Xinan Chemical Finds Considerable Growth Potential   

Zhejiang Xinan Chemical Industrial Group Co., Ltd. (SH: 600596) is a major glyphosate and silicone producer in China. It has been listed on the Shanghai Securities Exchange since September 2001. The main businesses of the company include pesticides, silicone materials and fine chemicals, with a portfolio of more than 100 product varieties.
    The company reported a core-business revenue increase of 32.91%, to RMB3.828 billion, in 2007, and its net profit reached RMB495 million, an increase of 50.1%. EPS is RMB1.72. According to experts, the prosperity of the glyphosate business and the development potential of the silicone business provided strong support to the performance improvement of the company.

The rising price of glyphosate
promoted the performance

One of the company's two main businesses performed better in 2007and the other performed worse. Due to the price drop caused by the increasing supply of silicone monomer from other producers, the gross profit rate of the silicone business in the company fell 7.63% and the profit grew only about 10.5% compared with 2006. In contrast, owing to the price rise of glyphosate, the gross profit rate of the pesticide business was 8.09 percentage points higher than 2006 and the overall profit grew by 102%. The pesticide business became the major driver for the performance of the company.
   The 25 000 t/a first-phase glyphosate project in Jiangnan Chemical Co., Ltd., a subsidiary controlled by Xinan Chemical, started trial production at the end of June 2007, helped the company achieve a total glyphosate output of around 50 000 tons in 2007.
   As the old plant site of Jiangnan Chemical Co., Ltd. was relocated at the end of 2007, the 15 000 t/a glyphosate unit in the old plant site discontinued production. The company's capacity to produce glyphosate is 55 000 t/a today. The 25 000 t/a second-phase glyphosate project in the new plant site is already under construction. Production is expected to start in the second quarter of 2008 and the capacity of glyphosate will reach 80 000 t/a at that time. Output will likely reach around 70 000 tons this year.
   Stimulated by strong demand in the international market, the price of glyphosate is already close to RMB60 000 per ton today. The glyphosate market will remain prosperous for Chinese producers in the next two years because the capacity expansion in China cannot fully meet the growing demand in the international market. In spite of the reduced export rebate, the gross profit rate of the glyphosate business in the company will still improve remarkably.


The silicone business has strong profit-earning ability

The company's capacity to make silicone monomer is the second biggest in China. Due to  the impact from the reduced inventory in producers and dealers and the capacity expansion in the domestic market, the price of silicone intermediates has declined since early 2007. The company has managed to maintain a relatively high gross profit rate on the strength of advantages in technology and management. On the one hand, demand in the silicone market is still growing. With the constant expansion of downstream application sectors, the growth of the silicone market is much higher than the growth of GDP. It is expected that the demand for silicone will keep growing at more than 25% before 2010. On the other hand, the high technical barrier in the silicone sector has brought opportunities to leading enterprises such as Xinan Chemical. The silicone production in the company makes the co-production of glyphosate. The cyclic utilization of chloromethane can also effectively reduce the production cost of silicone monomer.

Silicone in-depth processing lives up to expectations

The profit margin of silicone in-depth processing is much higher than the monomer production. Capabilities for in-depth processing of silicone are very limited in China. The company's capacity for high-temperature vulcanized silicone rubber and silane coupling agent are 20 000 t/a and 2 000 t/a respectively, making it a leading producer in China. The company's output of crude rubber will increase in 2008; production of mixed rubber will be started and the output of silane coupling agent grow considerably. Downstream products will therefore make greater contributions to profits.
   In July 2007 Momentive Performance Materials and Xinan Chemical announced at the same time that they plan to launch a 100 000 t/a silicone monomer project in Jiande, Zhejiang province. (CCR2007, No. 27) According to experts, the reasons that Momentive Performance Materials chooses to cooperate with Xinan Chemical Industrial Group Co., Ltd. instead of making direct access to the Chinese market are multiple factors of marketing, technology and management in China. The cooperation between the two companies is long-term and not confined to silicone monomer. Xinan Chemical will likely develop vigorously in silicone in-depth processing through introducing technologies from Momentive Performance Materials. Nevertheless, both Xinan Chemical and Momentive Performance Materials face powerful competition from China National BlueStar (Group) Corporation of ChemChina, the biggest silicone producer in China, and possible acquisition by BlueStar.