Thread Content
Chitianhua focuses on both coal and gas to foster sustainable growth. Source: China Securities Journal, 03-02-2010, 09:19:46 | Font size: Large, Medium, Small. Since its listing, Chitianhua has won the recognition of investors thanks to its strong performance and stable development. However, in recent years, shortages and rising prices of natural gas, the company’s main raw material, have exacerbated the issue of a limited range of products and raw materials. In response, the company adopted a development strategy centered on fertilizers, coupled with structural adjustments and diversification of operations. It made full use of Guizhou’s abundant coal resources to develop coal chemical industries, thereby establishing a sustainable development model that relies on both coal and gas. Ten years since its listing, the regional leader has achieved remarkable results. Chitianhua Co., Ltd. originated from Chishui Natural Gas Fertilizer Factory, established in 1974. It was one of the 13 large-scale fertilizer manufacturers in China that adopted foreign advanced equipment in the 1970s, and is primarily engaged in the production and sales of agricultural urea. Following a restructuring, the company was listed on the Shanghai Stock Exchange on February 21, 2000. Over the nearly ten years since its listing, the company has adhered to the corporate spirit of \"confidence, self-reliance, pragmatism, and progress,\" and followed the overall development strategy of \"being market-oriented, relying on quality for survival, and using technology for growth.\" Through the joint efforts of all employees at Chitianhua, the company has achieved one brilliant success after another. In terms of technical equipment, although the company’s production facilities were introduced from abroad in the 1970s, through continuous technological upgrades over the years – especially by adopting many of the world’s advanced technologies in its production processes – it has now reached an international standard equivalent to that of the mid-to-late 1990s. The production capacity has increased from the originally planned 480,000 tons of urea per year to over 630,000 tons per year; the company’s actual output accounts for 50% of the total fertilizer production in Guizhou Province and 70% of the total nitrogen fertilizer production there. In terms of asset size and profitability, the company’s total assets increased from around 840 million in 2000 to 4.688 billion in 2008 ； Core revenue increased from 600 million to nearly 1.15 billion ； Net profit increased from around 65 million to nearly 170 million, and the company has maintained steady growth over the past decade since its listing, with no losses recorded at any point. In terms of dividend returns, the company has distributed dividends every year since its listing, having done so for 9 consecutive years by 2008. In terms of brand and market share, the company’s flagship product, urea under the “Chi” brand, enjoys a high reputation both within the province and among customers. It has won numerous honors, including the **Golden Quality Product Award, National Customer Satisfaction Product Award, High-Quality Product Award from the Ministry of Chemical Industry, and High-Quality Product Award from Guizhou Province. Over the years, the rate of high-quality products has remained above 99%, the qualification rate for packaging weight is 100%, and the qualification rates for packaging strength and printing quality are also 100%. These quality indicators place it at the leading level among competitors in the same industry, further solidifying its leading position in Guizhou Province, with a market share of over 70% in that region. Despite numerous achievements and honors, the people of Chitianhua have not stopped progressing; rather, building on a solid foundation of development, they have kept track of market trends, taken proactive measures, and embarked on new entrepreneurial endeavors centered around their core industries. Proactive in planning, Tianfu Project explores coal chemical industry. In August 2005, the company, using its own funds together with Guizhou Hongfu Industrial Development Co., Ltd., invested 400 million yuan to establish Guizhou Tianfu Chemical Co., Ltd.; in October of the same year, work began on a coal chemical project capable of producing 300,000 tons of synthetic ammonia and 150,000 tons of dimethyl ether per year. The upstream raw materials used in the nitrogen fertilizer industry, in which Chitianhua is engaged, are mainly coal, natural gas, and oil. The prosperity of the entire nitrogen fertilizer industry is inversely related to the prices of these three raw materials – coal, natural gas, and oil – depending on the amounts required for ammonia synthesis. Additionally, changes in the prices of these three energy sources affect the price competitiveness of the industry, thereby giving rise to certain substitution relationships within it. At that time, the company’s main product, nitrogen fertilizer, being an important material for supporting agriculture, was subject to a production and distribution management system in which resources were allocated through the market under macro-control; preferences were granted in terms of the prices of raw materials, energy, and transportation, as well as taxes, while at the same time limits were imposed on the maximum selling price of fertilizers and the wholesale-retail price difference. The raw material used by the company to produce urea is also natural gas, which accounts for around 70% of the total cost of urea production. Moreover, there is a growing shortage of natural gas, sufficient only to meet about 85% of the company’s production capacity, thus becoming a major bottleneck for its continued development. Through in-depth analysis of a series of policy measures implemented by the relevant regulatory authorities, as well as the market trends for upstream raw materials and downstream products, the company realized that, as market-based reforms in the nitrogen fertilizer industry progress, the price of its production raw material – natural gas – will continue to rise. Meanwhile, the substitution effect of coal, which is abundant in Guizhou and can be used as a substitute raw material, will become increasingly significant. The Tianfu coal chemical project has a total investment of around 2.6 billion yuan. It is one of the sub-projects under the planned Wengfu Circular Economy-based Phosphorus-Coal Chemical and Ecological Industry Pilot Base in Qiannan Prefecture, Guizhou Province. It is part of the strategy to develop the western region; it involves the comprehensive utilization of Guizhou’s abundant coal resources, with the use of clean coal gasification technology to produce synthetic ammonia and dimethyl ether – a technology that is advanced, mature, and reliable. The company holds 51% of the shares. As it was the first coal chemical project of its kind, the company chose Hongfu Company as its partner. This company not only possesses extensive experience and relevant technologies in the field of coal chemicals, but the 300,000 tons of synthetic ammonia produced by the project are also supplied primarily to the ammonium phosphate production facility at Hongfu Company’s Wengfu Phosphate Fertilizer Plant, eliminating the need for long-distance transportation; moreover, the customer base is very stable. Meeting the challenges head-on: Jinchi Chemical Industry In September 2007, Chitianhua raised 450 million yuan by issuing convertible bonds, which were all invested in three projects: the utility facilities at the Tongzi coal chemical complex, gasification capacity of 1.12 billion cubic meters, and projects for the simultaneous production of ammonia and alcohol as well as fertilizers. To facilitate the prompt implementation of the relevant projects, the company and Guizhou Xidian Power Co., Ltd. jointly invested in establishing Guizhou Jinchi Chemical Co., Ltd. to take charge of the actual construction work. Recently, the company raised another 1.2 billion through a public offering, using this funds to increase the methanol production capacity of the ammonia-alcohol co-production project at the Tongzi coal chemical complex from 200,000 tons to 300,000 tons, and to raise its stake in Jinchi Chemical to 75%. Regarding the Tongzi Coal Chemical Industry Base project, relevant analysts believe that it can effectively eliminate the bottlenecks that hinder the long-term development of Chitianhua, and it is of great significance for the company’s strategy of focusing on fertilizer production while pursuing related diversifications. In December 2005, the factory outlet benchmark price for natural gas used in fertilizer production was increased by 100 yuan per thousand cubic meters. Although fertilizer prices were raised accordingly thereafter, this did not fully offset the reduction in profits caused by the increase in raw material costs. Moreover, the issue of insufficient production capacity due to inadequate gas supply has become increasingly prominent; in 2007, the gas supply covered only about 81% of the company’s production capacity, resulting in economic losses of over 10 million for the company ； In 2009, due to a severe shortage of natural gas as a raw material, the company’s production facilities were shut down for 74 days in the first half of the year, which directly resulted in a significant drop in the company’s urea production by around 20% on a year-on-year basis. Although in 2009, **to ensure the supply of fertilizer production, the prices for electricity and gas used in fertilizer production were kept unchanged temporarily, while policies allowing greater flexibility regarding the qualifications of dealers in the fertilizer distribution sector as well as price limits on sales were introduced. But in the long run, an increase in natural gas prices is an inevitable trend. Firstly, compared with foreign countries, the pricing of natural gas in China is relatively low. From January to September 2009, the average price of natural gas at PetroChina, one of the main domestic producers, was only 0.82 yuan per cubic meter, which is 75% of the international price of natural gas. Secondly, in terms of price per equivalent heat value, the price per kilocalorie is only 28.5% of that of crude oil with the same heat value, and 25.4% of the price of LPG (propane). Thirdly, there is strong demand for natural gas in our country; from 2000 to 2008, the average annual growth rate of domestic natural gas consumption was around 16%. By 2010, it was estimated that there would be a shortage of 20 billion cubic meters of natural gas, necessitating imports of natural gas at higher prices from abroad to fill this gap. Previously, the China Chemical Industry News and Hexun.com reported that relevant Chinese authorities have submitted proposals for reforming natural gas prices, which could see an increase of 0.3–0.6 yuan per cubic meter for natural gas used in fertilizer production and industrial purposes. Faced with an unfavorable market environment, the company responded calmly by adjusting its strategies in a timely manner in line with changes in the market at various stages, strengthening its control over distribution channels, and establishing a robust sales network that enabled it to maintain firm control over its target markets ； On the other hand, by taking decisive action and investing heavily in coal chemical projects, it not only strengthened its position in the nitrogen fertilizer business but also entered the production of related products such as methanol and dimethyl ether at the right time. Regarding the Tongzi coal chemical base, in addition to being the largest coal chemical project invested in by Guizhou Province and a key project in 2007 that received significant attention from local authorities, relevant information indicates that the project also enjoys many favorable conditions: firstly, it has abundant resource support. Guizhou is rich in coal resources and is known as the \"Coal Sea of South China.\" According to data from the Guizhou Coalfield Geology Bureau, at depths of up to 2,000 meters, the total coal reserves in the province amount to over 240 billion tons (of which 72 billion tons are high-quality, low-sulfur coal). The proven reserves stand at over 540 billion tons, ranking the province fifth in the country. The total coal resources in Tongzi County amount to 4.272 billion tons, with a wide variety of types available. Of these, the reserves of anthracite amount to 4.034 billion tons, those of bituminous coal to 238 million tons, and those of low-sulfur coal to 1.98 billion tons. The total mining capacity of the entire county currently amounts to 3 million tons, and efforts are being accelerated to expand this capacity through technological upgrades. At present, 17 new mines have been established with the help of investment attraction, bringing the total capacity to 2.7 million tons. At the same time, it is also planned to build 8 pairs of mines with a production capacity of 450,000 to 1.2 million tons per year, resulting in an overall production capacity of 4.8 million tons per year. In 2007, the county’s coal production reached 8.36 million tons. Second, it has strong technical support. This project employs advanced coal slurry pressurized gasification technology tailored to local coal types, domestically produced gas conversion systems capable of operating over a wide temperature range and with sulfur resistance, as well as domestically manufactured large-scale air separation units. For methanol production, domestic low-pressure shell-and-tube methanol synthesis technology is used, while energy-efficient three-column distillation technology is employed for methanol purification. The domestic technologies in question have proven reliable design, construction, and operation experiences in China. Third, it has a favorable location with convenient transportation. Tongzi County has a unique location, situated between Chongqing and Guiyang, with a distance of about 200 kilometers from each city, taking only two hours to reach either one. Transportation is available by land and water, making it very convenient. The factory is located in Taoping Group, Youcao Village, Liaoyuan Town, Tongzi County, 5.5 kilometers away from National Highway 210, 5.6 kilometers from the Tongzi entrance of the Chongzun Expressway, and 6 kilometers from the Tongzi freight yard on the Sichuan-Guizhou electrified railway (with a capacity of 1.5 million tons per year). A 2-kilometer long rural road leads to the Tongguan Highway. The coal transport road under construction (Tongzi-Rongguang Secondary Highway) passes by the edge of the factory site, giving it an extremely favorable geographical location. The entrance of Jiyuan Coal Mine is less than 1 kilometer away from the factory site, allowing raw coal to be transported directly via conveyor belt to the storage area inside the factory. Fourth, there is an adequate supply of water resources and raw materials. The factory is located downstream of the Tongzi River in the county town. The Tongzi River is formed by the confluence of three rivers: the Tianmen River, the Zhenxi River, and the Guandu River. Its catchment area covers 462 square kilometers, with an annual runoff volume of 243 million cubic meters. The county is rich in limestone reserves, with a total amount of over 10 billion tons. The calcium carbonate content exceeds 95%, while the calcium oxide content is above 54%, providing ample auxiliary materials such as limestone for coal chemical projects. With gradual commissioning, the coal chemical project is expected to generate substantial profits. At present, the related coal chemical projects of the company are progressing smoothly, and the land preparation work for the first phase of the Tongzi Coal Chemical project is nearing completion ； Installation work of the main equipment has begun on the main project, with nearly 500 units already installed ； The design of the main chemical packaging is 99% complete, currently in the stage of finalizing the design and arranging procurement ； The order for long-cycle equipment has been placed, and production is underway as planned ； 80% of the training plan has been completed ； The introduction of imported technologies has been fully completed ； The construction of the underground pipeline network is complete. As of December 31, 2009, a total investment of 2.7742 billion yuan had been made, and completion was expected by the end of 2010. The Tianfu project is currently in the testing phase, and it is estimated that products will be available in May or June 2010. Relevant analysts point out that China is a large agricultural country; its large population, low per capita land availability, and strong demand for food are major issues it has faced for a long time, and they also represent significant problems related to **security and strategy. Therefore, in **development strategies, the issues related to agriculture, rural areas, and farmers have always held a prominent position. The Third Plenary Session of the 17th Central Committee of the Party specifically formulated a series of policies to encourage and support agricultural development. Based on this, agriculture’s fundamental role in the country will remain unshaken, and fertilizers, which are used to support agriculture, will continue to develop steadily for a considerable period of time. In the past, the company relied on a single source of natural gas as raw material; chronic shortages of gas supply prevented it from fully utilizing its production capacity, which even led to a decline in its market share in the Guizhou region. The 520,000-ton urea production capacity associated with the Jinchi Coal Chemical Project not only allows the company to further expand its market share in Guizhou, but also provides support for the expansion of its products into markets outside the region, such as Guangdong and Guangxi. Related products such as dimethyl ether and methanol will also generate consistent revenue for the company. According to relevant forecast reports, among the company’s coal chemical projects, the Tianfu Coal Chemical Project is expected to generate for the company annual sales revenue of around 1.176 billion yuan, total profits and taxes of 440 million yuan, and after-tax profits of 214 million yuan ； The 1.12 billion cubic meter coal gasification project, the 500,000-ton ammonia and alcohol co-production project in Phase 1 of the Jinchiji Coal Chemical Project, along with the additional 100,000-ton methanol production project funded by this additional capital injection, are expected to generate sales profits of over 560 million yuan for the company. It is foreseeable that as the company’s related coal chemical projects come online gradually, Chitianhua’s development will adopt a healthy pattern in which natural gas chemicals and coal chemicals support and complement each other, enabling the company to move from a situation of relying on only one source of revenue to one of sustainable growth with two strong pillars.