Global Bio-Chem bides time on 5b yuan project
Global Bio-Chem Technology Group, the world's largest producer of lysine, a key chemical in animal feed, says it will go slow on a 5 billion yuan (HK$5.7 billion) expansion project to take advantage of falling construction costs and to hedge its bets amid uncertain chemical market conditions.
The Hong Kong-listed and headquartered group with production plants in several mainland centres has embarked on a five-year expansion project in downstream industrial chemicals.
It makes refined corn products such as corn starch and gluten meal used in animal feed and uses corn starch to produce a range of chemicals including amino acids, corn sweeteners, modified starch and polyol chemical products.
Modified starch is used in the food and paper industries, while corn sweeteners are used in food and beverage and pharmaceutical products. Polyol chemicals are industrial chemicals primarily made from crude oil.
Early this year, Global Bio-Chem said it planned to raise its annual polyol output capacity from 200,000 tonnes to 1 million tonnes in five years. The business was lucrative amid surging crude oil prices.
But with crude prices falling more than 50 per cent in the last three months and the global financial turmoil biting into developed nations' consumer demand and China's industrial exports, Global Bio-Chem has turned more cautious.
'At this stage, we are not changing the overall target of the five-year expansion plan, but we want to slow down the earlier portion of it so that we can take advantage of falling prices of steel and other materials,' said co-chairman Xu Zhouwen.
'It is not due to financing difficulty as we have sufficient cash flows and bank facilities to support it.'
With more than HK$2 billion of cash on hand, the group earns net cash inflow of HK$100 million and is supported by policy loans from the Agricultural Bank of China, according to Mr Xu.
But if crude oil prices fell to US$50 a barrel or lower for a prolonged period, the company would slow down the plan, as the project requires oil prices to be above US$45 to be profitable based on a corn price of 1,500 yuan a tonne.
New York crude oil futures for settlement next month closed last week at US$67.81 per barrel.
The company is the first in the world to produce polyol chemicals from refined corn materials on a commercial scale.
Prices of polyol including resins, propylene glycol and ethylene glycol had fallen about 10 per cent since mid-September, Mr Xu said, adding the company is watching closely to see how the turmoil on financial markets will affect the real economy.
Profit margins of crude oil-based industrial chemical producers have been squeezed by high crude prices and falling demand as industrial output growth slackens.
But prices and profitability of Global Bio-Chem's bread-and-butter product lysine had not been hit by the economic slowdown so far, Mr Xu said. The firm accounts for 80 per cent of the mainland's lysine output and 25 per cent of world production.
'Due to our large scale, we have been able to influence prices which have actually risen slightly between the start of the year and now,' Mr Xu said, adding mainland demand has been rising at 10 per cent to 15 per cent annually in the past few years as Beijing adopted policies to encourage expansion of food production.
The price of corn kernel, which makes up 70 per cent of total lysine production costs, has been fixed with farmers at about 1,350 yuan a tonne for next year, 12 per cent lower than this year, he said.
Global Bio-Chem's average corn cost is expected to rise 8.5 per cent this year from last year, while lysine prices have risen more than 20 per cent from last year.
Mainland corn prices have been kept lower than international levels as Beijing limited exports and raised export taxes to protect domestic consumers of the strategic crop.
Meanwhile, Mr Xu said the company planned to start commercial production of two new chemical products used in the pharmaceutical sector in the second half of next year. No new plant needs to be built.
Global Bio-Chem's share price has fallen 55.5 per cent since the start of the year to HK$1.05 and as low as 60 HK cents last week, but a confident Mr Xu said he spent more than HK$1 million raising his stake recently.
The firm posted first-half net profit growth of 161 per cent to HK$602 million, helped by higher lysine selling prices and volume. Mr Xu said third-quarter margins remained at first-half levels.