic soda, and calcium carbide increased by 5.1%, 5.2%, and 33.1% respectively on a year-on-year basis. It achieved operating revenues of 2.43 billion yuan and profits of 553 million yuan, with the profit margin increasing by 111.4%. A large number of traditional coal chemical enterprises, such as Inner Mongolia Meifang Coking Co., Ltd., Jiangsu Linggu Chemical Co., Ltd., and Henan Xinlianxin Fertilizer Co., Ltd., have all achieved remarkable results. 　　According to rough estimates, in 2017, the revenue and net profit of the traditional coal chemical industry grew by over 38% and 47% respectively; the number of companies that incurred losses was less than 5% of the total number of companies in this sector. The overall performance of the industry reached its best level in 10 years. 　　There is a large disparity in profitability within modern coal chemical industries. In contrast to the overall increase in profits and improved operational conditions of traditional coal chemical companies, since 2017, the performance growth of modern coal chemical industries has generally fallen short of expectations, and the gap between successful and less successful companies has continued to widen. 　　Companies that produce olefins from coal using methanol are performing well, while those that produce ethylene glycol from coal have seen a turnaround in their performance. 　　According to the annual report of China National Coal Energy Group Co., Ltd., in 2017 the company produced 976,000 tons of polyolefins, a figure that represented a 37.5% increase compared to the previous year ； 977,000 tons of polyolefins were sold, a year-on-year increase of 37.4% ； The average annual selling price of polyolefins was 7,677 yuan per ton, an increase of 688 yuan per ton or 9.84% compared to 2016. The modern coal chemical sector generated revenue of 7.504 billion yuan, a year-on-year increase of 51.02%, and achieved profits of 1.933 billion yuan. 　　In addition, the coal-to-olefins projects of Shenhua Ningmei Group Co., Ltd., Ningxia Baofeng Energy Group Co., Ltd., and Zhongtian Hechuang Energy Co., Ltd. have all generated substantial profits for these companies. Among them, Shaanxi Coal Chemical Pucheng Clean Energy Chemical Co., Ltd.’s new-generation 700,000-ton/year coal-to-olefins plant via methanol produced 619,000 tons of polyolefin products in 2017, generating sales revenue of 5.83 billion yuan and a profit of 250 million yuan ； In the first quarter of this year, 180,500 tons of polyolefin products were produced, generating profits of 61.317 million yuan, an increase of 10.47 million yuan compared to the previous year, representing a growth rate of 20.59%. 　　Unlike in the past when coal-based ethylene glycol production companies suffered from poor performance and low profitability, in 2017, the 200,000 tons per year coal-based ethylene glycol plant operated by Yangmei Shouyang and the 220,000 tons per year plant operated by Yangmei Shenzhou generated profits of 95 million yuan and 150 million yuan respectively for their parent company, Shanxi Yangmei Group Co., Ltd. The 4 coal-to-ethylene glycol production facilities that have been put into operation by Henan Energy and Chemical Group Co., Ltd. have generated profits of over 300 million yuan. Xinjiang Tianye’s 350,000 tons per year project for producing ethylene glycol from calcium carbide furnace exhausts, as well as Shandong Hualu Hengsheng’s 50,000 tons per year facility for producing ethylene glycol from syngas, generated profits of 150 million yuan and over 30 million yuan for their respective parent companies. Even Danhua Chemical Technology Co., Ltd., whose performance has been rather disappointing in recent years, achieved impressive results in 2017. The company’s annual report shows that in 2017, its holding subsidiary, Tongliao Jinmei Chemical Industry Company, generated revenue of 814.6 million yuan from ethylene glycol products throughout the year, a 52.06% increase on a year-on-year basis. The gross profit margin for these products was 26.33%, up by 27.28 percentage points compared to the previous year. This contributed to Danhua Technology achieving total revenue of 1.331 billion yuan for the whole year, as well as a net profit of 266 million yuan attributable to the shareholders of the listed company – representing increases of 86.98% and 262.2% respectively on a year-on-year basis. 　　In contrast to the thriving coal-to-olefins and coal-to-ethylene glycol industries, coal-to-oil companies still face difficult circumstances, while those in the coal-to-gas sector are in an even worse situation. 　　According to Wang Shukuan, deputy general manager of Shanxi Coal Chemical Shenmu Rich Oil Energy Technology Co., Ltd., due to various unfavorable factors such as high tax burdens, rising coal prices, low oil prices, and increasing overall costs, coal-to-oil production suffered industry-wide losses in 2017. Among them, the 120,000 tons per year coal tar full fraction hydrogenation unit operated by Shanxi Coal Chemical Shenmu Rich Oil Energy Technology Co., Ltd. was able to operate safely and stably over long periods of time, with an average annual load rate of 109%, yet it still incurred losses of 31 million yuan ； Due to various reasons, Shaanxi Future Energy Chemical Co., Ltd. was unable to ensure the stable, continuous, and efficient operation of its million-ton coal-based indirect oil production facility, resulting in significant losses ； The million-ton direct coal liquefaction demonstration project of Shenhua Ordos Coal-to-Oil Branch has suffered huge losses for many consecutive years. 　　Jiang Jiansheng, senior advisor at Inner Mongolia Yitai Coal-to-Oil Co., Ltd., revealed that in 2017, although the various chemicals sold by the company managed to shield it from the impact of the consumption tax on refined oil products, factors such as the continuous rise in coal prices and low international oil prices, which prevented associated product prices from rising significantly, meant that the company could not escape the situation of higher sales volumes without corresponding increases in profits. As a result, the company incurred a loss of 4.495 million yuan for the whole year. The situation of Shanxi Lu’an Coal-based Synthetic Oil Co., Ltd. is very similar to that of Yitai Coal-to-Oil Company. Although the company made every effort to avoid various risks in its operations, since the raw materials used in its products are primarily anthracite, the continuous rise in coal prices and their high levels kept the company in a slight loss for the entire year. 　　The situation of coal-to-gas enterprises is even worse. Reporters have learned that China’s first coal-to-natural gas project to go into operation – the 1.33 billion cubic meters per year coal-to-gas facility in the first phase of Inner Mongolia Datang International Kesikteng Coal-to-Natural Gas Co., Ltd. – has been operating at a loss since its commissioning. Although the project was transferred to Sino-Singapore New Energy Technology Co., Ltd. on June 30, 2016, and it operated at a high load rate in 2017 with smooth sales, it continued to incur losses in that year due to high initial investment and financial costs, as well as restrictions on the price of pipeline natural gas. The other two coal-to-natural gas projects that have been put into operation – the coal-to-gas project of Yili Xintian Coal Chemical Co., Ltd. and the coal-to-gas project of Xinjiang Qinghua Yili Energy Co., Ltd. – also failed to turn a profit. Only the coal-to-LNG project of Inner Mongolia Guanghui Energy Chemical Co., Ltd. managed to turn a profit, as it took advantage of the strong market trend characterized by soaring domestic LNG prices last winter. 　　Of the 3 ethanol production plants powered by coal (syngas) that have been built in the country, some are still in the stage of fixing leaks and optimizing parameters, as their processes have just been put into operation ； Some saw limited increases in product prices due to rapid rises in coal prices, and none were able to turn a profit. 　　Industry experts believe that the poor performance of coal-to-oil companies is mainly influenced by three factors. First, in 2017, although there were more increases than decreases in domestic refined oil prices, the average reduction in prices was significantly greater than the average increase. In the first 10 months, the price of refined oil in China dropped by 50 yuan per ton compared to the beginning of the year. This means that even if the benefits from higher refined oil prices can be realized in November and December, the short duration makes it impossible to offset the previous losses. 　　Secondly, the continuous rise in coal prices and their high levels have significantly increased the production costs for coal-to-oil enterprises. Last year, the domestic coal market remained at high levels, continuing from the upward trend of the year before. In January 2017, the price of 5,500 kcal thermal coal in the Bohai Sea region was as high as 620 yuan per ton, up by 250 yuan per ton on a year-on-year basis, representing a growth rate of 67.57%. Although there were some fluctuations thereafter, the price still rose to around 700 yuan per ton. Compared with the average price of 450 yuan per ton in 2016, this represented an increase of 180 yuan per ton, or 40%. Based on the calculation that 3.6 tons of standard coal are required to produce 1 ton of oil products and chemicals, an increase in coal prices leads to a rise in the processing cost of coal-to-oil production by 780 yuan per ton. 　　Thirdly, high tax burdens exacerbate the difficulties faced by coal-to-oil companies. At the current tax rates, taking into account the current costs and prices of coal-to-oil production, if a company produces oil products exclusively and complies fully with its tax obligations, it will incur a loss of 1,500 to 2,000 yuan per ton of product produced. 　　Hu Haifeng, a member of the Decision-making Advisory Committee of Shaanxi Province, also said that the improved performance of traditional coal chemical enterprises is attributed to the cyclical recovery of the chemical industry. More importantly, it highlights how supply-side structural reforms have led to the elimination of outdated production capacity and a balance between market supply and demand. However, as more new advanced production capacity comes online, the supply-demand balance in the market will be disrupted once again, and a situation like the current one of soaring prices will not be sustainable. 　　Although the performance of coal-to-oil production is poor, relevant companies remain cautiously optimistic about its prospects. Wang Shukuan, deputy general manager of Shanxi Coal Chemical Shenmu Fuyou Energy Technology Co., Ltd., said that when the price of coal is 300 yuan per ton, the break-even point for coal-to-oil enterprises corresponds to an international oil price of 55 dollars per barrel. Today, international oil prices have stabilized at $65 per barrel, approaching $75 per barrel; if the consumption tax on refined oil is not taken into account, large-scale companies can achieve profitability. Companies such as Shenmu Tianyuan Chemical Co., Ltd., which has a coal tar hydrogenation capacity of 500,000 tons per year, achieved a profit of 190 million yuan in 2017; since the beginning of this year, driven by the steady rise in oil prices, its monthly profits have reached over 40 million yuan each ； Shenmu Fuyou Energy Technology Company, which has completed its capacity expansion upgrades, is also expected to turn a profit this year. 　　Hu Xianxian, general manager of Shanxi Lu’an Coal-based Synthetic Oil Co., Ltd., said that as the scale of new energy vehicles grows, the growth rate of domestic refined oil consumption will slow down, and it is even possible to see negative growth in 5 years. This will further exacerbate the oversupply of refined oil products in the country, intensifying competition in the refined oil market. Therefore, whether to meet the current need to avoid consumption taxes on refined oil products or to consider the future development of the enterprise, coal-to-oil companies should, while striving for larger and more scaled-up production facilities, accelerate the research, development, and production of specialty, dedicated, and high-end chemicals in order to avoid competing with oil refining companies. 　　The prospects for coal-based ethylene glycol remain promising. “After nearly 10 years of improvement and optimization, the technology related to coal-based ethylene glycol has become increasingly mature. There is a huge demand in China, and a supply gap still exists.” Furthermore, since the ethylene process is widely used internationally, the price of ethylene glycol is highly correlated with international crude oil prices. With international oil prices expected to rise and it becoming difficult to bring them back below $50 per barrel, it holds good prospects to appropriately develop coal-to-ethylene glycol projects in coal-rich regions. ”Zhang Xiaojun, general manager of Yulin Chemical Co., Ltd. under Shaanxi Coal Group, told reporters. 　　He explained that it was based on this assessment that Shaanxi Coal Group decided to invest 100 billion yuan in building a demonstration project for the use of coal in the production of chemicals in Yulin; recently, a key component of this large-scale project – an facility for producing ethylene glycol from coal at a capacity of 1.8 million tons per year – was put into operation. 　　The experts interviewed are generally pessimistic about the prospects of coal-to-natural gas projects. Considering current technological capabilities and overall energy consumption, coal-to-gas projects involve high costs and large investment requirements; in the central and eastern regions where coal prices are high, as well as in places in the northwest such as Shaanxi, Inner Mongolia, and Ningxia, these projects do not have any cost advantages. Although coal prices and project manufacturing costs are low in Xinjiang, the gas produced there needs to be transported via pipelines such as the West-East Gas Pipeline, and its price is controlled by the \"Big Three Oil Companies,\" making it difficult to achieve profitability as well. If processed into liquefied natural gas, it can be sold at a good price in the market, and high profits can be earned especially during the winter heating season. However, the transportation costs associated with transporting it over thousands of kilometers, along with potential safety risks, pose significant concerns for many investors. Furthermore, globally, there is a surplus of natural gas and liquefied natural gas. In the future, international natural gas prices are unlikely to rise along with oil prices; in fact, they may even decline gradually. Experts suggest that investors should leverage both domestic and international resources, view the domestic energy supply and demand situation from an international perspective, make rational decisions, and approach coal-to-gas projects with caution. 　　Although coal-based olefins are performing well, industry experts warn that they face the risk of declining profit margins, so it is not advisable to rush into investing in them.