China BlueChemical, the fertiliser manufacturing unit of state-owned oil and gas major China National Offshore Oil, plans to make a complete switch from natural gas to coal to power its urea plant in Inner Mongolia by 2015, to ensure the plant stays viable amid rising gas costs.
Chief executive Yang Yexin said the plant would have problems making a profit if gas prices rose another 20-30 per cent from present levels .
"In the long term, gas prices are bound to go up, so we need to plan ahead to ensure sustainability of the plant," Yang said.
Beijing is under pressure to lift domestic gas prices since more gas has to be imported to meet demand, and international gas prices are much higher than regulated domestic prices.
The Tianye plant makes urea, a nitrogenous fertiliser, which together with phosphate and potassium, are the three key ingredients in a balanced fertiliser mix.
The plant also makes methanol, which is an industrial chemical and fuel.
Urea output at the plant fell 4 per cent and methanol production decline 16 per cent in the first half from the year-earlier period, due to a shortage of gas.
Yang said gas supplier PetroChina would complete a second pipeline in the region this winter, which would ease the supply shortage.
At China BlueChemical's Hainan plant, its main base, output also tumbled 16.6 per cent and methanol production slid 7.6 per cent in the first half, due to planned maintenance of facilities. Yang said production volumes should return to normal as no overhauls of major facilities were planned for the second half, and major maintenance checks tended to take place once every two to three years.
Declines in output and sales were more than offset by the benefits from a 11.5 per cent rise in the average urea selling price; and a 4.3 per cent gain in the methanol selling price, resulting in a 5.1 per cent gain in overall first-half sales.
However, due to lower sales volumes, the firm's fixed costs were higher on a per-tonne basis, squeezing its profit margin to 30.4 per cent from 35.7 per cent in the same period last year. Net profit dropped 11.8 per cent year-on-year to 908.45 million yuan.