Sanwei Group: Steps up Main Businesses

Shanxi Sanwei Group Co., Ltd. (Sanwei Group, SZ: 000755) is
mainly engaged in the production of 1,4-butanediol (BDO) and
downstream products such as tetrahydrofuran (THF),
polytetrahydrofuran, gama-butyrolactone (GBL) and polyvinyl
alcohol (PVA). It is the only BDO producer using the calcium
carbide process in the world.

1. BDO: main development sector
BDO and its downstream products accounted for 32% of the main
business revenue and more than 70% of the main business profit
in Sanwei Group Co., Ltd. in 2005 and therefore constitute the
main development orientation. The company has 2 BDO units today
using the calcium carbide-acetylene-aldehyde process with a
total capacity of 80 000 t/a.  The 75 000 t/a BDO project using
the maleic anhydride process to be constructed with funds raised
from the stock market will start production in the middle of 2008
and generate benefits in 2009.
   Unlike most BDO producers in the world, Sanwei Group Co., Ltd.
uses calcium carbide for the acetylene production as raw
material. Shanxi province has abundant coal and calcium carbide
resources and the production cost is therefore low. The 75 000
t/a BDO project (including 20 000 t/a THF and 10 000 t/a GBL)
using the maleic anhydride esterification and hydrogenation
process only needs an investment of RMB380 million. It is much
lower than the total investment of RMB600 million in the 35 000
t/a BDO unit using the calcium carbide-acetylene-aldehyde
process and the 15 000 t/a THF unit.
   In the 80 000 t/a BDO capacity owned by the company, 25 000
t/a can be used to directly produce 15 000 tons of THF and 10
000 tons of GBL a year. 15 000 tons of THF can in turn be used
to produce 15 000 tons of PTMEG (polytetramethylene ether glycol)
a year. The BDO project using the maleic anhydride process being
constructed today can be more flexible. With some adjustments
it can simultaneously produce 35 000 tons of BDO, 20 000 tons
of THF and 10 000 tons of GBL a year.
   The demand of BDO in China was 138 000 tons, the import amount
was 82 000 tons and the actual output was 56 000 tons in 2005.

2. PTMEG: great potential
The consumption of PTMEG in China is mainly in the great demand
of polyurethane fiber. The total consumption of PTMEG in China
was 107 000 tons in 2005 and around 88 600 tons of the total was
used in the polyurethane production. Due to surplus capacity,
polyurethane fiber producers had to reduce their operating rate
in order to maintain the product price in 2005. With the maturing
of the polyurethane fiber sector, the demand growth of
polyurethane fiber will be maintained at 10%-15% in future. The
application of PTMEG in non-fiber sectors has just started in
China and there is still considerable space for development.

3. GBL: oversupply
The consumption of GBL in China was 35 000 tons in 2005 and the
demand of BDO in the GBL production was around 33 000 tons, an
increase of 40.3% over 2004. There are already more than 20 GBL
producers with a capacity of around 50 000 t/a in China today.
The import amount of GBL was 3 300 tons in 2005 and the
self-sufficiency rate has already reached around 90%.

4. PBT: stable demand growth
PBT (polybutylene terephthalate) is extensively used in
electronic, electric and automobile sectors. With the impact
from modified PBT being produced in some PBT producers, the
demand of BDO in the PBT production was only 24 000 tons in 2005,
a drop of 27.6% from 2004. With the development of automobile
and electronic sectors, however, the demand of PBT in China will
still increase stably in future and the average annual growth
will be maintained at around 10%.

5. PVA: stable with improvement
The capacity of PVA in China was around 600 000 t/a in 2005 and
the demand was around 550 000 tons a year. The PVA variety is
however mainly PVA 1799. The unitary product variety has led to
surplus capacity and fierce competition. With the development
of the construction sector in China, PVA will have more extensive
applications in adhesives and coatings sectors and develop
towards product diversification. Sanwei Group Co., Ltd. has a
100 000 t/a PVA capacity and mainly produces PVA 1799. PVA 1788
has also started production today. Product diversification will
help enhance the profit-earning of PVA in the company.
   50% of raw material vinyl acetate used in the company for the
PVA production is purchased from outside sources. The crude oil
price rise has led to an increase in the price of vinyl acetate
in the international market and also in the production cost of
PVA in the company. It is expected that the profit in the PVA
production in 2006 will be equal to 2005.

6. Crude benzene: wait and see
The 200 000 t/a crude benzene and 125 000 t/a refined benzene
project to be constructed with RMB280 million raised in the stock
market will start production at the end of 2007 and generate
benefits in 2008. Benzene is mainly produced from crude oil today
and its price follows the crude oil price. With the improved use
of coke oven gas in China, a number of crude benzene
hydrogenation projects will be launched. There is however still
a gap in product quality between refined benzene made with this
process and petroleum benzene. The conservative gross profit
rate of the project is therefore around 10%.