Cangzhou Dahua Copes with Effects of Last Year's Explosion    


Cangzhou Dahua Co., Ltd. (SH: 600230), listed in Shanghai Securities Exchange on April 6th, 2001, is a leading TDI (toluene diisocyanate) and chemical fertilizer producer in China. Its product portfolio includes TDI, urea, ammonia, hydrogen peroxide, ammonium nitrate, melamine, nitric acid and caustic soda. ChemChina, China's fifth largest chemical firm, holds 58.25% equity in the company.

The company posted its 2007 fiscal report showing a sales revenue of RMB1.5 billion, a decline of 8.83% and a net profit of RMB78.86 million, down 25.72%. The plunge is mainly attributed to the accidental explosion that happened in the TDI facility in May 2007.

The urea price stays high
In spite of oversupply in the market, the price of urea will stay high over the next few years, according to the company's analysis. The main reasons are as follows: (a) The price rise of natural gas, power and raw materials will promote the cost increase of urea; (b) The price of grain has surged since 2006; (c) The price of raw materials for nitrogenous fertilizers such as crude oil and natural gas in the international market will be maintained at a high level.
   The company has a urea production capacity of 550 000 t/a and an ammonia capacity of 330 000 t/a. Urea produced by the company accounts for around 32% of the total urea market volume in Hebei province. Although the situation of the urea business is slack, production and sales of urea in the company are basically balanced.
   Natural gas is the major raw material for urea production in the company. The price of more than 60% of natural gas used in the company is the market price, being as high as RMB1.3/m3. The price of the remaining natural gas is the special price for chemical fertilizer production, being RMB0.78/m3. China will further increase natural gas prices in the next few years. As the company uses great quantities of high-priced natural gas, the profit growth in the urea business of the company is expected to slow down.

Expanding its TDI production capacity further  

The TDI branch restored production six months after the explosion, in November 2007. (CCR2007, No. 33) The explosion caused great troubles to ChemChina that had just become the majority shareholder in early 2007.
    For the sake of economics, the nitration section where the explosion took place has not yet restored production. The company now buys DNT (dinitrotoluene) from Gansu Yinguang Juyin Chemical Co., Ltd. for TDI production. The production cost is therefore around RMB200 per ton higher than before, negatively impacting the performance of the company.
    Cangzhou Dahua is planning to construct a new DNT unit, but has not disclosed the timetable. Due to the delay in design, the 50 000 t/a TDI project (including the DNT unit) that was originally planned to come on stream in the first half of 2008 can only be completed in early 2009.
    The company has a TDI capacity of 30 000 t/a today. After the completion of the 50 000 t/a project, the total TDI capacity will reach 80 000 t/a. The company will become a leading enterprise in the TDI sector of China at that time. Besides, the plan to launch a 100 000 t/a TDI project was already approved in November 2007 (CCR 2008 No.6). The new project is expected to be completed in 2012. The sustained expansion of the TDI capacity will promote rapid performance growth for the company.
    The demand for TDI in China has been increasing stably, but that growth is slowing down year by year. The 1990s was the period for the rapid development of TDI in China when the average annual demand growth was around 15%. After 2000 were several years of stable development with an average annual growth maintained at around 9%. Most of the domestic demand is satisfied by imports. The consumption of TDI in China is around 400 000 tons a year today and the domestic total capacity of TDI has reached 290 000 t/a. Due to uncontrollable events in some units, there is often seasonal supply shortage in some areas.
   With the TDI production restoration, the price of TDI has reduced slightly. Because of the supply deficit, however, the price of TDI is still maintained at a high level.
    The upstream feedstock chain of TDI is crude oil to toluene to DNT then TDI. The price of DNT is determined mainly by toluene. Despite the sustained price rise of crude oil, toluene is currently in oversupply in the international market and its price has stayed low.
    Although there is a considerable supply shortage in the domestic toluene market, toluene in surrounding countries such as Korea, Singapore, Thailand and Japan is in oversupply. CNPC and Sinopec Group are also increasing the production capacity of toluene. There will therefore be an abundant supply of toluene in China in the next few years and the price of toluene will not likely increase significantly.