Coal’s value increases by 12 times; the coal chemical industry undergoes a collective \"Great Leap Forward\"”

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Lured by the potential for an 8-12 times increase in value, various coal companies have launched their own coal chemical projects to extend their industrial chains. The rapid development of the coal chemical industry is a market-driven phenomenon and is normal. The growing length of the coal industry chain has forced coal companies to change their product structure. The increasing coal consumption by coal companies themselves undoubtedly reduces the overall supply capacity available to society. By 2008, the world’s first product resulting from direct coal liquefaction was set to be produced in the Shendong coal field operated by Shenhua Group; once in operation, it would consume 3.45 million tons of coal per year, enabling the production of 1.08 million tons of various petroleum products. This investment of 10 billion yuan saw construction begin in August 2004, and it has been designated as a coal chemical demonstration project under China’s 11th Five-Year Plan for the coal industry. Once fully completed, it will be able to process 15 million tons of raw coal per year to produce 5 million tons of refined oil products. Public data shows that by 2020, China’s coal-to-oil industry will have a production capacity of 50 million tons. At present, there are 7 coal-to-oil projects in our country, including those operated by Shenhua Group, Yitai Group, Yankuang Group, Lu’an Group, and others. Coal-to-oil projects are booming, increasing the value of coal by a factor of 12. China’s second-largest coal company after Shenhua Group, China National Coal Group, naturally did not want to be left behind. In 2007, it launched a project in Harbin aimed at producing 600,000 tons of olefins and 2.2 million tons of methanol per year, with an estimated investment of over 10 billion yuan. In addition, China National Coal Group has also begun to advance a 3 million-ton dimethyl ether project in Ordos. The launch of coal chemical projects across various regions is related to the improvement in the **policy environment. At the end of November 2007, the **National Development and Reform Commission issued the Coal Industry Policy**, which stated that further policies would be introduced and stabilized to encourage large coal enterprises to participate in joint ventures with enterprises in the metallurgy, chemical industry, building materials sector, and transportation industry. “**The basic approach to steadily advancing the coal industry and continuously developing the coal chemical industry in order to alleviate the strain on oil supply has become further clarified. This will undoubtedly further accelerate the mergers and reorganizations of coal companies and chemical enterprises. ”An industry insider in the coal sector said. “Following the coal chemical industry chain, starting from coal, moving on to methanol, and then to products such as dimethyl ether, urea, acetic acid, melamine, and olefins, it is a process in which profits double at each stage. From the perspective of adding value through coal processing, coal-fired power generation can increase the value by 2 times; coal-to-methanol conversion can boost the value by about 4 times; while further processing of methanol into chemical products such as olefins can increase the value by 8 to 12 times. Therefore, companies are highly motivated to extend the industrial chain and develop coal chemical industries. ” Data provided by the China Coal Transport and Marketing Association show that coal enterprises currently play a crucial role in projects such as coal-to-oil and methanol production, accounting for over 60% of these activities. Among the five major coal enterprise groups in Shanxi, a province renowned for its coal production, Jincheng Coal Industry Group, Yangquan Coal Industry Group, and Lu’an Group have achieved a balance where coal-related industries and non-coal industries each account for half of their operations. At present, the annual production capacity of synthetic ammonia and urea in Shanxi’s coal industry has exceeded 6 million tons. Among this, Jincheng Coal Industry Group’s ammonia production exceeds 4 million tons, accounting for one-fifth of the total national output ； The annual production capacity of fertilizers such as urea at Jincheng Orchid Group has exceeded 3 million tons. Based on the current development trend, by the end of the 11th Five-Year Plan period, the sales revenue from non-coal industries in Shanxi’s coal sector is expected to reach 100 billion yuan. Starting in May 2004, relying on its advantages in anthracite resources and utilizing capital operations as a means, Jincheng Coal Industry Group successfully acquired control over 11 chemical enterprises in seven major grain-producing regions including Shanxi, Henan, Hebei, Jiangsu, Shandong, Anhui, and Hubei. This enabled the group to enter the field of coal chemicals. By 2007, its total production and operation volume reached 30 billion yuan, of which the non-coal industries accounted for 65.84% of the total production and operation volume, while contributing 78.28% of the profits. The coal chemical sector achieved an output value of 12.8 billion yuan, accounting for 42% of the total production and operation volume, thus becoming a major strength of the group company. The established coal company Shandong Yankuang Group stands out; it makes full use of its advantages in technology, management, brand strength, and funding to actively participate in the development of coal resources in Heze in Shandong, Guizhou, Shanxi, and Shaanxi. It vigorously pursues a strategy of expanding its operations overseas and works hard to industrialize the core technologies related to coal chemistry. Following the development direction of \"large-scale projects – integrated production – industrial bases,\" efforts will be focused on building the Lunan Chemical Industry Park, centered around coal gasification and integrated production; the Yanzhou Chemical Industry Park, focused on coal coking and the processing of downstream products; and the Zoucheng Chemical Industry Park, aimed at the clean utilization of high-sulfur coal extracted directly from mines. These parks will together form a energy and coal chemical industry hub in Lunan. By 2010, it is planned that the coal chemical industry will achieve annual sales revenue of 25.84 billion yuan, becoming a key industry with output value exceeding that of coal. Although the coal chemical industry in Henan, a major coal-producing province, started late, it showed strong momentum for catch-up by mid-2007. Among Henan’s 24.5 billion tons of total reserves, about 9 billion tons are of long-flame coal and anthracite, which are suitable for the development of coal chemical industry, giving the region excellent resource conditions. In May 2007, Hebi Coal Group, located in Hebi, and Zhongyuan Dahuahua Group jointly invested 15 billion yuan to build a facility with an annual methanol production capacity of 2 million tons. In July 2007, Pingdingshan Coal Industry Group (hereinafter referred to as “Pingmei Group”) joined forces with Zhumadian Lan Tian Group, the country’s largest methanol producer at that time, to establish Pingmei Lan Tian Chemical Co., Ltd., with the goal of going public within 3 to 5 years. Throughout 2007, Pingmei Group produced 37.15 million tons of coal. The total investment in the coal-salt integrated chemical circular economy industrial park that it plans to build is approximately 24.45 billion yuan; once completed, this park will generate annual sales revenue of 21.611 billion yuan, and it will enable Pingmei Group to process 10 million tons of coal locally each year. In August 2007, a contract was signed for a 1-million-ton dimethyl ether project jointly established by Yongmei Group and Haohua Group; the investment in this project amounted to over 7 billion yuan, with an annual production capacity of 1 million tons of dimethyl ether. This is currently the largest methylene dimoxide production facility in the country with a capacity of millions of tons. The real climax is yet to come. Although these coal chemical projects have only just entered a \"substantive phase,\" the Henan coal chemical industry powerhouse that is being established – Henan Coal Chemical Group – is also gradually taking shape. As planned, Henan Coal Chemical Group will be reorganized from Yongcheng Coal and Electricity Group, Yima Coal Industry Group, Henan Gas Group, and Henan Combustion and Chemicals Company. The goal is to create the largest energy and chemical enterprise in central China, with revenue expected to reach 150 billion yuan by 2015. The appeal of the coal chemical industry: For the coal sector, developing coal chemicals allows for the maximum utilization of its resource advantages and enhances economic efficiency ； For the chemical industry, the involvement of coal companies can ensure a supply of resources. Therefore, this is indeed a \"win-win\" situation. “There’s no need to worry about market issues for some chemical products nowadays; with a few exceptions, they are all in high demand in the market. Many energy products are even in such high demand that they sell out as soon as they are produced. ”A manager from a chemical company in Henan told reporters. For example, dimethyl ether is a very important type of coal-based alcohol-ether fuel. According to the estimates provided by the listed company Guanghui Shares, the current average investment profit rate in China is 45.45%. However, industry insiders say that in Henan and many other regions across the country, the actual profit margin is much higher than this. According to estimates by relevant experts, when oil prices are above $40 per barrel, in regions with shortages of oil and gas but abundant coal, using coal chemical processes to produce chemicals such as methanol, olefins, dimethyl ether, formaldehyde, and urea results in production costs that are 5% to 10% lower than those of petrochemical processes, offering strong competitiveness and good economic benefits. Methanol, on the other hand, is a raw material for producing olefins and fine chemical products. As demand for downstream products such as acetic acid, formaldehyde, and dimethyl ether grows rapidly in the market, demand for methanol is expected to increase at a rate of around 12% per year. According to **relevant authorities’ projections, by 2010 the domestic demand for methanol is expected to exceed 12 million tons. However, the total capacity of methanol production projects under development in the country already amounts to 15 million tons. There are two possible scenarios for the future development of the methanol market: first, the rapid increase in demand for methanol-based downstream products in China creates favorable conditions for the development of a coal chemical industry chain that uses methanol as its starting material; second, since the use of methanol as a fuel in regular gasoline is currently strictly prohibited, some methanol producers targeting the automotive fuel market will focus more on the advanced processing of methanol, which will lead to increased competition in this industry. Based on market analyses conducted by relevant domestic authorities regarding key coal chemical products, and taking into account the new production capacity added during China’s 11th Five-Year Plan period, there will be a significant shortage in the markets for olefins, aromatics, and dimethyl ether by 2010. The demand for ethylene is expected to reach around 25.5 million tons, resulting in a shortage of over 10 million tons; the demand for propylene is estimated at around 17 million tons, with a shortage of more than 5 million tons. With the gradual implementation of policies aimed at replacing fuels with alcohol-ether mixtures, demand for dimethyl ether is set to grow rapidly. The market demand for downstream processed products such as acetic acid, polyoxymethylene, melamine, and dimethylformamide is expected to increase at a rate of over 5% per year. Therefore, coal chemical products have good market prospects. For investors, choosing new projects also comes with its own advantages and disadvantages. For example, a trend of uncontrolled expansion in methanol production is already emerging; if this continues, there will be a significant surplus of methanol supply by 2010. The reporter learned that aside from companies such as Yongmei and Yimei, which have relatively long industrial chains, the production capacity of some other coal enterprises in Henan is currently focused on the production of methanol fuel. What to do if there is less raw coal? “\"Maximizing profits is the duty of any enterprise,\" said Li Chaolin, manager of the Information Center at the China Coal Transportation and Marketing Association. \"The rapid development of the coal chemical industry is a market-driven phenomenon and something normal.\" ” Li Chaolin also emphasized that the growing length of the coal industry chain has forced coal companies to change their product structure: products with lower prices have been replaced by related products with higher added value. As a result of the continuous expansion of the coal-based industrial chain, coal companies themselves consume more and more coal, which undoubtedly reduces the overall supply capacity in society, leading to a decrease in coal supply contracts. Li Chaolin explained that, for example, the Hebi Coal Industry Group Company faces limited increases in its coal production capacity; yet the demand for coal for power generation and chemical manufacturing within the company continues to rise, which results in a decline in the company’s ability to supply coal products. Data provided by the Heze Coal Group to the journalist show that in 2006, the group’s raw coal production was 6.4953 million tons, its coal sales revenue amounted to 2.248 billion yuan, while revenue from other main business activities (including coal chemical processing, power generation, and building materials) totaled 4.728 billion yuan ； In 2007, the output of raw coal was 6.9923 million tons, with sales revenue amounting to 2.591 billion yuan; sales from other main business areas totaled 5.230 billion yuan. In 2008, the output of raw coal is expected to exceed 7.2 million tons. With the commissioning of a series of coal chemical projects, the revenue generated by the coal chemical industry is projected to reach 2.920 billion yuan, while the revenue from the power and building materials industries is expected to be 2.656 billion yuan. Adding in revenues from other industries, the total operational revenue is expected to amount to 10.5 billion yuan. It has turned out that relying solely on the sale of raw coal will not lead to significant growth for the Heze Coal Group. “This is a rather extreme example of coal companies,” said Li Chaolin. “It’s understandable for companies to make market-driven choices in order to survive. ” Li Chaolin believes that the volume of coal purchased and sold between coal supply and demand enterprises is determined by the enterprises themselves and is constrained by transportation capacity. The amount specified in coal contracts meets the needs of the enterprises, is based on fair competition, and is in line with the laws of a market economy. Therefore, the volume of sales contracts and additional construction by coal companies are all normal market behaviors and represent ordinary market phenomena. Li Chaolin does not agree that the rapid development of coal chemical industry was the main cause of the shortage of thermal coal at the beginning of 2008. Li Chaolin believes that the current coal chemical production capacity has not been fully utilized, and the demand for raw coal has not increased sufficiently. The main reason for the shortage of thermal coal, from the perspective of coal suppliers, is the closure of coal mining enterprises, which has led to a reduction in effective production capacity and resulted in a temporary halt in output. Li Chaolin gave an example: In order to ensure safe production, starting from December 26, 2007, 80% of the coal production enterprises in Datong ceased operations for rectification in order to further improve their safety facilities; only 20% of the mines continued to operate. These mines were mainly there to meet the coal demand of certain key sectors and enterprises. At present, only a few rural coal mines remain in operation. The shutdown of the vast majority of coal mines has led to rising coal prices in the region. The Datong mines are located in the southwest of the city area, spanning areas such as Datong, Zuo Yun, You Yu, Huairen, Shanyin, and Shuozhou. In this area, there are coal mines at the **provincial and municipal levels, as well as in districts, counties, towns, and sub-district offices. The annual total coal production amounts to around 100 million tons, ranking first in the industry nationwide and enjoying a high reputation worldwide. An insider from a local coal company in Datong told Li Chaolin that at that time, due to the tight supply of coal, their company was unable to fulfill the nearly 100,000-ton coal supply contracts it had with its clients; nowadays, it is even impossible to obtain coal at high prices. “The current shortage of thermal coal has been largely resolved, and coal production and supply have returned to normal. At present, high-quality coal is still being shipped as ordinary thermal coal, which is a waste since high-quality coal resources are limited. Coal is a non-renewable resource that can only be used once, and industries such as metallurgy have a strong demand for high-quality coal. ”Li Chaolin said. It is reported that Pingmei Group, giving priority to helping power companies meet their urgent needs, once shipped high-quality coal as thermal coal, reducing the selling price per ton by over 200 yuan.