Friday, November 11, 2005
YaSheng Group (YHGG) methanol
This key project is considered a high priority for the Government of Gansu Province which has been awarded to the YaSheng Group. This project has received strong financial and political support by the Chinese government in the pursuit of alternative energy. The total investment for this project is approximately $224 million USD among which $67 million USD is expected to be invested by the YaSheng Group with the remaining investment to be contributed by the Gansu Province of the PRC.The leading producer of methanol worldwide is Methanex (MEOH) which was one of my investments up until May-June 2005 (very profitable). This presentation contains an excellent overview of the industry. The current global market for methanol is around 35 million tons per year. The real key to methanol production is getting a low cost source of natural gas (which is the main ingredient). North America and Europe are now high cost sources and companies have been shutting down plants there and opening plants in the low cost locations. Slide 10 of the presentation has the quintessential supply/demand curve.
Methanex claims China is a high cost producer, with costs of about $180/ton. Whether China should produce or import will depend on methanol prices and natural gas prices (see slide 38). It doesn't look so great for YaSheng, but so long as the demand continues to ramp up, the methanol prices should hold up making the new plant profitable, but it's probably not going to be a real low cost producer.
The company has established working agreements with China National Petroleum Corporation to supply 300 million cubic meters gas and with Jiuquan Steel Company to supply 1.4 billion cubic meters of liquid gas for this project.The cost of this gas determines whether this is a good project or not. But since the Chinese government is providing so much of the investment, the equation is probably not bad.
China uses 20% of global methanol production (about 7 million tons) and is a fast growing market increasing at 10% per year (700,000 tons). The YaSheng plant would be 500,000 tons.
Methanex expects Chinese supply of methanol to be about 16% of the global supply growth.