Lutianhua Mitigates Unfavorable Factors and Seeks Developments

The head office of Lutianhua (Group) Co., Ltd., the cradle of the modern urea industry in China, is located in Chengdu, Sichuan province in the western region of China. The production base of the company is in Luzhou, Sichuan province located in the upper reaches of the Yangtze River.    After 40 years' construction and development, the company has acquired great resource advantages and formed a large production capacity of chemical fertilizers for agricultural use with natural gas as feedstock and grease chemicals for industrial use with animal and plant fat as feedstock. The company has a comprehensive capacity of 800 000 t/a ammonia, 1.6 million t/a urea, 50 000 t/a nitric acid, 110 000 t/a ammonium nitrate and 30 000 t/a grease chemicals today and has become a chemical enterprise with diversified operations and multi-leveled developments integrating production, research, design, manufacturing, construction, installation, trade and service.

3 unfavorable factors in the nitrogenous fertilizer sector

Experts point out that the nitrogenous fertilizer sector in China is faced with 3 major unfavorable factors today. (1) Except for coastal areas, the price of nitrogenous fertilizers in other regions has recently presented a declining trend. With the price drop of grain and the new capacity of nitrogenous fertilizers in the first half of 2006, the price of chemical fertilizers in 2006 will surely be lower than 2005. (2) It seems that the policy for lifting restrictions on the price of chemical fertilizers will still not start implementation in the first half of 2006. As some listed chemical fertilizer companies sell products through their own agricultural production means companies to bypass price restrictions, even if price restrictions are lifted nitrogenous fertilizer producers will not gain great benefits. On the contrary, after lifting price restrictions, existing favorable measures to chemical fertilizer producers will be eliminated and the production cost in chemical fertilizer producers will be greatly increased. (3) The price of natural gas in the domestic market is on the low side today. The price rise of natural gas in future will increase the production cost in chemical fertilizer producers using natural gas as raw material such as Lutianhua (Group) Co., Ltd.     In face with these 3 major unfavorable factors, can Lutianhua (Group) Co., Ltd. use its own 3 major advantages to consolidate its leading position and make a growth in an adverse circumstance?

Mitigate unfavorable factors

Lutianhua (Group) Co., Ltd. has 3 major advantages in large scale, feedstock natural gas and geographic location. In terms of the advantage in large scale, the company is the largest urea producer in China with an actual urea capacity of 1.6 million t/a and therefore has a prominent advantage in large scale.    In terms of the advantage in feedstock natural gas, the average production cost today is around RMB1 650 per ton of product in chemical fertilizer producers with oil as feedstock and around RMB1 350 per ton of product in chemical fertilizer producers with coal as feedstock, but only around RMB950 per ton of product in chemical fertilizer producers with natural gas as feedstock. The production cost in large chemical fertilizer producers with natural gas as feedstock is less than RMB800 per ton of product. Large chemical fertilizer producers with natural gas as feedstock therefore have a prominent advantage. According to experts' estimates, when other cost variables remain the same, when the price of natural gas increases by every RMB0.10 per m3, the production cost of urea is up by around RMB60 per ton. We can see that the impact is quite limited. It means that the advantage in feedstock natural gas in Lutianhua (Group) Co., Ltd. will not be much reduced due to the price rise of natural gas. As the price of natural gas used in the chemical fertilizer production is related to agriculture, relevant departments of the state have paid great attention to it. There is yet no final scheme for reform to the oil product pricing mechanism. The advantage in feedstock natural gas in the company will therefore hopefully be maintained for a considerable period of time in future.      In terms of the advantage in geographical location, China implements favorable freight for the transportation of chemical fertilizers. Take urea for instance, the 1 000km freight for urea is RMB23.4 per ton and less than RMB50 per ton when loading and unloading charges are added. The cost for the transmission of natural gas used per ton of urea is RMB126 per 1 000km, much higher than the freight for urea. The transmission of feedstock natural gas is therefore not as cost effective as the transportation of product urea. It is also true with the transportation of coal in chemical fertilizer producers with coal as feedstock. Chemical fertilizer producers close to feedstock producing areas therefore have greater advantage in cost. Lutianhua (Group) Co., Ltd. is located in the Sichuan Basin with abundant natural gas resources and therefore has prominent advantage in geographical location.

Seek broader development space

Lutianhua (Group) Co., Ltd. became listed at Shenzhen Securities Exchange in June 1999. With golden opportunities offered by the west development strategy, the company is trying its best to use its own resources and advantages in talent, technology, equipment and capital to cooperate with domestic and foreign companies and research units, use its high and new technologies to upgrade existing operations, conduct technical cooperation with other high-tech sectors in special chemical fertilizers, biological chemical fertilizers and fine chemicals, develop new products and new technologies, introduce advanced management methods and conduct renovation to management systems, create new growth space and achieve new advances through alliance, merging, equity participation and equity holding.     The closing share price of Lutianhua (Group) Co., Ltd. was RMB6.76 on Nov. 10, a drop of 2.17%.