3F: A Leading Fluorine Chemical Company

Shanghai 3F New Materials Co., Ltd. (3F, SH: 600636) is a company
mainly engaged in the research, development, production and
operation of fluorine-containing materials. It owns a complete
fluorine chemical industrial chain. Products include CFCs, CFC
substitutes, fluorine-containing polymers and
fluorine-containing fine chemicals. There are more than 30
product varieties. The company holds a leading position in China
in the technology development and the product grade of
fluorine-containing materials.

CDM project

The HFC23 decomposition project in Changshu 3F Zhonghao Chemical
New Material Co., Ltd. (Changshu 3F Zhonghao) controlled by 3F
is already registered as a clean development mechanism (CDM)
project at the United Nations. According to the "Agreement on
the Purchase of Emission Reduction" signed between Changshu 3F
Zhonghao and the World Bank, the World Bank will buy the emission
reduction of HFC-23 generated in Changshu 3F Zhonghao during
2007-2013. The total emission reduction amount is 10.44 million
tons of carbon dioxide equivalent each year and the price of
emission reduction is Euros 6 per ton. The project started
execution on January 1st, 2007. It is expected that the project
will increase a profit of more than RMB90 million a year for the
company in the following 7 years.

CFCs compensation

According to the CFCs output reduction plan made by the State
Environmental Protection Administration(SEPA), the total CFCs
output reduction in Changshu 3F Zhonghao Chemical New Material
Co., Ltd. is 16 117 tons. The Foreign Economics Cooperation
Organization of SEPA has signed a contract with Changshu 3F
Zhonghao on a total CFCs output reduction of 9 327 tons from 2000
to 2005.
   In the second half of 2006, the company announced twice that
a total compensation of RMB86.49 million was already transferred
to the subsidy income of the company. This compensation is paid
for the emission reduction of around 6 500 tons. Based on the
total emission reduction of 16 117 tons, the company can get
another compensation of around RMB120 million for the remaining
emission reduction of 9 600 tons.

CFC substitutes

CFC substitutes produced in the company mainly include F141b,
F142b, F152a, F125, F32 and F227. The total output was 79 000
tons in 2005. The proportion of CFC substitutes in the
main-business revenue and the main-business profit was 43% and
32% respectively in the first three quarters of 2006.
   For long years, fluorine chemicals with the highest gross
profit in the domestic market are blends. The technology for
blends is mainly controlled in the hands of DuPont of the United
States. The joint venture enterprise jointly established by
DuPont as a leading blended refrigerant producer in the world
and 3F mainly produces blended refrigerants for sale in the
Chinese market. CFC substitutes produced in 3F are mostly
provided to the joint venture enterprise for the use in the
production of blended refrigerants. Although the market of
blended refrigerants in China is not in order today, the market
prospect of CFC substitutes produced by 3F as a major raw
material supplier will therefore not be much affected.
   CFC substitutes produced by 3F already hold around 30% share
in the domestic market. The marginal effect produced by further
inputs in scale and cost will not be very high. The technology
for CFC substitutes is already widespread. The technical
advantage is therefore weakening. To get out of the low-price
competition, it is necessary to develop products that have high
technology and can avoid large-scale competition.
   As a leading fluorine chemical enterprise, 3F has desired
technical capabilities and technical reserves such as halon
substitute F227 and non-refrigerating products. F142b that can
be used as foaming agent for rigid plastics in wall heat
insulation is also such product. Owing to the compulsory
implementation of the energy conservation program enforced by
the Ministry of Construction, the extensive market space of
polyurethane rigid plastics will increase the demand of
F142b-based foaming agents. The company has already made
arrangements to cope with the market trend. It is now ready to
enter the market with a capacity of 30 000 t/a F142b in 2007.

Future development

Fluorine-containing polymers have a brisk demand from
downstream. It is expected that the demand in the domestic market
will rapidly grow in the next few years. Fluorine-containing
polymers and their in-depth processed products mainly include
fluorine resins and fluorine rubbers. They will become major
development focuses and important profit sources for the company.
A group of fluorine-containing polymer units such as the 3 500
t/a tetrafluoroethylene monomer unit, the 2 500 t/a disperse
polytetrafluoroethylene unit and the 1 000 t/a polyvinylidene
fluoride unit located in Shanghai Caojing Development Zone are
completed in 2006 and will generate benefits in 2007. In future
the company will also construct fluorine rubber units and
further expand the capacity of fluorine-containing polymer
units.
   In fluorine-containing fine chemicals, perfluorocaprylic
acid produced by Shanghai Fluorine Fine Chemical Co., Ltd. with
74% equity held by 3F has always been in short supply. The product
price and the gross profit are both highly satisfactory. Besides,
the first-phase 100 t/a hexafluoroacetone and 30 t/a bisphenol
AF project located in Caojing, Shanghai will also start to make
contributions in 2007.