Competitor' s exit propels it to become the world' s number two producer of dimethylformamide.

CATALIST-LISTED Jiutian Chemical Group recently became the world' s second-largest dimethylformamide (DMF) producer, after a competitor exited the business. The economics of its chemicals production business have also improved, and the company expects this situation may continue for some time.

 

Executive director Lee Chee Seng told The Business Times that the cost of a key raw material has plunged drastically while the average selling price of its mainstay product DMF has risen significantly.

 

The combination of these factors helped the Henan-based producer to improve its gross profit margin to 31 per cent for the three months to September, from 8 per cent a year ago. It posted a profit of 51.9 million yuan (S$10.5 million) in the quarter - versus 2.4 million yuan for the corresponding period a year ago.

 

Return to profit

 

It also went from a loss of 6.9 million yuan to earnings of 32.7 million yuan in the second quarter of this year, thanks to a 20.5 per cent decline in the price of its key raw material methanol.

 

Methanol, which makes up over 50 per cent of Jiutian' s raw material costs, has historically moved in tandem with crude oil prices. Methanol now costs about 1,800 yuan per tonne. It hit a trough of 1,500 yuan per tonne when oil prices dived earlier in the year, said Mr Lee.

 

The former investment banker, who led a group of private equity investors in 2004 to carry out a management buyout of Jiutian, said methanol prices have gone as high as 3,500 yuan per tonne in the past 15 years.

 

Meanwhile, Jiutian' s competitor Zhejiang Communications Technology Company quit the business of DMF production in May - pulling 180,000 tonnes in annual capacity from the market. Jiutian, with an annual capacity of 150,000 tonnes from its two plants, became the world' s second largest DMF producer.

 

Zhejiang Communications' exit, combined with greater demand for DMF, pushed DMF prices up 36 per cent year on year in the third quarter.

 

DMF is used to make polyurethane (which, in turn, is used in synthetic leather), animal feed and pesticides. Demand for DMF is rising as China' s economy recovers.

 

Asked if the newly attractive economics might attract new DMF makers, Mr Lee said there are some entry barriers. Production requires a lot of electricity and steam, for instance, which makes a plant difficult to set up.

 

Mr Lee sees the company benefiting from depressed methanol costs and high DMF prices for a while, especially as methanol prices are highly correlated with crude oil prices. The latter are likely to stay low until global economies recover from the novel coronavirus-induced recession.

 

" We have a longer runway this time compared to the previous cycles&hellip I don' t give a time(frame)&hellip but I could only say that this is probably the one time in the 15-year listed history of Jiutian that we see a longer runway. It' s a fair statement because I don' t want to give the market too high hopes."

 

Besides DMF, Jiutian also produces methylamine (MA), in three forms: monomethylamine, dimethylamine and trimethylamine. MA is used in lithium batteries, semiconductors and pharmaceutical products.

 

The company also has the capacity to produce sodium hydrosulfite (SH). Its SH plant with two lines was mothballed for reconfiguration and modification last year. Jiutian considers restarting the plant in the first half of next year, with one line producing the chemical and three other intermediate products.

 

It is in discussions to team up with another chemical entity to modify the other line to produce other more profitable products, but Mr Lee is not prepared to share details yet.

 

He is considering diversifying the company' s income streams to smooth out cyclicality, but said nothing has been decided yet.

 

Heavy share trading

 

Shares of Jiutian have seen unusually heavy trading since August, accounting for 25 per cent of trading volume on at least one day.

 

The counter rose as high as S$0.121 earlier this month, but has since come down. It closed Nov 20 at S$0.092.

 

The stock is up 513.3 per cent over the last 52 weeks, putting it among the top 10 performers listed on SGX over the past year.

 

Asked if he knows of any reason for the activity, Mr Lee said: " No, I don' t know of any specifics. But the whole market is watching this stock, you know, otherwise we cannot have this volume."

 

Even as investors appear to be more excited about Jiutian' s prospects, however, Mr Lee will have to contend with a reputation among Chinese companies listed on the Singapore Exchange (SGX). Many of these so-called S-chips have been in the news over accounting fraud and corporate scandals.

 

Comparing Jiutian with other S-chips, the 57-year-old Mr Lee noted that the company is not owned by an individual. Its largest shareholder Anyang Chemical Industry Group Co, with a 25.3 per cent stake, is a Chinese state-owned enterprise.

 

Meanwhile, Mr Lee is seizing the opportunity of increased interest to get involved in roadshows for institutional investors and raise the profile of Jiutian, which does not have a website.

 

He said: " My medium-term plan is to have more institutional (investors) as my shareholders."