Sichuan Meifeng: Capacity Expansion and Performance Upgrading

1.0 million t/a urea capacity

The 200 000 t/a ammonia and 300 000 t/a urea unit in Sichuan Meifeng Chemical Industry Co., Ltd. (SZ: 000731) completed wet commissioning on Sept. 18, 2005. It is the first large localized ammonia and urea unit with intellectual property right in China. The project uses new advanced technologies such as the natural gas continuous catalytic conversion process, the low-pressure ammonia synthesis process and the modified CO2 stripping urea process. Both the process and the design hold the leading position in China.       Sichuan Meifeng has already owned 5 medium and small ammonia and urea units with an ammonia capacity of 440 000 t/a and a urea capacity of 700 000 t/a. With the completion of this new project, the total urea capacity in the company has reached 1.0 million t/a and the company has been included in domestic chemical fertilizer giants. The capacity that has already started production in the company holds the second place in Southwest China only next to Lutianhua Group Inc. and the competitiveness of the company has therefore been greatly upgraded.

Guaranteed natural gas supply

Sichuan Meifeng (Group) Co., Ltd., the controlling shareholder of Sichuan Meifeng Chemical Industry Co., Ltd., transferred 45.03 million shares to Chengdu Huachuan Petroleum Exploration and Development Corporation in 2002 (Huachuan was founded in 1992, its controlling shareholder — China National Star Petroleum Corp. that merged into Sinopec in 2000). Chengdu Huachuan became the biggest shareholder of Sichuan Meifeng Chemical Industry Co., Ltd. with an equity proportion of 18.33%. Sichuan Meifeng (Group) Co., Ltd. was reduced to the second biggest shareholder of the company with an equity proportion of 17.79%. Sichuan Meifeng Chemical Industry Co., Ltd. has therefore become a subsidiary indirectly controlled by Sinopec and a nitrogenous fertilizer producer based on natural gas.     Puguang Gas Field, a super large gas field recently discovered by Sinopec in the northeast of Sichuan, has been defined as the largest gas field so far discovered in the Sichuan Basin. It has proven gas reserves of 114.4 billion m3. The further development of natural gas in surrounding areas will provide a greater guarantee for the natural gas supply to Sichuan Meifeng Chemical Industry Co., Ltd.     Due to restrictions such as pricing mechanism, pipeline capacity and downstream market, the price of natural gas in the domestic market is only RMB600 - 1 200 per m3 today. It is much lower than the import price of around RMB3 000 per m3 in the American market and also much lower than prices of energies with the same heat value such as RMB2 500 per ton for crude oil, RMB3 000 per ton for fuel oil and around RMB4 000 per ton for LPG.       More than a half of natural gas in China is used in the production of primary chemical products such as chemical fertilizers and methanol. As an important clean energy with the most rapid demand growth in near future, the low price of natural gas will not help the rational utilization of resources.     Starting from the second quarter of 2005, West Sichuan Production and Transmission Department of Sinopec Southwest Company and Mianyang Tianneng Fuel Gas Development Co., Ltd. that supply around 80% of natural gas to the company increased the price of natural gas by around RMB0.08 per m3. Based on the consumption of 1 000 m3 of natural gas per ton of urea, the cost of urea will increase by RMB80 per ton. The cost increase will reduce the gross profit margin of urea by 5.0 percentage points. Although the average market price of urea in the first half of 2005 was around 30% higher than last year, the average gross profit margin in the company was only 33.58%, being a slight increase over the level of 32.83% in the same period of 2004  and much lower than the overall level of 35.38% in the whole of 2004. It shows some unfavorable impacts from the price rise of natural gas.

Forthcoming urea price drop

The price of urea in the domestic market dropped to the historical lowest of around RMB1 000 per ton in the first half of 2000. The average ex-factory price of urea increased to RMB1 120 per ton in 2001, RMB1 250 per ton in 2002, RMB1 330 per ton in 2003 and RMB1 600 per ton in 2004. The price continued to have a drastic increase in the first half of 2005. It once reached more than RMB2 000 per ton and the average ex-factory price also touched around RMB1 750 per ton. With impacts from the exemption of value added tax, the imposition of export tariff and the slack fertilizer demand in agricultural production, the ex-factory price of urea in the domestic market started to drop to RMB1 600 - 1 750 per ton in the third quarter of 2005.     The 5-year prosperity in the urea sector is mainly a result of the inherent rules of cyclic functioning in the petrochemical sector. The massive net export increase of urea caused by the drastic price rise of energy and urea in the international market has also helped extend the period of prosperity. Agriculture is a sector with very low growth and very weak cost bearing capacity. After bridging the gap left by imported products, the average annual demand growth of chemical fertilizers, nitrogenous fertilizers in particular, is only around 2% in China. The policy of restricting the export of products with great energy consumption and the large-scale construction of new projects 2005 and 2006 will produce a considerable impact on the price of urea. It is expected that the price of urea in the domestic market will have a gradual downturn in the next few years.      The completion of the 200 000 t/a ammonia and 300 000 t/a urea unit in Sichuan Meifeng Chemical Industry Co., Ltd. will help increase the output in the company in 2005 and 2006. With large shareholders as the backing and the guaranteed natural gas supply, the company has the ability to make further urea capacity expansion through construction and renovation. It can even achieve rapid expansion through capital functioning such as acquisition at an optimal time.