Cangzhou Chemical Conducts Strategic Investment

Cangzhou Chemical Industrial Co., Ltd. (Cangzhou Chemical, SZ:
600722) is located in Cangzhou Coastal-Port Chemical Industry
Zone, Hebei province. Major products of the company include
caustic soda, PVC resin, liquid chloride, etc.
   Of the 290 000 t/a PVC capacity the company owns, only a
capacity of 60 000 t/a is in normal operation today. With the
help of local governments, however, the 230 000 t/a PVC project
that has suspended production for more than one year may soon
start operation. Reformation talks with strategic investors
have also entered the crucial stage. After the coming of
strategic investors, the 400 000 t/a PVC project funded by the
company with an investment of nearly RMB1.0 billion can be
started once again. (CCR2006, No. 26)

230 000 t/a PVC project may restore production

According to a senior executive of the company, 90% of the profit
in Cangzhou Chemical comes from PVC resin. The PVC production
in China mainly uses the petroleum process and the calcium
carbide process. In the petroleum process, PVC is produced from
EDC (ethane dichloride) that is a downstream product of crude
oil. The raw material has to be imported and the production cost
is therefore high. In the calcium carbide process, PVC is mainly
produced from calcium carbide. The production cost is lower, but
there are defects of great energy consumption and serious
pollution. The petroleum process is the development trend of the
PVC production.
   The PVC production in Cangzhou Chemical today is composed of
two portions. One portion is the 60 000 t/a PVC production base,
which mainly uses the calcium carbide process. The other is the
230 000 t/a PVC production base, which is close to Huanghua Port
and mainly uses the petroleum process. The price of raw material
EDC has maintained at a high level in 2006 and the price of
product PVC is however going down due to fierce competition. The
price of PVC produced through the petroleum process is lower than
the price of cost. The company is forced to suspend the
production in the 230 000 t/a base. Besides, the 400 000 t/a base
in the company has not yet started production.
   Shanghai Chlor-Alkali Chemical Co., Ltd. (Shanghai
Chlor-Alkali Chemical, SH: 600618) and Cangzhou Chemical are
both leading PVC producers in China, whose actual production
capacity and the design ability are however different. Shanghai
Chlor-Alkali Chemical can produce EDC itself. Cangzhou Chemical
has to import great quantities of EDC from Japan and Europe at
a high price. Moreover, the company has no great initiative in
raw material purchase.
   Cangzhou Chemical plans to start the production of the 230
000 t/a PVC production base at the end of November 2006. The raw
material price recently reduced so that the company is
determined to restore the 230 000 t/a PVC production base even
if it makes small profit or suffers loss. Failing that, next time
for the production restoration would be postponed to spring of
2007.

Who will take over Cangzhou Chemical?

Strategic cooperation and reformation is what Cangzhou Chemical
recently persists in doing. According to well-informed sources,
in addition to making investments in the 400 000 t/a PVC project,
strategic investors will surely shoulder some liabilities. The
third quarter performance statement shows that total debts in
the company amount to RMB3.5 billion. New financing channels
will be explored after the coming of strategic investors.
   Cangzhou Chemical and Shanghai Chlor-Alkali Chemical have
held several rounds of talks on their cooperation. An initial
agreement on the intent of strategic cooperation in the form of
cross shareholding has been reached. However, there is no
possibility for Shanghai Chlor-Alkali Chemical to take over
Cangzhou Chemical.
   Some other strategic investors such as China Petrochemical
Development Corporation of Taiwan province (CPDC), Shenhua
Group and ChemChina (China National Chemical Corporation) have
also made contacts with Cangzhou Chemical, but no specific
agreements on the intent of cooperation have been reached.
   CPDC has already had cooperation with Cangzhou Chemical
several times. In the 400 000 t/a PVC project and another project
with an investment of nearly RMB4.0 billion, the two sides have
not yet reached an agreement on the intent of cooperation in the
form of controlling equity. Due to the deficit of cash flow and
the difficulty in operation, Cangzhou Chemical has started
considering the possibility of allowing CPDC to increase its
equity and even have controlling equity.
   Shenhua Group has always hoped to hold equity or controlling
equity in the 3000t liquid chemical terminal in Cangzhou Dahua
Group. Besides, Shenhua Group and Cangzhou Dahua Group are
cooperating in the joint construction of a liquid chemical
terminal in Huanghua Port. Calcium carbide and power resources
owned by Shenhua Group in Shaanxi and Inner Mongolia provinces
are important raw materials for PVC production in Cangzhou
Chemical. With the involvement of Shenhua Group, the PVC
capacity using the calcium carbide process in Cangzhou Chemical
will greatly increase but with serious pollution and great
energy consumption.
    In October 2006, Cangzhou Municipal Government and
ChemChina signed the "Agreement on the Cooperation in Asset
Reformation of Hebei Cangzhou Dahua Group Co., Ltd. ". The
reformation between Cangzhou Dahua Group and ChemChina was
therefore completed. (CCR2006, No. 31) ChemChina will purchase
51% equity from Cangzhou Dahua Group and construct ChemChina
Cangzhou Chemical Industry Base. We will wait and see where
Cangzhou Chemical will go.