KCCC: Coke and Coal Chemical Business Opens up Growth Space

Kailuan Clean Coal Co., Ltd. (KCCC, SH: 600997) is located in
Kailuan, Hebei province. Its main business includes the mining
of coal and accompanying resources, the dressing and processing
of raw coal, the sales of coal products and the production and
sales of coking products. The recoverable reserves in the
company today are around 440 million tons, accounting for 10%
of the total reserves of antracite with high adhesiveness in
China.

Advantages in resources and geographical location

KCCC has two coal mines called Fangezhuang Coal Mine and Lvjiatuo
Coal Mine. The major coal type is antracite with high
adhesiveness with rare resources in China. The company produced
7.45 million tons of raw coal in 2006, an increase of 7.8% over
2005. There is no plan for coal capacity expansion today, so the
remaining reserves are therefore enough for the mining of around
50 years. The major coal product in the company is grade 9-12
refined fat coal. With technical renovation, the output of
refined antracite with high adhesiveness was 2.638 million tons
in 2006, an increase of 16.5% over 2005. The output rate of
refined antracite with high adhesiveness increased from 32.7%
in 2005 to 35.4% in 2006. The rapid capacity expansion of coke
in recent years has led to a supply shortage of antracite with
high adhesiveness. It is expected that the price of antracite
with high adhesiveness will still rise stably in the next few
years.
   Besides, KCCC has an excellent advantage in geographical
location. It is not only close to large coal-consuming
enterprises such as Shougang Group and Tangsteel Group, but also
can use Jingtang Port and Caofeidian Port, two important ports
in Hebei, to ship coal chemical products in future.

Rapid development of coke and coal chemical businesses

KCCC makes use of its advantage in resources to vigorously
develop the coke business. In 2004 KCCC established Qian'an
Sinochem Coal Chemical Co., Ltd. in collaboration with Shougang
Group and Qian'an Major Project Investment Co., Ltd. The major
product of the company is metallurgical coke and 90% of the
product is directly supplied to Shougang Group. KCCC owns 49.68%
equity in the company. The project is executed in two phases and
each phase has a capacity of 1.1 million t/a. The first phase
fully reached the design capacity in 2006 and the actual output
was 1.18 million tons that year. The second phase started
production at the beginning of 2007 and will fully reach the
design capacity this year.
   In July 2006 KCCC established Tangshan Zhongrun Coal Chemical
Co., Ltd. in collaboration with Tanggang Group and Tangshan
Gangxing Industry Co., Ltd. KCCC owns 94.08% equity in the
company. The project includes 2.0 million t/a coke and 250 000
t/a methanol. It is executed in two phases. The first phase has
1.1 million t/a coke and 100 000 t/a coke oven gas based methanol.
The first-phase coke unit has already started production. It
will fully reach the design capacity this year and the output
in 2007 is expected to be 700 000-800 000 tons. The first-phase
methanol unit will start production in July or August 2007. The
second phase will be launched construction in 2007, put on stream
at the end of 2008 and fully reach the design capacity in the
first half of 2009. KCCC will acquire a capacity of 4.2 million
t/a coke and 250 000 t/a methanol at that time.
   KCCC has already signed an agreement with Koppers (China)
Carbon and Chemical Company Ltd. and Tangsteel Group on making
joint investments to establish Tangshan Koppers Kailuan Carbon
Chemical Co., Ltd. KCCC owns 51% equity in the company. The new
company will launch a 300 000 t/a coal tar project. Matched
facilities include a 100 000 t/a benzene hydrofining unit.
Construction on the coal tar project will be launched in 2007
and production will be started in the third quarter of 2008. Coal
tar for the project will be almost totally from two coking plants
under KCCC. Nearly a half of crude benzene will be from coking
plants under KCCC and the balance will be purchased from outside
sources.
   All the above-mentioned projects will reach the design
capacity in mid-2009. The sales revenue in KCCC will hopefully
reach RMB10 billion in 2010, more than 3 times higher than the
sales revenue of RMB3.159 billion in 2006. KCCC will develop
itself from a coal mining enterprise into an enterprise
integrating coal, coke and chemicals. The product portfolio will
have major readjustments. The revenue of the coke and chemical
business will account for around 75% of the total.

Projection of performance growth

Tangshan of Hebei province has a coke capacity of over 20 million
t/a today and refined fat coal produced in KCCC has a supply
shortage. The price of fat coal in the company is stably growing
in 2007. The tax-inclusive price of refined fat coal in Kailuan
reached RMB780 per ton on May 14th, 2007, nearly RMB60 per ton
higher than the price at the beginning of 2007. Due to the
shortage of resources, the trend of price rise will continue to
last.
   The output of coal in KCCC has basically remained unchanged
in the past two years. The growth of the sales revenue mainly
comes from the price rise of coal. It is expected that the average
annual growth of the sales revenue in the coal business will be
8% in 2007 and 2008. Due to the impact from other factors, however,
the cost of the coal business in the company will also have an
8% growth.