Rational Thoughts on Thermal Development of Coal Chemical Industry

As coal resources are extensively exploited, local governments in China have been keen on promoting coal projects and driving the rapid growth of the coal processing industry. This push is often justified by the aim of converting energy and stimulating economic growth. However, it also presents significant challenges, particularly concerning credit risks within the coal chemical sector. Many investors remain attracted to coal chemical projects due to their potential contributions to GDP and the allure of abundant coal resources. The transportation bottlenecks in Northern Shaanxi further fuel this drive for local development. Despite these incentives, the coal chemical industry faces numerous hurdles, including overcapacity and rising costs. One major issue is the stark contrast between investment and returns. Statistics from the National Development and Reform Commission reveal that the traditional coal chemical industry suffers from overcapacity exceeding 30%. In the first half of 2009, the operating rate of methanol plants stood at roughly 40%, while olefin production projects saw less than 10% of their facilities actually operational. Overall, coal chemical firms exhibit poor operating efficiency. A prime example is Yulin Coal Chemical's 600,000-ton coal-to-methanol project. Originally anticipated to yield substantial profits, the project incurred heavy losses once it began operations in 2007. By then, coal prices had surged above 700 yuan per ton, while methanol prices hovered around 3,000 yuan. Today, methanol prices hover just over 2,000 yuan, and Yulin Coal Chemical has invested over 700 million yuan. Due to these losses, the facility is set to shut down within its first year of production. Similar issues have plagued two other coal chemical companies in Yan'an, leading to intermittent production and bleak recovery prospects. Another challenge stems from rising costs. In Yulin, despite 50% of coal chemical projects being funded by coal mines, half of them are still losing money. Water shortages pose a significant problem, with coal chemical firms consuming vast amounts of water during production. Shaanxi has responded by developing surface water resources from the Wuding River and building reservoirs like Wangyu Block to address this. However, the scarcity of water and rising prices have contributed to financial struggles for existing coal chemical enterprises. Furthermore, the coal chemical industry faces criticism for its high energy consumption, pollution levels, and environmental risks. Environmental externalities like water usage and pollutant emissions are often overlooked, yet when considered, many projects in Northern Shaanxi would fail to be economically viable. This has led to increasing pressure on companies to halt operations. Banks have also grown cautious regarding coal chemical projects. Compared to other industries, banks tend to be more hesitant to provide loans to coal chemical ventures. In Yan'an, Huangling United Association encountered significant challenges after issuing over 10 million yuan to local coal mines from 2000 to 2005. Following the state's policy to shut down smaller mines and consolidate resources, these loans resulted in over 700 million yuan in bad debts. It took nearly eight years to resolve these issues, delaying credit expansion for other sectors within the region. To manage the coal chemical industry effectively, financial support needs to be carefully balanced. Rising coal prices and additional costs have slowed operations. The state has tightened approval processes, limiting small projects while encouraging larger state-owned enterprises to acquire resources. Currently, only 18% of Yulin's coal reserves are held by local governments, with the remainder controlled by provincial and state entities. The primary goal remains securing coal resources for these projects. Some halted projects survive by leasing mining rights or selling raw coal. However, retaining coal resources is central to their survival. Thus, measures should be implemented to control this sector’s development: First, objectively assess the current situation and embrace a scientific development approach. This involves integrating industries systematically, planning holistically, and ensuring contiguous regional management. Existing enterprises and declared projects should be managed collectively to avoid resource waste, redundant construction, and environmental harm. Second, standardize resource allocation. Governments must analyze the policy environment, operational capabilities, and production capacities of coal chemical firms in Northern Shaanxi. Balancing resource utilization with environmental protection is crucial, along with considering both short-term gains and long-term sustainability. Third, integrate coal chemical firms to mitigate industry risks. This includes consolidating enterprises, approving projects rigorously, and making rational choices. Projects should align with national policies, leverage available resources, and meet market demands to avoid overbuilding and excess capacity. Lastly, banks should offer prudent support while managing credit risks. Prudent intervention, strong monitoring, and collaboration with other institutions can help mitigate risks and sustain the industry. By addressing these challenges, the coal chemical industry can potentially become a robust driver of local economic growth.