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Yanzhou Coal Industry Acquires Lunan Chemical to Enter the High-End Coal-Based New Materials Sector Author/Source: China Securities Journal Date: 2020-11-25 Clicks: 18 Yanzhou Coal Industry recently announced its intention to acquire 7 assets belonging to its controlling shareholder, Yankuang Group, for approximately 18.355 billion yuan in cash. Among them, Yankuang Lunan Chemical Co., Ltd. (referred to as “Lunan Chemical”) is one of the main assets of the transaction subject. With 53 years of development history, Lunan Chemical aims to become a leading innovative enterprise in the field of coal-based new materials across the country. The acquisition of Lunan Chemical was undertaken by this company in order to extend its industrial chain and achieve coordinated development of its business operations. Gasification technology has clear advantages. According to available information, Lunan Chemical is a large-scale high-tech chemical enterprise with 53 years of history, focusing on the production and research and development of new materials, new energy sources, and high-end fine chemical products. It possesses multiple product chains such as methanol-formaldehyde-polyoxymethylene, acetic acid-acetic anhydride-acetates-cellulose acetate, etc.; its products are highly interlinked throughout the supply chain, giving it strong market competitiveness. In terms of products, Lunan Chemical currently produces nine main categories of products, including acetic acid, acetates, acetic anhydride, polyoxymethylene, butanol, and synthetic ammonia, with a total production capacity of 3 million tons. In its specific niche, Lunan Chemical is one of the few companies in China that possess the technology for producing polyoxymethylene. With a production capacity of 80,000 tons, it ranks second in the country; it is able to produce nearly 10 different grades of polyoxymethylene. The company has rapidly grown into an important supplier of high-quality engineering plastics and plastic alloys in China. Its overall operational efficiency, product consumption levels, and profitability are superior to those of similar facilities in the country, placing it at an advanced level domestically. In addition, Lunan Chemical has an acetic acid production capacity of 1 million tons, ranking among the top three in the country. In 2017, 2018, and 2019, Lunan Chemical achieved profits of 197 million yuan, 428 million yuan, and 447 million yuan respectively. In the first half of this year, the COVID-19 pandemic imposed significant pressures on Lunan Chemical’s production and operations as well as its project development. However, starting from June, the company began to turn a profit, with monthly earnings exceeding 40 million yuan; in October, its profit amounted to 51.29 million yuan. It is reported that Lunan Chemical has a long history and leading technology in the field of coal chemical industry. The predecessor of Lunan Chemical – Shandong Lunan Fertilizer Factory – introduced in October 1987 the world’s fifth and China’s first Texaco water-coal slurry gasification demonstration unit. By independently mastering this technology, it continuously broke records for long-term operation, enabling China to join the ranks of countries at the forefront of clean coal utilization. Thereafter, Lunan Fertilizer Factory collaborated with East China University of Science and Technology to introduce revolutionary innovations in water-coal slurry gasification technology, successfully industrializing a new type of multi-nozzle opposed gasifier. This achievement broke foreign countries’ monopoly over advanced technologies such as coal gasification and acetic acid production via the carbonyl method, earning the company the reputation of being a \"Chinese Eastman\"-style chemical enterprise. In 2019, a new type of gasifier capable of handling 4,000 tons of coal per day was put into operation at Yankuang Rongxin Chemical, marking another breakthrough in the scaling up of this technology. It is reported that in line with Shandong Energy Group’s goal of establishing a **-level coal chemical industry demonstration base in southern Shandong, during the 14th and 15th Five-Year Plans periods, Lunan Chemical will focus on both optimizing existing facilities and achieving growth through new investments. It will aim for larger-scale operations, development within industrial parks, higher-end products, and more integrated value chains. Following the strategy of building, strengthening, and complementing these value chains, the company will explore ways to integrate coal chemistry, petrochemistry, and salt chemistry. By the end of the 14th Five-Year Plan period, it seeks to create safe, green, intelligent, and efficient demonstration factories, achieving excellence in terms of technological level, management quality, efficiency, and risk resistance. By 2030, it aspires to become a leading innovative enterprise in the field of coal-based new materials nationwide. Multiple projects are set to go into operation. On July 13, 2020, Yankuang Group and Shandong Energy Group Co., Ltd. underwent a joint restructuring. The restructured Shandong Energy Group has set strategic goals to strengthen and optimize its six core business areas: coal, coal-fired power, coal chemical industry, high-end equipment manufacturing, new energy and new materials, and modern logistics and trade. The focus for the development of the coal chemical industry and new energy and new materials lies in Lunan Chemical Industry. Under this development strategy, multiple projects at Lunan Chemical are being accelerated. On June 28, the high-end modified polyoxymethylene project (alcohol-based new material) was completed and put into operation, producing qualified polyoxymethylene products from the first batch of feedstock used. The project with an annual production capacity of 300,000 tons of caprolactam and related facilities will also come online in September 2021. The caprolactam production facility of Lunan Chemical is the largest one under construction in China, featuring technology that is at the leading level in the country. The quality of its products meets **top-grade standards, satisfying the quality requirements of the high-end caprolactam market, which relies mainly on high-speed spun pellets. In October 2020, Shandong Energy Group approved the industrial demonstration project for the development of a new OMB powder coal gasification technology with a capacity of 3,000 tons per day at Lunan Chemical. This project is designed to use high-sulfur, high-ash, and high-ash-fusing-point coal varieties from Shandong’s local deposits; such coal types are much more suitable for use in this system compared to those used in water-coal slurry gasifiers, and the vast majority of coal types can be utilized. This will further strengthen the company’s technical leadership in the field of coal gasification. The 600,000 tons per year ammonia synthesis plant built as part of this project will serve as a key element and link for the integrated development of the company’s petrochemical and coal chemical industries, further reducing the production costs of new material products. In addition, Lunan Chemical has planned more than a dozen new projects related to amino-based and alcohol-based materials in the future; the output of these products is expected to reach 3 million tons, with sales revenue and profits/taxes amounting to 27 billion yuan and 3.5 billion yuan respectively. It is expected that by September 2021, once the caprolactam production facility is completed and put into operation, Lunan Chemical’s main revenue will exceed 10 billion yuan. With the completion of the OMB powder gasification furnace project, as well as the gradual implementation of projects for producing 200,000 tons per year of acrylic acid, 600,000 tons per year of olefins, and 200,000 tons per year of EVA, Lunan Chemical will strive to achieve larger scale, more integrated industrial parks, higher-end products, and closer integration with end-users, thereby realizing its goal of creating \"several new Lunan Chemicals\".