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As coal resources are being exploited on a large scale, local governments have been supportive of coal projects, aiming to transform energy and boost economic growth. This has also posed a challenge for the coal chemical industry, particularly concerning credit risks. The allure of coal chemical projects lies in their contribution to GDP and the advantage of abundant coal resources. Coupled with transportation bottlenecks in northern Shaanxi, there is a stronger drive to develop coal processing locally. Investors continue to flock to both local governments and enterprises, rushing to push these projects forward rapidly. A new wave of investment is showing signs of a "firestorm."
While investments are pouring in, returns are not keeping pace. Data from the National Development and Reform Commission shows that the traditional coal chemical industry faces over 30% overcapacity. Under pressure from imported goods, the operating rate of methanol plants in the first half of 2009 was around 40%, while olefin production projects saw fewer than 10% actually operational. Coal chemical companies are generally experiencing poor operational efficiency.
(I) Rising raw material costs have led to significant losses for coal chemical companies. In February 2004, Yulin Coal Chemical began constructing a 600,000-ton coal-to-methanol project, with expectations of substantial profits. By 2007, when the project went online, coal prices had soared above 700 yuan per ton, while methanol prices hovered around 3,000 yuan. At that time, the project could still turn a profit. Now, with methanol prices dropping to just over 2,000 yuan, Yulin Coal Chemical's total investment has exceeded 700 million yuan. Due to severe losses, the project is expected to shut down within a year of production. Similar issues have plagued two coal chemical companies in Yan'an, leading to intermittent production with little hope of recovery.
(II) Increased costs are pushing coal chemical companies to the brink. In Yulin City, coal chemical projects are currently 50% funded and 50% loss-making, even with coal mines in place. The coal chemical industry requires vast amounts of water, prompting Shaanxi to plan the diversion of surface water from the Wuding River and the construction of the Wangyu Block Reservoir to meet the water demands of the Yuheng Coal Chemical Industry Zone. Long-term solutions like the Yellow River Diversion Project and the South-to-North Water Diversion are being considered, but existing projects cannot afford to wait for distant water solutions. With water scarcity growing and prices rising, along with increasing labor costs, coal chemical companies face further losses and shutdowns.
(III) The "two highs and one surplus"困境 is causing coal chemical companies to struggle. These companies consume large amounts of energy, pollute heavily, and carry significant environmental risks. Globally, concerns about the environmental impacts of coal chemical development have grown in recent years. Following the rapid expansion of the industry in Shaanxi Province, most organic pollutants emitted by coal chemical enterprises are difficult to degrade, and environmental infrastructure lags behind, worsening pollution problems. If environmental externalities like water usage and high emissions were factored into coal chemical project costs, many projects in northern Shaanxi would become economically unviable, forcing numerous companies to cease operations.
(IV) Diminishing bank credit support has led to financial distress among coal chemical companies. Compared to other industries, banks have traditionally been cautious about extending credit to the coal chemical sector. In Yan'an, Huangling United Association extended over 10 million yuan to local coal mines from 2000 to 2005. After the state's policy of closing down small coal mines and consolidating resources, this resulted in over 700 million yuan in bad loans. It took Huangling nearly eight years to resolve these issues, delaying the association's progress relative to other counties. This caution reflects the challenges banks face in supporting the coal chemical industry.
Financial Support for the Coal Chemical Industry Must Be Treaded Carefully
With high coal prices and rising costs, coal chemical companies are struggling. The state has tightened its approval process for coal chemical projects, severely restricting small ventures while favoring larger state-owned enterprises that can secure coal resources. In Yulin, only 18% of coal reserves belong to local governments, while the rest are held by provincial or state-owned enterprises. Ultimately, the goal of acquiring coal chemical projects is to gain access to these resources. Some projects have halted production but cling to leased mining rights or sell raw coal to stay afloat. Thus, it is crucial to manage this sector carefully.
(1) Objectively assess the current situation and embrace a scientific development model. First, plan the industry comprehensively. The current state of coal chemical enterprises in northern Shaanxi suffers from a lack of clear national strategies, industrial policies, and local government-driven initiatives focused on political achievements. Many companies lack clarity in market positioning and product differentiation, resulting in盲目pursuit of short-term gains. Based on the region's coal reserves, environmental capacity, water resources, and production capabilities, planners should adopt a scientific approach, integrating regional management and managing existing enterprises and proposed projects to prevent resource waste, redundant construction, and environmental harm.
Second, standardize resource allocation. The government must evaluate the policy environment, operational levels, and production capacities of coal chemical companies strategically. Balancing local economic interests with societal harmony, and considering short-term versus long-term benefits, careful scrutiny of mergers and acquisitions is essential. This ensures rational and sustainable coal resource utilization.
(2) Integrate coal chemical companies to mitigate industry risks. First, consolidate enterprises. Following principles of similarity and complementarity, integrate companies that have completed or plan to launch projects. This fosters intensive, large-scale operations and enhances risk resistance. Companies with small scales, weak production capabilities, severe pollution, poor technology, and inadequate facilities should be phased out. This reverses the trend of inefficient resource use, fragmented product chains, and disordered market competition.
Second, enforce strict approvals. Local governments must adhere to the NDRC's plans, ensuring market access compliance with national policies and environmental standards. Scientific evaluations of industry prospects are necessary to curb repeated construction and unauthorized projects. Maintaining order in coal chemical operations is vital to prevent chaos and ensure sustainable local economic growth.
Third, make rational choices. Projects must be analyzed scientifically before implementation. Policy orientation, resource availability, and market demands should guide decisions. Avoiding overheated investments and redundant construction is key to fostering a healthy coal chemical industry.
(3) Prudent bank support and credit risk management. First, adopt a cautious approach. Given the high risks involved, banks should prudently intervene based on national macroeconomic policies. New projects require rigorous evaluations of markets, products, and pre-lending investigations. Prioritize viable projects with proper procedures, collateral, and risk mitigation strategies.
Second, enhance monitoring and risk control. Post-lending management must include designated departments and personnel for oversight. Monitor cash flows, enforce regulations, and identify potential risks early. Stay informed about national policies and global market trends to preemptively address issues.
Third, foster collaboration and risk-sharing. Given the high stakes of coal chemical projects, engage with security agencies, banking institutions, and guarantors to distribute risks. Strengthen communication with local governments and corporate managers for proactive risk management. Collaboration ensures financial stability and prevents losses.