Rational Thoughts on Thermal Development of Coal Chemical Industry

Over the past few years, the extensive exploitation of coal resources has prompted local governments to back the development of coal projects and the swift growth of coal processing industries in their regions. This push is often motivated by the desire to convert energy efficiently while driving economic growth. However, this rapid expansion has posed significant challenges to the coal chemical sector, particularly concerning credit risks. The allure of coal chemical projects lies in their potential to significantly boost GDP and leverage the region's coal resource advantages. Especially in northern Shaanxi, where transportation bottlenecks persist, there's a strong incentive to develop on-site coal processing industries. Investors continue to flock to these areas, eager to capitalize on the seemingly promising projects, leading to a renewed surge in investments. Unfortunately, this rush often results in a mismatch between investment and returns, creating a concerning imbalance. Investment versus Returns: A Contrasting Picture According to statistics from the National Development and Reform Commission, the traditional coal chemical industry is suffering from overcapacity exceeding 30%. Faced with competition from imported goods, the operating rate of methanol plants across China was only around 40% in the first half of 2009. Similarly, olefin production projects are struggling to reach operational levels, with fewer than 10% actually starting up. As a result, most coal chemical firms are experiencing poor operational efficiency. Case Study: Rising Raw Material Prices Erode Profits Take Yulin Coal Chemical, which began constructing a 600,000-ton coal-to-methanol project in early 2004. Initially, expectations were high, anticipating substantial profits. By the time the project went live in 2007, coal prices had skyrocketed to over 700 yuan per ton, while methanol prices hovered around 3,000 yuan. Despite these initial projections, the project barely managed to break even. Now, with methanol prices dropping below 2,000 yuan and total investments surpassing 700 million yuan, the company has incurred severe losses. The project is set to shut down within a year of its commencement. Similar issues plague two other coal chemical enterprises in Yan’an, resulting in intermittent production and little hope for recovery. Rising Operational Costs Spell Trouble In Yulin City, coal chemical projects are currently operating at a 50% loss rate despite being partially subsidized. These enterprises consume vast amounts of water during production, prompting Shaanxi to explore alternative water sources like the surface water of the Wuding River. Plans include building the Wangyu Block Reservoir and implementing long-term strategies such as diverting water from the Yellow River and the South-to-North Water Transfer Project. Yet, the immediate scarcity of water has driven prices higher, and rising labor costs have compounded losses. This has forced several coal chemical companies either to shut down or operate at a loss. Environmental Concerns and Economic Viability The coal chemical sector faces criticism due to its high energy consumption, pollution, and environmental risks. In recent years, Shaanxi has seen rapid growth in the coal chemical industry, yet most organic pollutants remain challenging to degrade. Environmental infrastructure lags behind, exacerbating pollution concerns. If international standards were applied, including the environmental costs of water usage and emissions, many coal chemical projects in northern Shaanxi would prove economically unviable, leading to widespread shutdowns. Shrinking Bank Support Compounds Financial Difficulties Unlike other industries, banks have historically approached coal chemical ventures with caution. For instance, in Yan’an, the Huangling United Association provided loans amounting to over 10 million yuan to local coal mines between 2000 and 2005. Following the national policy to shut down small coal mines and integrate resources, this led to over 700 million yuan in bad debts. It took nearly eight years for the association to recover from this setback, causing delays in lending to other counties. Consequently, the coal chemical industry now faces tightening credit lines. Prudent Financial Support for the Coal Chemical Sector With rising coal prices and additional costs eating into profitability, the government has tightened scrutiny over coal chemical projects. Smaller ventures face stricter controls, while larger state-owned enterprises acquire projects to secure coal resources. In Yulin, only 18% of coal reserves are held by local governments, leaving the majority controlled by provincial and state entities. Acquiring coal chemical projects is often a strategy to gain access to these valuable resources. Even projects halted due to operational issues cling to coal rights, hoping to sell raw coal as a last resort. Recommendations for Balanced Growth To address these challenges, we suggest the following steps: First, objectively assess the current landscape and adopt a scientific development approach. Planning should be holistic, considering the region's coal reserves, environmental capacity, water availability, and production capabilities. Local governments should avoid the pitfalls of focusing solely on short-term gains and instead aim for sustainable development through integrated regional management. Second, streamline resource allocation. Policymakers must evaluate the operational levels and environmental impacts of coal chemical companies. Balancing local economic benefits with broader societal harmony requires careful scrutiny of mergers and acquisitions to ensure the sustainable use of coal resources. Third, consolidate coal chemical enterprises to mitigate industry risks. Mergers should prioritize companies with complementary strengths and capabilities to enhance operational efficiency and resilience. Strict approvals should be enforced to prevent unauthorized constructions and redundant projects. Rational choices in project development are crucial to avoid overbuilding and excess capacity. Lastly, banks should offer measured financial support while managing credit risks. Prudent interventions, thorough evaluations of new projects, and close monitoring of existing ones are essential. Collaboration with other financial institutions and guarantee agencies can help share risks effectively. Engaging with local authorities and industry stakeholders ensures timely interventions and preemptive measures. In conclusion, the coal chemical industry in northern Shaanxi faces numerous challenges that require careful handling. By balancing development goals with sustainability and financial prudence, the region can harness its coal resources responsibly and foster long-term economic growth.