INDUSTRY OVERVIEW
THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW
Certain information and statistics set out in this section and elsewhere in this document relating to the PRC economy and the construction, coke, methanol, pure benzene and coal industries and markets have been extracted from various official government publications and other sources. No report or publication quoted or used in this document was commissioned by us. The information in such sources and publications may not be consistent with information compiled by other institutions within or outside China. Due to the inherent time-lag involved in collecting any industry and economic data, some or all of the data contained in this section may only represent the state of affairs at the time such data was collected. As such, you should also take into account subsequent movements in our industry and the PRC economy when you evaluate the information contained in this section. The Directors have exercised reasonable care in extracting and repeating such information and statistics. We believe that the sources of such information are appropriate sources and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. No independent verification has been carried out on such information and statistics. None of our Company, our respective directors and advisers makes any representation as to the accuracy of such information and statistics, which may be inaccurate, incomplete, out-of-date or inconsistent with each other or with other information and statistics. THE PRC ECONOMY China’s economy has grown significantly since the PRC Government initiated economic reforms and “open-door” policies in 1978, recording eight years of continuous growth after China’s accession to the WTO in 2001. According to the National Bureau of Statistics of China, China’s real GDP grew at a CAGR of 10.5% from 2001 to 2008, and China became the third largest economy in the world in 2008 according to the World Bank. The following chart sets out China’s GDP and its growth rate for the periods indicated. China’s Nominal GDP and Real GDP Growth Rate, 2001-2008 RMB billion 13.0%
40,000 35,000 10.0%
30,000 25,000
8.3%
10.1%
10.4%
30,067
9.1%
9.0%
18,322 10,966
12,033
13,582
15,988
8.0% 6.0% 4.0%
10,000
2.0%
5,000 0
0.0% 2001
2002
2003
2004
2005
2006 Nominal GDP
Source:
12.0% 10.0%
25,731 21,192
20,000 15,000
14.0%
11.6%
2007
2008 Real GDP Growth
National Bureau of Statistics of China
Demands for our products are dependent on China’s economic development. Of particular relevance to our business are China’s urbanization and industrialization and the growth in its fixed asset investments.
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INDUSTRY OVERVIEW Urbanization and Industrialization The rates of urbanization and industrialization in China continued to rise as its economy grew. According to CEIC, China’s urbanization rate (being urban population as a percentage of total population) increased from 37.7% in 2001 to 45.7% in 2008. During the same period, China’s industrialization rate (being GDP attributable to industrial activities as a percentage of total GDP) increased from 45.1% to 48.6%, according to the National Bureau of Statistics of China. The following chart sets out China’s urbanization rate and industrialization rate for the periods indicated. China’s Urbanization Rate and Industrialization Rate, 2001-2008 50%
48.7%
47.7% 45.1%
48.6%
48.6%
46.2%
46.0% 44.8%
45%
45.7%
44.9%
43.9%
43.0% 41.8% 40.5% 39.1%
40%
37.7%
35%
30% 2001
2002
2003
2004
2005
2006
2007
Urbanization Rate
2008
Industrialization Rate
Source: CEIC for urbanization rate; National Bureau of Statistics of China for industrialization rate
Growth in Fixed Asset Investments Driven by the high rates of urbanization and industrialization in recent years, fixed asset investments in China also increased substantially, growing at a CAGR of 24.5% from 2001 to 2008 according to CEIC. The following chart sets out the total fixed asset investments in China and their growth rates for the periods indicated. Total Fixed Asset Investments in China and Annual Growth Rate, 2001-2008 RMB billion
25,000
27.7%
26.8%
26.0% 23.9%
24.8%
30% 25%
20,000
17,229 16.9%
15,000
20%
13,732
13.0%
11,000
15%
8,877
10,000 5,000
25.5%
3,721
4,350
5,557
7,048
10% 5%
0
0% 2001
2002
2003
2004
2005
2006
Total Fixed Asset Investments in China
Source: CEIC
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2007
2008
Annual Growth Rate
THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW CONSTRUCTION INDUSTRY As a result of China’s urbanization and industrialization and growth in fixed asset investments, China’s construction industry experienced rapid growth in recent years. According to CEIC, the total output of China’s construction industry increased at a CAGR of 21.8% from RMB1,536 billion in 2001 to RMB6,114 billion in 2008. The following chart sets out the total output of China’s construction industry and its growth rates for the periods indicated. Total Output of China’s Construction Industry and Annual Growth Rate, 2001-2008 RMB billion 8,000 7,000
30% 24.6%
22.9%
25.7% 22.8%
20.6%
6,000
19.1%
5,000
25% 20%
19.8% 15%
3,455 2,902
3,000 2,000
5,104 4,156
4,000
6,114
20.3%
2,308 1,536
10%
1,853
5%
1,000
0%
0 2001
2002
2003
2004
2005
2006
Total Output of China's Construction Industry
2007
2008
Annual Growth Rate
Source: CEIC
COKE INDUSTRY Introduction There are two broad categories of coke: metallurgical coke and foundry coke. Metallurgical coke is a carbon material produced by the destructive distillation of a mixture of coking coal and may be used as a fuel in smelting iron ore in a blast furnace. Foundry coke is a special type of coke that is used in furnaces to produce cast and ductile iron products. Coke’s principal usage in the steel industry is to melt and reduce iron ore, which is used for making pig iron in the steel production process. To produce pig iron, iron ore, coke, heated air and limestone or other fluxes are fed into a blast furnace. The heated air causes coke combustion, which provides the heat for pig iron production as well as the source of carbon for removing the oxygen from the iron ores. The production of pig iron involves blasting large quantities of air at the bottom of the blast furnace, and coke also provides structural support for the raw materials stacked up in the blast furnace, allowing ventilation for the heated air to rise up and liquid iron to be collected at the bottom
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INDUSTRY OVERVIEW of the blast furnace. Crude steel is made from molten steel after processing pig iron and other raw materials from the process of casting. Crude steel is then further processed into finished steel products. The following chart sets out a breakdown of the consumption of coke in China in 2007. Breakdown of Consumption of Coke in China in 2007 Chemicals 7.3% Others 7.7%
Steel , Pig Iron and Alloys 85.0%
Source: CEIC
Coke is a solid carbon-based derivative of coking coal. Coke is grey, hard and porous. Ash content and sulfur content are considered the key properties of coke. Generally, the lower the ash content and sulfur content, the higher the price of the coke. With the steel, pig iron and alloys industries being the main end-user of coke, its mechanical strength when being pressed in the coking process and its ability to endure blast furnace conditions are also key qualities. Coke may have a water content of a few percentages of its mass. The following table sets forth the main chemical properties of Class I and Class II coke in accordance with quality standard GB/T 1996-2003 stipulated by the PRC General Administration of Quality Supervision, Inspection and Quarantine. Classifications Index
Class I
Class II
Ash Content (%) ........................................................
≤12
≤13.5
Sulfur Content (%) .....................................................
≤0.6
≤0.8
Volatility (%) .............................................................
≤1.8
≤1.8
Mechanical Strength (M40)
(1)
(%) .............................
≥80
≥76
Mechanical Strength (M25)
(2)
(%) .............................
≥92
Mechanical Strength (M10)
(3)
(%) .............................
For M25: ≤7.0; For M40: ≤7.5
≥88 (4)
≤8.5
(1)
This measures the percentage of coke which is 40mm or greater in diameter after the coke pressing process for categorization of coke by size.
(2)
This measures the percentage of coke which is 25mm or greater in diameter after the coke pressing process for categorization of coke by size.
(3)
This measures the percentage of coke which is 10mm or smaller in diameter after the coke pressing process for categorization of coke by size.
(4)
M10 is ≤ 7.0 if tested by the methodology for determining M25, and ≤ 7.5 if tested by the methodology for determining M40.
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INDUSTRY OVERVIEW Coking is the process by which coke is produced from coal. This involves feeding coking coal of suitable physical and chemical qualities into ovens for heating, which combines the carbon and residual ash present and removes volatile compounds. The coke is then cooled in a quench tower and screened before storage or transportation. The various volatile compounds dispelled are usually collected and processed into other chemical products. These include coking gas, coal tar, ammonium sulfate, phenol, naphthalene and crude benzene. Demand and Supply Landscape The rapid growth of China’s construction industry has led to an increase in demand for pig iron and crude steel. As a result, China’s pig iron and crude steel production volume also experienced substantial growth in recent years, with annual outputs increasing from 147 million tonnes of pig iron and 151 million tonnes of crude steel in 2001, to 471 million tonnes of pig iron and 500 million tonnes of crude steel in 2008, according to Metalytics. According to Metalytics, China is currently the largest crude steel production country in the world, producing 37.7% of the total global crude steel output in 2008, which is far more than the second largest crude steel production country in the world, Japan, which produced 8.9% of the total global crude steel output in 2008. The following chart sets out China’s annual output of pig iron and crude steel for the periods indicated. China’s Annual Outputs of Pig Iron and Crude Steel, 2001-2008 million tonnes 600 471
500 414 400
345
300
257 214
200
147
151
171
495
471
500
423
356
280
222
182
100 0 2001
2002
2003
2004
2005
2006
2007 Pig Iron
2008 Crude Steel
Source: Metalytics, 2009
The PRC Government announced in late 2008 that it will implement a RMB4,000 billion economic stimulus package, and that such package will consist of, among others, investments in the national public infrastructure development, national housing development, and reconstruction works in regions hit by the Sichuan earthquake in May 2008. As a result of this stimulus package, steel
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INDUSTRY OVERVIEW production activities increased in the nine months ended September 30, 2009 when compared to the nine months ended December 31, 2008. The following chart sets out the steel production volume in China for the periods indicated. Annual Steel Production Volume in China, 2004-2009 9M million tonnes 700.0 600.0
579.1
560.1
500.0
499.3
467.0 369.3
400.0 295.6
300.0 200.0 100.0 0.0
2004
2005
2006
2007
2008
2009 9M
Source: CEIC
Within China, the largest steel production province in China in 2008 was Hebei, with an output volume of 115.5 million tonnes, according to CEIC. The second and third largest were Jiangsu and Shandong, producing 72.5 million tonnes and 50.5 million tonnes of steel, respectively. The following chart sets out the production volume of the ten largest steel production provinces in China in 2008. Top 10 Provinces in China by Steel Production Volume in 2008 million tonnes 140.0 120.0
115.5
100.0 80.0
72.5
60.0
50.5 42.7
40.0
29.4
25.5
21.6
20.8
20.4
19.9
Hubei
Shanghai
Guangdong
Shanxi
20.0 0.0 Hebei
Jiangsu
Shandong
Liaoning
Tianjin
Henan
Source: CEIC
Steel production volume in Hebei has grown steadily over recent years, increasing from 47.4 million tonnes in 2004 to 115.5 million tonnes in 2008 at a CAGR of 24.9%. During the nine months ended September 30, 2009, steel production volume in Hebei was 108.6 million tonnes. The following chart sets out the steel production volume in Hebei for the periods indicated.
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INDUSTRY OVERVIEW Annual Steel Production Volume in Hebei, 2004-2009 9M million tonnes
140.0 115.5
120.0
108.6
106.0
100.0 85.4 80.0 63.2 60.0
47.4
40.0 20.0 0.0 2004
2005
2006
2007
2008
2009 9M
Source: CEIC
As the largest steel production province in China in 2008, Hebei is also a major coke production province in China. According to the China Coking Industry Association, Hebei has been the second largest coke production province in China behind Shanxi since 2004, and it accounted for 12.1% of the total coke production volume in China in 2008. The following chart sets out the production volume of the ten largest coke production provinces in China in 2008. Top 10 Provinces in China by Coke Production Volume in 2008 million tonnes 90.0 82.4 80.0 70.0 60.0 50.0 39.2
40.0
28.9
30.0
20.4
17.4
20.0
13.2
12.3
12.2
10.8
Inner Mongolia
Shaanxi
Yunnan
Jiangsu
10.1
10.0 0.0 Shanxi
Hebei
Shandong
Henan
Liaoning
Sichuan
Source: China Coking Industry Association, 2008
Fueled by the growth of steel production in Hebei, coke production volume in Hebei also experienced significant growth in recent years, increasing from 17.7 million tonnes in 2004 to 39.2 million tonnes in 2008 at a CAGR of 22.0%. The global and domestic economic slowdown in the last
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INDUSTRY OVERVIEW quarter of 2008 resulted in slower growth in steel production volume in Hebei. Due to the decreased demand for coke in such quarter, the aggregate coke production volume in Hebei in 2008 remained at the same level as that in 2007. As a result of the improved economic and market environments, as well as the RMB4,000 billion economic stimulus package announced by the PRC government in late 2008, steel production activities increased in the nine months ended September 30, 2009 when compared to the nine months ended December 31, 2008. This in turn led to an increase in the demand for coke and Hebei produced 34.6 million tonnes of coke during such nine-month period. The following chart sets out the coke production volume in Hebei for the periods indicated. Annual Coke Production Volume in Hebei, 2004-2009 9M million tonnes 45.0 39.2
40.0
39.2 34.6
35.0
30.7
30.0 24.6 25.0 20.0
17.7
15.0 10.0 5.0 0.0 2004
2005
2006
2007
2008
2009 9M
Source: China Coking Industry Association, 2004-2009
Pricing Dynamics The market price of coke in China is largely driven by its supply and demand, as well as government policies. The market price of coke in China increased steadily in recent years. According to the China Coking Industry Association which published the average selling price of Class I and Class II coke on a combined basis, by the end of 2007, the market price for coke above 40mm (including VAT) rose by 46.0% from RMB995 per tonne in January 2006 to RMB1,453 per tonne in December 2007. Coke prices continued to increase during the first eight months of 2008 as demand from the steel industry grew. The market price for coke above 40mm in diameter (including VAT) rose by 95.9% from RMB1,453 per tonne in December 2007 to RMB2,846 per tonne in August 2008. From August to December 2008, coke prices decreased sharply due to decreased demand from the steel industry both domestically and for export and an increase in coke inventory caused by the deteriorated global and domestic market conditions, with the market price for coke above 40mm in diameter (including VAT) dropping by 43.6% to RMB1,606 per tonne. In 2009, the market prices of coke above 40mm in diameter (including VAT) rebounded slightly due to the recovery of the steel industry, increasing by 10.3% from RMB1,606 per tonne in December 2008 to RMB1,771 per tonne in November 2009. The following chart sets out the monthly average selling price of Class I and Class II coke (on a combined basis) in China for the periods indicated.
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INDUSTRY OVERVIEW Monthly Average Selling Price of Coke in China (1) (January 2006 - November 2009) RMB/tonne 3,000 2,500 2,000 1,500 1,000 500 Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09 Nov-09
>40mm 25~40mm in diameter in diameter Source: China Coking Industry Association, 2006-2009 (1)
Including VAT
METHANOL INDUSTRY Introduction Methanol is a colorless, flammable and toxic liquid with an alcohol-like odor. Methanol has broad applications and can be used to produce a number of products. Methanol is commonly converted to formalin, which is used in the manufacturing process of plastics, plywood, paints, explosives and permanent press textiles. Methanol is also blended in gasoline as methanol fuel for use by vehicles in a number of countries. Other chemical derivatives of methanol include DME, acetic acid and MTBE. DME can be blended with LPG for home heating and cooking or used as a replacement for diesel as a transportation fuel. Acetic acid is used as a chemical reagent for the production of various chemical compounds and can be used to manufacture insecticides and pharmaceutical products. MTBE can be used as a fuel component in gasoline as well. Methanol can also be processed into a laboratory solvent. The chart below sets out a breakdown of the consumption of methanol in China in 2008. Breakdown of Consumption of Methanol in China in 2008 Others 24.2%
Formalin 29.8%
MTBE 8.1% Acetic acid 9.3%
Methanol fuel 12.5% DME 16.1%
Source: CBI China
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INDUSTRY OVERVIEW Prior to the mid-1920s, methanol was produced by the distillation of wood. This inefficient method has been superseded by a multi-step process based on hydrogen-carbon oxide mixtures, which was introduced in the mid-1920s. Mixtures used as feedstock to produce methanol include natural gas and other hydrocarbon chemical mixtures derived from coal. Outside China, natural gas is more commonly used as feedstock, but given the popular use of coal as an energy source in China, coking gas is more widely used as a feedstock in China. The multi-step process involves processing hydrogen-carbon oxide mixtures with heat, steam and oxygen to convert the feedstock into a synthetic gas containing hydrogen, carbon monoxide and carbon dioxide. The synthetic gas is condensed and processed at high heat in the presence of copper-based catalysts to produce crude methanol. Crude methanol is then purified by distillation to recover methanol. Supply and Demand Landscape As China’s economy grew, energy supply became an increasingly large concern, and the use of methanol as an alternative fuel source became increasingly attractive. Under government encouragement, the supply of methanol in China has grown rapidly over recent years. The chart below sets out the production volume of methanol in China for the periods indicated. Annual Methanol Production Volume in China, 2001-2008 million tonnes 12.0
11.1 10.1
10.0 7.5
8.0 5.4
6.0 4.4 4.0
3.0 2.0
2.1
2.0 0.0 2001
2002
2003
2004
Source: CEIC
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2005
2006
2007
2008
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INDUSTRY OVERVIEW Driven by the rapid development of the chemicals industry in China, which consumes various downstream products of methanol, as well as increasing gasoline prices, which encourage the use of methanol as an alternative fuel source, the demand for methanol in China increased rapidly over recent years. The chart below sets out the annual methanol consumption volume in China. Annual Methanol Consumption Volume in China, 2001-2008 million tonnes 14.0 12.2 12.0
10.4
10.0
8.4
8.0
6.7 5.7
6.0 4.0
3.5
3.9
4.3
2001
2002
2003
2.0 0.0 2004
2005
2006
2007
2008
Source: CEIC, Cheminfo
On May 18, 2009, the Standardization Administration of China announced a set of national standards for M85 methanol gasoline for vehicle-use. These standards would be implemented starting from December 1, 2009. M85 methanol gasoline is a methanol-blended gasoline which contains approximately 85% of methanol and approximately 15% of gasoline. Methanol-blended gasoline emits fewer pollutants, such as sulfur dioxide, nitrous oxide and solid particles, than pure gasoline. Methanol-blended gasoline is also generally cheaper than gasoline. Car engines need to be modified in order to run on M85 methanol gasoline, but domestic automakers have developed engines suitable for methanol gasoline. Methanol gasoline has already been in use in northern Chinese provinces such as Shanxi, Shaanxi and Henan. The implementation of the national standards for M85 methanol gasoline for vehicle-use is expected to eliminate discrepancies between the industry standards in different provinces, enhance market access for methanol-blended gasoline in China and hence increase demand for methanol.
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INDUSTRY OVERVIEW Pricing Dynamics According to CEIC, methanol prices (including VAT) have remained at around the level of RMB2,500 per tonne to RMB3,000 per tonne from 2004 through the six months ended June 30, 2006. Methanol prices (including VAT) fluctuated after July 2006 and increased to approximately RMB4,000 per tonne in the last quarter of 2007. At the start of 2008, due to decreased demand for downstream products of methanol, prices dropped again to approximately RMB3,400 per tonne. During the second quarter of 2008, partially driven by increases in the price of gasoline, methanol prices (including VAT) rebounded, reaching over RMB4,000 per tonne in June 2008. Since then, due to deteriorating global and domestic market conditions as well as an influx of low priced methanol import, methanol prices (including VAT) dropped to below RMB2,000 per tonne in December 2008. Since January 2009, methanol prices (including VAT) in China started to stabilize at around RMB2,000 per tonne. The chart below sets out the monthly average selling price of methanol (including VAT) in China from January 2004 to November 2009. Monthly Average Selling Price of Methanol in China (1) (January 2004 - November 2009) RMB/tonne 4,500 4,000 3,500 3,000 2,500 2,000 1,500 Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09 Nov-09
Source: CEIC (1)
Including VAT
PURE BENZENE INDUSTRY Introduction Pure benzene is a colorless, toxic and highly flammable liquid. It is primarily used to manufacture chemical ingredients such as ethylbenzene, cyclohexane and cumene. Pure benzene is used as an industrial solvent, a derivative for manufacturing synthesized benzene and in the production of nylon, dyes, plastics, drugs, explosives and synthetic rubber. Pure benzene is traditionally manufactured from the distillation of crude benzene and coke oven light oils. Nowadays, pure benzene is most commonly produced by: (i) catalytic reforming, (ii) steam cracking of liquid petroleum feedstock, (iii) hydrodealkylation of toluene and (iv) toluene
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INDUSTRY OVERVIEW disproportionation. Catalytic reforming involves blending a mixture of hydrocarbons with hydrogen, exposing it to a bifunctional platinum chloride or rhenium chloride catalyst to form aromatic hydrocarbons, separating the aromatics by extraction and obtaining pure benzene from distillation. Steam cracking involves producing ethylene and other alkenes from paraffin gases, naphthas, gas oils and other hydrocarbons. Depending on the feedstock used, this process can yield pyrolysis gasoline, a benzene-rich liquid, as by-product. Benzene is extracted with a solvent and through distillation. Toluene hydrodealkylation involves converting toluene to benzene by mixing toluene with hydrogen and exposing it to a chromium, molybdenum or platinum oxide catalyst. Toluene disproportionation involves reacting two toluene molecules and rearranging the methyl groups from one toluene molecule to the other to yield one benzene molecule and one xylene molecule, and is mostly used by manufacturers with similar demands for both benzene and xylene. Supply and Demand Landscape The global supply of pure benzene has been tight since 2004, which in turn increased profitability for pure benzene manufacturing and led to subsequent capacity increase. The majority of the new capacity growth is in Asia and the Middle East, in particular China, Thailand and Saudi Arabia. According to Merchant Research & Consulting, China produced 5.8 million tonnes of pure benzene in 2008 and is the second largest pure benzene production country in the world, just behind the US which produced 7.0 million tonnes of pure benzene in 2008. The chart below sets out the production volume of the ten largest pure benzene production areas in the world in 2008. Top 10 Areas in the World by Pure Benzene Production in 2008 million tonnes 8.0 7.0
7.0 5.8
6.0
5.3 5.0 4.0 3.3 3.0 2.3 2.0
2.0 1.5 1.1
1.0
0.9
Taiwan
U.K.
Iran
1.0 0.0 US
China
Japan
South Korea
Germany Netherlands Thailand
Source: Merchant Research & Consulting, 2009
China’s pure benzene production has remained at approximately or slightly above 5.8 million tonnes per year in recent years, according to Merchant Research & Consulting. China has a negative trade balance of pure benzene with its consumption slightly exceeding its production in recent years,
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INDUSTRY OVERVIEW according to Merchant Research & Consulting. The chart below sets out the pure benzene production and consumption volume in China for the periods indicated. Pure Benzene Production and Consumption Volume in China, 2006-2008 million tonnes 7.0 5.9
5.8
6.0
6.2
6.0
6.1
5.8
5.0 4.0 3.0 2.0 1.0 0.0 2006
2007
2008 Production Volume
Consumption Volume
Source: Merchant Research & Consulting, 2009
Pricing Dynamics According to CEIC, pure benzene prices (including VAT) have increased gradually from approximately RMB5,150 per tonne in January 2004 to approximately RMB8,200 per tonne in December 2006. Pure benzene prices (including VAT) further increased to above RMB9,000 per tonne in 2007 and reached over RMB10,500 per tonne in June and July 2008. In the fourth quarter of 2008, driven by deteriorating economic and market conditions, pure benzene prices (including VAT) dropped sharply to RMB3,010 per tonne in December 2008. Since January 2009, pure benzene prices (including VAT) in China started to recover, due to improved market conditions as well as increase in the demand of downstream chemical products. Monthly Average Selling Price of Pure Benzene in China (1) (January 2004 - November 2009) RMB/tonne 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Jan-04
Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Nov-09
Source: CEIC (1) Including VAT
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INDUSTRY OVERVIEW COKING COAL INDUSTRY Introduction Coal is a combustible sedimentary rock composed principally of carbon. Other constituents of coal include hydrogen, oxygen, sulfur and nitrogen. Coal is a type of fossil fuel and is formed from a layer of plant being accumulated between layers of rock and exposed to heat and pressure over long periods of time. Depending on the extent of exposure, coal transforms successively from peat, which is the lowest form of coal, to lignite, sub-bituminous coal, bituminous coal and anthracite, which is the highest rank of coal in terms of carbon content. Lignite and sub-bituminous coal are low rank coals. They are usually brown in color, softer, and are dull and earthy in appearance. They have a low carbon content, high moisture level and a low energy level. Bituminous coal and anthracite are higher rank coals. They are typically black in color and are glossier in appearance. They have higher carbon content, lower moisture level and higher energy content than low ranked coal. Some types of bituminous coal contain higher energy contents than anthracite. Coking coal is a form of bituminous coal and typically has a carbon content of around 60-80%. The majority of coking coal is used as a feedstock to produce coke. To improve efficiency, raw coal is usually washed to remove waste and constituents such as ash before it is used as feedstock. A portion of coking coal is also used to produce electricity and heat in power plants. The demand for coking coal in China is largely driven by the production of coke, which is in turn driven by the production of pig iron and crude steel by the steel production industry. With the rapid growth of the steel industry in China, the demand for coking coal also increased significantly in recent years.
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INDUSTRY OVERVIEW China is the largest producer of hard coal in the world in 2008, accounting for 47.4% of the world’s hard coal, according to OECD/IEA. The following chart sets out the regional shares of global hard coal production in 2008. Regional Shares of Global Hard Coal Production in 2008 China 47.4%
Former Soviet Union 7.0%
Asia (excluding China) 13.9% Latin America 1.5%
OECD 26.1%
Africa 4.1%
Source: Key World Energy Statistics 2009娀 OECD/IEA, 2009, figure on page 14: “1973 and 2008 regional shares of hard coal production”
Within China, Shanxi has been the largest raw coal supply province in China historically, according to CEIC. The chart below sets out the supply volume of the ten largest raw coal supply provinces in China in 2008. Top 10 Provinces in China by Raw Coal Supply Volume in 2008 million tonnes 700.0 609.5 600.0 500.0
465.1
400.0 300.0 226.5
208.9
200.0
146.6
119.1
118.0
100.0
86.0
81.9
79.1
Sichuan
Heilongjiang
Hebei
0.0 Shanxi
Inner Mongolia
Shaanxi
Henan
Shandong
Source: CEIC, 2008
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Anhui
Guizhou
THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW China produced a total of approximately 1,033 million tonnes of raw coking coal in 2008, according to Fenwei. The chart below sets out the supply volume of the ten largest raw coking coal supply provinces in China in 2008. Top 10 Provinces in China by Raw Coking Coal Supply Volume in 2008 million tonnes 350.0 327.0 300.0 250.0 200.0 150.0 120.4
112.4
100.0
75.9
75.8 49.9
50.0
49.1
40.7
33.5
30.0
0.0 Shanxi
Shandong
Anhui
Heilongjiang
Henan
Hebei
Guizhou
Yunnan
Inner Mongolia
Sichuan
Source: Fenwei
According to Fenwei, China had approximately 280 billion tonnes of proven coking coal reserves in 2008, with proven reserves (i) being those that geological and engineering information indicates with reasonable certainty that coking coal can be recovered in the future from known deposits under existing economic and operating conditions and (ii) including basic reserves and resources (based on the Chinese Resource and Reserve Reporting Standards). The chart below sets out the proven coking coal reserves of the top ten provinces in China in 2008. Top 10 Provinces in China by Proven Coking Coal Reserves in 2008 million tonnes 180,000 160,000
155,184
140,000 120,000 100,000 80,000 60,000 40,000 20,022 20,000
18,838 10,004
9,501
9,453
9,299
8,612
7,146
5,310
Guizhou
Heilongjiang
Xinjiang
Henan
Hebei
Inner Mongolia
Shaanxi
0 Shanxi
Anhui
Shandong
Source: Fenwei
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THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW The chart below sets out certain monthly average selling prices of coking coal from January 2006 to September 2009. Certain Monthly Market Prices of Coking Coal, January 2006 - September 2009 RMB/tonne 2,500
2,000
1,500
1,000
500
0 Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09 Sep-09
Main coking coal from Liulin, Shanxi (1) 1/3 coking coal from Zaozhuang, Shandong (2) Fat coal from Lingshi, Shanxi
(1)
Source: Fenwei Notes: (1)
These are “mine mouth” prices, being the prices of coking coal for pick-up from the relevant mines, exclusive of VAT.
(2)
These are “FOR” (free-on-rail) prices, being the prices of coking coal already loaded onto rail cars. Prices include all costs incurred prior to the coking coal being loaded onto the rail cars and include loading costs. Prices are inclusive of VAT.
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INDUSTRY OVERVIEW
Certain information and statistics set out in this section and elsewhere in this document relating to the PRC economy and the construction, coke, methanol, pure benzene and coal industries and markets have been extracted from various official government publications and other sources. No report or publication quoted or used in this document was commissioned by us. The information in such sources and publications may not be consistent with information compiled by other institutions within or outside China. Due to the inherent time-lag involved in collecting any industry and economic data, some or all of the data contained in this section may only represent the state of affairs at the time such data was collected. As such, you should also take into account subsequent movements in our industry and the PRC economy when you evaluate the information contained in this section. The Directors have exercised reasonable care in extracting and repeating such information and statistics. We believe that the sources of such information are appropriate sources and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. No independent verification has been carried out on such information and statistics. None of our Company, our respective directors and advisers makes any representation as to the accuracy of such information and statistics, which may be inaccurate, incomplete, out-of-date or inconsistent with each other or with other information and statistics. THE PRC ECONOMY China’s economy has grown significantly since the PRC Government initiated economic reforms and “open-door” policies in 1978, recording eight years of continuous growth after China’s accession to the WTO in 2001. According to the National Bureau of Statistics of China, China’s real GDP grew at a CAGR of 10.5% from 2001 to 2008, and China became the third largest economy in the world in 2008 according to the World Bank. The following chart sets out China’s GDP and its growth rate for the periods indicated. China’s Nominal GDP and Real GDP Growth Rate, 2001-2008 RMB billion 13.0%
40,000 35,000 10.0%
30,000 25,000
8.3%
10.1%
10.4%
30,067
9.1%
9.0%
18,322 10,966
12,033
13,582
15,988
8.0% 6.0% 4.0%
10,000
2.0%
5,000 0
0.0% 2001
2002
2003
2004
2005
2006 Nominal GDP
Source:
12.0% 10.0%
25,731 21,192
20,000 15,000
14.0%
11.6%
2007
2008 Real GDP Growth
National Bureau of Statistics of China
Demands for our products are dependent on China’s economic development. Of particular relevance to our business are China’s urbanization and industrialization and the growth in its fixed asset investments.
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INDUSTRY OVERVIEW Urbanization and Industrialization The rates of urbanization and industrialization in China continued to rise as its economy grew. According to CEIC, China’s urbanization rate (being urban population as a percentage of total population) increased from 37.7% in 2001 to 45.7% in 2008. During the same period, China’s industrialization rate (being GDP attributable to industrial activities as a percentage of total GDP) increased from 45.1% to 48.6%, according to the National Bureau of Statistics of China. The following chart sets out China’s urbanization rate and industrialization rate for the periods indicated. China’s Urbanization Rate and Industrialization Rate, 2001-2008 50%
48.7%
47.7% 45.1%
48.6%
48.6%
46.2%
46.0% 44.8%
45%
45.7%
44.9%
43.9%
43.0% 41.8% 40.5% 39.1%
40%
37.7%
35%
30% 2001
2002
2003
2004
2005
2006
2007
Urbanization Rate
2008
Industrialization Rate
Source: CEIC for urbanization rate; National Bureau of Statistics of China for industrialization rate
Growth in Fixed Asset Investments Driven by the high rates of urbanization and industrialization in recent years, fixed asset investments in China also increased substantially, growing at a CAGR of 24.5% from 2001 to 2008 according to CEIC. The following chart sets out the total fixed asset investments in China and their growth rates for the periods indicated. Total Fixed Asset Investments in China and Annual Growth Rate, 2001-2008 RMB billion
25,000
27.7%
26.8%
26.0% 23.9%
24.8%
30% 25%
20,000
17,229 16.9%
15,000
20%
13,732
13.0%
11,000
15%
8,877
10,000 5,000
25.5%
3,721
4,350
5,557
7,048
10% 5%
0
0% 2001
2002
2003
2004
2005
2006
Total Fixed Asset Investments in China
Source: CEIC
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2007
2008
Annual Growth Rate
THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW CONSTRUCTION INDUSTRY As a result of China’s urbanization and industrialization and growth in fixed asset investments, China’s construction industry experienced rapid growth in recent years. According to CEIC, the total output of China’s construction industry increased at a CAGR of 21.8% from RMB1,536 billion in 2001 to RMB6,114 billion in 2008. The following chart sets out the total output of China’s construction industry and its growth rates for the periods indicated. Total Output of China’s Construction Industry and Annual Growth Rate, 2001-2008 RMB billion 8,000 7,000
30% 24.6%
22.9%
25.7% 22.8%
20.6%
6,000
19.1%
5,000
25% 20%
19.8% 15%
3,455 2,902
3,000 2,000
5,104 4,156
4,000
6,114
20.3%
2,308 1,536
10%
1,853
5%
1,000
0%
0 2001
2002
2003
2004
2005
2006
Total Output of China's Construction Industry
2007
2008
Annual Growth Rate
Source: CEIC
COKE INDUSTRY Introduction There are two broad categories of coke: metallurgical coke and foundry coke. Metallurgical coke is a carbon material produced by the destructive distillation of a mixture of coking coal and may be used as a fuel in smelting iron ore in a blast furnace. Foundry coke is a special type of coke that is used in furnaces to produce cast and ductile iron products. Coke’s principal usage in the steel industry is to melt and reduce iron ore, which is used for making pig iron in the steel production process. To produce pig iron, iron ore, coke, heated air and limestone or other fluxes are fed into a blast furnace. The heated air causes coke combustion, which provides the heat for pig iron production as well as the source of carbon for removing the oxygen from the iron ores. The production of pig iron involves blasting large quantities of air at the bottom of the blast furnace, and coke also provides structural support for the raw materials stacked up in the blast furnace, allowing ventilation for the heated air to rise up and liquid iron to be collected at the bottom
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INDUSTRY OVERVIEW of the blast furnace. Crude steel is made from molten steel after processing pig iron and other raw materials from the process of casting. Crude steel is then further processed into finished steel products. The following chart sets out a breakdown of the consumption of coke in China in 2007. Breakdown of Consumption of Coke in China in 2007 Chemicals 7.3% Others 7.7%
Steel , Pig Iron and Alloys 85.0%
Source: CEIC
Coke is a solid carbon-based derivative of coking coal. Coke is grey, hard and porous. Ash content and sulfur content are considered the key properties of coke. Generally, the lower the ash content and sulfur content, the higher the price of the coke. With the steel, pig iron and alloys industries being the main end-user of coke, its mechanical strength when being pressed in the coking process and its ability to endure blast furnace conditions are also key qualities. Coke may have a water content of a few percentages of its mass. The following table sets forth the main chemical properties of Class I and Class II coke in accordance with quality standard GB/T 1996-2003 stipulated by the PRC General Administration of Quality Supervision, Inspection and Quarantine. Classifications Index
Class I
Class II
Ash Content (%) ........................................................
≤12
≤13.5
Sulfur Content (%) .....................................................
≤0.6
≤0.8
Volatility (%) .............................................................
≤1.8
≤1.8
Mechanical Strength (M40)
(1)
(%) .............................
≥80
≥76
Mechanical Strength (M25)
(2)
(%) .............................
≥92
Mechanical Strength (M10)
(3)
(%) .............................
For M25: ≤7.0; For M40: ≤7.5
≥88 (4)
≤8.5
(1)
This measures the percentage of coke which is 40mm or greater in diameter after the coke pressing process for categorization of coke by size.
(2)
This measures the percentage of coke which is 25mm or greater in diameter after the coke pressing process for categorization of coke by size.
(3)
This measures the percentage of coke which is 10mm or smaller in diameter after the coke pressing process for categorization of coke by size.
(4)
M10 is ≤ 7.0 if tested by the methodology for determining M25, and ≤ 7.5 if tested by the methodology for determining M40.
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THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW Coking is the process by which coke is produced from coal. This involves feeding coking coal of suitable physical and chemical qualities into ovens for heating, which combines the carbon and residual ash present and removes volatile compounds. The coke is then cooled in a quench tower and screened before storage or transportation. The various volatile compounds dispelled are usually collected and processed into other chemical products. These include coking gas, coal tar, ammonium sulfate, phenol, naphthalene and crude benzene. Demand and Supply Landscape The rapid growth of China’s construction industry has led to an increase in demand for pig iron and crude steel. As a result, China’s pig iron and crude steel production volume also experienced substantial growth in recent years, with annual outputs increasing from 147 million tonnes of pig iron and 151 million tonnes of crude steel in 2001, to 471 million tonnes of pig iron and 500 million tonnes of crude steel in 2008, according to Metalytics. According to Metalytics, China is currently the largest crude steel production country in the world, producing 37.7% of the total global crude steel output in 2008, which is far more than the second largest crude steel production country in the world, Japan, which produced 8.9% of the total global crude steel output in 2008. The following chart sets out China’s annual output of pig iron and crude steel for the periods indicated. China’s Annual Outputs of Pig Iron and Crude Steel, 2001-2008 million tonnes 600 471
500 414 400
345
300
257 214
200
147
151
171
495
471
500
423
356
280
222
182
100 0 2001
2002
2003
2004
2005
2006
2007 Pig Iron
2008 Crude Steel
Source: Metalytics, 2009
The PRC Government announced in late 2008 that it will implement a RMB4,000 billion economic stimulus package, and that such package will consist of, among others, investments in the national public infrastructure development, national housing development, and reconstruction works in regions hit by the Sichuan earthquake in May 2008. As a result of this stimulus package, steel
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INDUSTRY OVERVIEW production activities increased in the nine months ended September 30, 2009 when compared to the nine months ended December 31, 2008. The following chart sets out the steel production volume in China for the periods indicated. Annual Steel Production Volume in China, 2004-2009 9M million tonnes 700.0 600.0
579.1
560.1
500.0
499.3
467.0 369.3
400.0 295.6
300.0 200.0 100.0 0.0
2004
2005
2006
2007
2008
2009 9M
Source: CEIC
Within China, the largest steel production province in China in 2008 was Hebei, with an output volume of 115.5 million tonnes, according to CEIC. The second and third largest were Jiangsu and Shandong, producing 72.5 million tonnes and 50.5 million tonnes of steel, respectively. The following chart sets out the production volume of the ten largest steel production provinces in China in 2008. Top 10 Provinces in China by Steel Production Volume in 2008 million tonnes 140.0 120.0
115.5
100.0 80.0
72.5
60.0
50.5 42.7
40.0
29.4
25.5
21.6
20.8
20.4
19.9
Hubei
Shanghai
Guangdong
Shanxi
20.0 0.0 Hebei
Jiangsu
Shandong
Liaoning
Tianjin
Henan
Source: CEIC
Steel production volume in Hebei has grown steadily over recent years, increasing from 47.4 million tonnes in 2004 to 115.5 million tonnes in 2008 at a CAGR of 24.9%. During the nine months ended September 30, 2009, steel production volume in Hebei was 108.6 million tonnes. The following chart sets out the steel production volume in Hebei for the periods indicated.
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INDUSTRY OVERVIEW Annual Steel Production Volume in Hebei, 2004-2009 9M million tonnes
140.0 115.5
120.0
108.6
106.0
100.0 85.4 80.0 63.2 60.0
47.4
40.0 20.0 0.0 2004
2005
2006
2007
2008
2009 9M
Source: CEIC
As the largest steel production province in China in 2008, Hebei is also a major coke production province in China. According to the China Coking Industry Association, Hebei has been the second largest coke production province in China behind Shanxi since 2004, and it accounted for 12.1% of the total coke production volume in China in 2008. The following chart sets out the production volume of the ten largest coke production provinces in China in 2008. Top 10 Provinces in China by Coke Production Volume in 2008 million tonnes 90.0 82.4 80.0 70.0 60.0 50.0 39.2
40.0
28.9
30.0
20.4
17.4
20.0
13.2
12.3
12.2
10.8
Inner Mongolia
Shaanxi
Yunnan
Jiangsu
10.1
10.0 0.0 Shanxi
Hebei
Shandong
Henan
Liaoning
Sichuan
Source: China Coking Industry Association, 2008
Fueled by the growth of steel production in Hebei, coke production volume in Hebei also experienced significant growth in recent years, increasing from 17.7 million tonnes in 2004 to 39.2 million tonnes in 2008 at a CAGR of 22.0%. The global and domestic economic slowdown in the last
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INDUSTRY OVERVIEW quarter of 2008 resulted in slower growth in steel production volume in Hebei. Due to the decreased demand for coke in such quarter, the aggregate coke production volume in Hebei in 2008 remained at the same level as that in 2007. As a result of the improved economic and market environments, as well as the RMB4,000 billion economic stimulus package announced by the PRC government in late 2008, steel production activities increased in the nine months ended September 30, 2009 when compared to the nine months ended December 31, 2008. This in turn led to an increase in the demand for coke and Hebei produced 34.6 million tonnes of coke during such nine-month period. The following chart sets out the coke production volume in Hebei for the periods indicated. Annual Coke Production Volume in Hebei, 2004-2009 9M million tonnes 45.0 39.2
40.0
39.2 34.6
35.0
30.7
30.0 24.6 25.0 20.0
17.7
15.0 10.0 5.0 0.0 2004
2005
2006
2007
2008
2009 9M
Source: China Coking Industry Association, 2004-2009
Pricing Dynamics The market price of coke in China is largely driven by its supply and demand, as well as government policies. The market price of coke in China increased steadily in recent years. According to the China Coking Industry Association which published the average selling price of Class I and Class II coke on a combined basis, by the end of 2007, the market price for coke above 40mm (including VAT) rose by 46.0% from RMB995 per tonne in January 2006 to RMB1,453 per tonne in December 2007. Coke prices continued to increase during the first eight months of 2008 as demand from the steel industry grew. The market price for coke above 40mm in diameter (including VAT) rose by 95.9% from RMB1,453 per tonne in December 2007 to RMB2,846 per tonne in August 2008. From August to December 2008, coke prices decreased sharply due to decreased demand from the steel industry both domestically and for export and an increase in coke inventory caused by the deteriorated global and domestic market conditions, with the market price for coke above 40mm in diameter (including VAT) dropping by 43.6% to RMB1,606 per tonne. In 2009, the market prices of coke above 40mm in diameter (including VAT) rebounded slightly due to the recovery of the steel industry, increasing by 10.3% from RMB1,606 per tonne in December 2008 to RMB1,771 per tonne in November 2009. The following chart sets out the monthly average selling price of Class I and Class II coke (on a combined basis) in China for the periods indicated.
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INDUSTRY OVERVIEW Monthly Average Selling Price of Coke in China (1) (January 2006 - November 2009) RMB/tonne 3,000 2,500 2,000 1,500 1,000 500 Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09 Nov-09
>40mm 25~40mm in diameter in diameter Source: China Coking Industry Association, 2006-2009 (1)
Including VAT
METHANOL INDUSTRY Introduction Methanol is a colorless, flammable and toxic liquid with an alcohol-like odor. Methanol has broad applications and can be used to produce a number of products. Methanol is commonly converted to formalin, which is used in the manufacturing process of plastics, plywood, paints, explosives and permanent press textiles. Methanol is also blended in gasoline as methanol fuel for use by vehicles in a number of countries. Other chemical derivatives of methanol include DME, acetic acid and MTBE. DME can be blended with LPG for home heating and cooking or used as a replacement for diesel as a transportation fuel. Acetic acid is used as a chemical reagent for the production of various chemical compounds and can be used to manufacture insecticides and pharmaceutical products. MTBE can be used as a fuel component in gasoline as well. Methanol can also be processed into a laboratory solvent. The chart below sets out a breakdown of the consumption of methanol in China in 2008. Breakdown of Consumption of Methanol in China in 2008 Others 24.2%
Formalin 29.8%
MTBE 8.1% Acetic acid 9.3%
Methanol fuel 12.5% DME 16.1%
Source: CBI China
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INDUSTRY OVERVIEW Prior to the mid-1920s, methanol was produced by the distillation of wood. This inefficient method has been superseded by a multi-step process based on hydrogen-carbon oxide mixtures, which was introduced in the mid-1920s. Mixtures used as feedstock to produce methanol include natural gas and other hydrocarbon chemical mixtures derived from coal. Outside China, natural gas is more commonly used as feedstock, but given the popular use of coal as an energy source in China, coking gas is more widely used as a feedstock in China. The multi-step process involves processing hydrogen-carbon oxide mixtures with heat, steam and oxygen to convert the feedstock into a synthetic gas containing hydrogen, carbon monoxide and carbon dioxide. The synthetic gas is condensed and processed at high heat in the presence of copper-based catalysts to produce crude methanol. Crude methanol is then purified by distillation to recover methanol. Supply and Demand Landscape As China’s economy grew, energy supply became an increasingly large concern, and the use of methanol as an alternative fuel source became increasingly attractive. Under government encouragement, the supply of methanol in China has grown rapidly over recent years. The chart below sets out the production volume of methanol in China for the periods indicated. Annual Methanol Production Volume in China, 2001-2008 million tonnes 12.0
11.1 10.1
10.0 7.5
8.0 5.4
6.0 4.4 4.0
3.0 2.0
2.1
2.0 0.0 2001
2002
2003
2004
Source: CEIC
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2005
2006
2007
2008
THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW Driven by the rapid development of the chemicals industry in China, which consumes various downstream products of methanol, as well as increasing gasoline prices, which encourage the use of methanol as an alternative fuel source, the demand for methanol in China increased rapidly over recent years. The chart below sets out the annual methanol consumption volume in China. Annual Methanol Consumption Volume in China, 2001-2008 million tonnes 14.0 12.2 12.0
10.4
10.0
8.4
8.0
6.7 5.7
6.0 4.0
3.5
3.9
4.3
2001
2002
2003
2.0 0.0 2004
2005
2006
2007
2008
Source: CEIC, Cheminfo
On May 18, 2009, the Standardization Administration of China announced a set of national standards for M85 methanol gasoline for vehicle-use. These standards would be implemented starting from December 1, 2009. M85 methanol gasoline is a methanol-blended gasoline which contains approximately 85% of methanol and approximately 15% of gasoline. Methanol-blended gasoline emits fewer pollutants, such as sulfur dioxide, nitrous oxide and solid particles, than pure gasoline. Methanol-blended gasoline is also generally cheaper than gasoline. Car engines need to be modified in order to run on M85 methanol gasoline, but domestic automakers have developed engines suitable for methanol gasoline. Methanol gasoline has already been in use in northern Chinese provinces such as Shanxi, Shaanxi and Henan. The implementation of the national standards for M85 methanol gasoline for vehicle-use is expected to eliminate discrepancies between the industry standards in different provinces, enhance market access for methanol-blended gasoline in China and hence increase demand for methanol.
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THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW Pricing Dynamics According to CEIC, methanol prices (including VAT) have remained at around the level of RMB2,500 per tonne to RMB3,000 per tonne from 2004 through the six months ended June 30, 2006. Methanol prices (including VAT) fluctuated after July 2006 and increased to approximately RMB4,000 per tonne in the last quarter of 2007. At the start of 2008, due to decreased demand for downstream products of methanol, prices dropped again to approximately RMB3,400 per tonne. During the second quarter of 2008, partially driven by increases in the price of gasoline, methanol prices (including VAT) rebounded, reaching over RMB4,000 per tonne in June 2008. Since then, due to deteriorating global and domestic market conditions as well as an influx of low priced methanol import, methanol prices (including VAT) dropped to below RMB2,000 per tonne in December 2008. Since January 2009, methanol prices (including VAT) in China started to stabilize at around RMB2,000 per tonne. The chart below sets out the monthly average selling price of methanol (including VAT) in China from January 2004 to November 2009. Monthly Average Selling Price of Methanol in China (1) (January 2004 - November 2009) RMB/tonne 4,500 4,000 3,500 3,000 2,500 2,000 1,500 Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09 Nov-09
Source: CEIC (1)
Including VAT
PURE BENZENE INDUSTRY Introduction Pure benzene is a colorless, toxic and highly flammable liquid. It is primarily used to manufacture chemical ingredients such as ethylbenzene, cyclohexane and cumene. Pure benzene is used as an industrial solvent, a derivative for manufacturing synthesized benzene and in the production of nylon, dyes, plastics, drugs, explosives and synthetic rubber. Pure benzene is traditionally manufactured from the distillation of crude benzene and coke oven light oils. Nowadays, pure benzene is most commonly produced by: (i) catalytic reforming, (ii) steam cracking of liquid petroleum feedstock, (iii) hydrodealkylation of toluene and (iv) toluene
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THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW disproportionation. Catalytic reforming involves blending a mixture of hydrocarbons with hydrogen, exposing it to a bifunctional platinum chloride or rhenium chloride catalyst to form aromatic hydrocarbons, separating the aromatics by extraction and obtaining pure benzene from distillation. Steam cracking involves producing ethylene and other alkenes from paraffin gases, naphthas, gas oils and other hydrocarbons. Depending on the feedstock used, this process can yield pyrolysis gasoline, a benzene-rich liquid, as by-product. Benzene is extracted with a solvent and through distillation. Toluene hydrodealkylation involves converting toluene to benzene by mixing toluene with hydrogen and exposing it to a chromium, molybdenum or platinum oxide catalyst. Toluene disproportionation involves reacting two toluene molecules and rearranging the methyl groups from one toluene molecule to the other to yield one benzene molecule and one xylene molecule, and is mostly used by manufacturers with similar demands for both benzene and xylene. Supply and Demand Landscape The global supply of pure benzene has been tight since 2004, which in turn increased profitability for pure benzene manufacturing and led to subsequent capacity increase. The majority of the new capacity growth is in Asia and the Middle East, in particular China, Thailand and Saudi Arabia. According to Merchant Research & Consulting, China produced 5.8 million tonnes of pure benzene in 2008 and is the second largest pure benzene production country in the world, just behind the US which produced 7.0 million tonnes of pure benzene in 2008. The chart below sets out the production volume of the ten largest pure benzene production areas in the world in 2008. Top 10 Areas in the World by Pure Benzene Production in 2008 million tonnes 8.0 7.0
7.0 5.8
6.0
5.3 5.0 4.0 3.3 3.0 2.3 2.0
2.0 1.5 1.1
1.0
0.9
Taiwan
U.K.
Iran
1.0 0.0 US
China
Japan
South Korea
Germany Netherlands Thailand
Source: Merchant Research & Consulting, 2009
China’s pure benzene production has remained at approximately or slightly above 5.8 million tonnes per year in recent years, according to Merchant Research & Consulting. China has a negative trade balance of pure benzene with its consumption slightly exceeding its production in recent years,
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THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW according to Merchant Research & Consulting. The chart below sets out the pure benzene production and consumption volume in China for the periods indicated. Pure Benzene Production and Consumption Volume in China, 2006-2008 million tonnes 7.0 5.9
5.8
6.0
6.2
6.0
6.1
5.8
5.0 4.0 3.0 2.0 1.0 0.0 2006
2007
2008 Production Volume
Consumption Volume
Source: Merchant Research & Consulting, 2009
Pricing Dynamics According to CEIC, pure benzene prices (including VAT) have increased gradually from approximately RMB5,150 per tonne in January 2004 to approximately RMB8,200 per tonne in December 2006. Pure benzene prices (including VAT) further increased to above RMB9,000 per tonne in 2007 and reached over RMB10,500 per tonne in June and July 2008. In the fourth quarter of 2008, driven by deteriorating economic and market conditions, pure benzene prices (including VAT) dropped sharply to RMB3,010 per tonne in December 2008. Since January 2009, pure benzene prices (including VAT) in China started to recover, due to improved market conditions as well as increase in the demand of downstream chemical products. Monthly Average Selling Price of Pure Benzene in China (1) (January 2004 - November 2009) RMB/tonne 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Jan-04
Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Nov-09
Source: CEIC (1) Including VAT
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THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW COKING COAL INDUSTRY Introduction Coal is a combustible sedimentary rock composed principally of carbon. Other constituents of coal include hydrogen, oxygen, sulfur and nitrogen. Coal is a type of fossil fuel and is formed from a layer of plant being accumulated between layers of rock and exposed to heat and pressure over long periods of time. Depending on the extent of exposure, coal transforms successively from peat, which is the lowest form of coal, to lignite, sub-bituminous coal, bituminous coal and anthracite, which is the highest rank of coal in terms of carbon content. Lignite and sub-bituminous coal are low rank coals. They are usually brown in color, softer, and are dull and earthy in appearance. They have a low carbon content, high moisture level and a low energy level. Bituminous coal and anthracite are higher rank coals. They are typically black in color and are glossier in appearance. They have higher carbon content, lower moisture level and higher energy content than low ranked coal. Some types of bituminous coal contain higher energy contents than anthracite. Coking coal is a form of bituminous coal and typically has a carbon content of around 60-80%. The majority of coking coal is used as a feedstock to produce coke. To improve efficiency, raw coal is usually washed to remove waste and constituents such as ash before it is used as feedstock. A portion of coking coal is also used to produce electricity and heat in power plants. The demand for coking coal in China is largely driven by the production of coke, which is in turn driven by the production of pig iron and crude steel by the steel production industry. With the rapid growth of the steel industry in China, the demand for coking coal also increased significantly in recent years.
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THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW China is the largest producer of hard coal in the world in 2008, accounting for 47.4% of the world’s hard coal, according to OECD/IEA. The following chart sets out the regional shares of global hard coal production in 2008. Regional Shares of Global Hard Coal Production in 2008 China 47.4%
Former Soviet Union 7.0%
Asia (excluding China) 13.9% Latin America 1.5%
OECD 26.1%
Africa 4.1%
Source: Key World Energy Statistics 2009娀 OECD/IEA, 2009, figure on page 14: “1973 and 2008 regional shares of hard coal production”
Within China, Shanxi has been the largest raw coal supply province in China historically, according to CEIC. The chart below sets out the supply volume of the ten largest raw coal supply provinces in China in 2008. Top 10 Provinces in China by Raw Coal Supply Volume in 2008 million tonnes 700.0 609.5 600.0 500.0
465.1
400.0 300.0 226.5
208.9
200.0
146.6
119.1
118.0
100.0
86.0
81.9
79.1
Sichuan
Heilongjiang
Hebei
0.0 Shanxi
Inner Mongolia
Shaanxi
Henan
Shandong
Source: CEIC, 2008
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Anhui
Guizhou
THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW China produced a total of approximately 1,033 million tonnes of raw coking coal in 2008, according to Fenwei. The chart below sets out the supply volume of the ten largest raw coking coal supply provinces in China in 2008. Top 10 Provinces in China by Raw Coking Coal Supply Volume in 2008 million tonnes 350.0 327.0 300.0 250.0 200.0 150.0 120.4
112.4
100.0
75.9
75.8 49.9
50.0
49.1
40.7
33.5
30.0
0.0 Shanxi
Shandong
Anhui
Heilongjiang
Henan
Hebei
Guizhou
Yunnan
Inner Mongolia
Sichuan
Source: Fenwei
According to Fenwei, China had approximately 280 billion tonnes of proven coking coal reserves in 2008, with proven reserves (i) being those that geological and engineering information indicates with reasonable certainty that coking coal can be recovered in the future from known deposits under existing economic and operating conditions and (ii) including basic reserves and resources (based on the Chinese Resource and Reserve Reporting Standards). The chart below sets out the proven coking coal reserves of the top ten provinces in China in 2008. Top 10 Provinces in China by Proven Coking Coal Reserves in 2008 million tonnes 180,000 160,000
155,184
140,000 120,000 100,000 80,000 60,000 40,000 20,022 20,000
18,838 10,004
9,501
9,453
9,299
8,612
7,146
5,310
Guizhou
Heilongjiang
Xinjiang
Henan
Hebei
Inner Mongolia
Shaanxi
0 Shanxi
Anhui
Shandong
Source: Fenwei
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THIS INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Information Pack must be read in conjunction with the section headed ‘‘Warning’’ on the cover of this Information Pack.
INDUSTRY OVERVIEW The chart below sets out certain monthly average selling prices of coking coal from January 2006 to September 2009. Certain Monthly Market Prices of Coking Coal, January 2006 - September 2009 RMB/tonne 2,500
2,000
1,500
1,000
500
0 Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09 Sep-09
Main coking coal from Liulin, Shanxi (1) 1/3 coking coal from Zaozhuang, Shandong (2) Fat coal from Lingshi, Shanxi
(1)
Source: Fenwei Notes: (1)
These are “mine mouth” prices, being the prices of coking coal for pick-up from the relevant mines, exclusive of VAT.
(2)
These are “FOR” (free-on-rail) prices, being the prices of coking coal already loaded onto rail cars. Prices include all costs incurred prior to the coking coal being loaded onto the rail cars and include loading costs. Prices are inclusive of VAT.
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