Sinolink: Modern coal chemical industry expansion is imminent, and demand for related equipment is expected to explode.

Sinolink released a research report stating that, according to calculations, assuming that the projects currently underway will be fully operational in the next five years, the annual average coal consumption of modern coal chemical production capacity in the next five years will be not less than 37.14 million tons, which is about 2.1 times the average level of 18-24E, mainly for the production capacity of coal-based fuels in Xinjiang. The progress of modern coal chemical projects is accelerating, with domestic companies having deep technical expertise and order experience in related equipment. It is recommended to pay attention to domestic leaders in air separation equipment, Hangzhou Oxygen Plant Group (002430.SZ), and domestic leaders in turbine compressors, Xi'An Shaangu Power (601369.SH). Sinolink's main points are as follows: Analysis of the prospects of expanding coal chemical production: According to calculations, assuming that the projects currently underway will be fully operational in the next five years, the annual average increase in coal consumption of modern coal chemical production capacity in the next five years will not be less than 37.14 million tons, which is about 2.1 times the average level of 18-24E, and mainly for the production capacity of coal-based fuels in Xinjiang. Modern coal chemical industry mainly refers to the chemical industry with coal gasification and liquefaction as the core processes, which can be divided into coal-based fuel production and coal gasification for chemical raw materials based on process and policy support. (1) Coal-based fuels: The total production capacity of coal gasification/coal liquefaction projects that have been put into operation is 7.455 billion cubic meters/9.78 million tons, accounting for only 3.2%/2.3% of the national natural gas/crude oil production. Currently, there are at least 12 coal gasification/coal liquefaction projects under development (10 in Xinjiang)/4 (2 in Xinjiang), corresponding to a total annual production capacity of 42 billion cubic meters/9.56 million tons. The coal-based fuel projects expected to be put into operation in the next five years are expected to far exceed the sum of the past 15 years. The application of low-cost Xinjiang coal is expected to solve the economic viability issue of the projects. (2) Coal gasification for chemical raw materials: Processes with significant increases in coal consumption include coal-based methanol, coal-based ethylene glycol, and coal-based synthetic ammonia. 1) Coal-based methanol: In 2023, China's coal-based methanol production accounted for 83.9%. China's methanol production continues to grow, with no fear of overcapacity, and is steadily increasing. Currently, there are at least approximately 33.16 million tons of annual production capacity for coal-based methanol projects under development in China, which may lead to an annual growth in new capacity of 23.9% in the next five years. 2) Coal-based ethylene glycol: From 2019 to 2023, China's ethylene glycol production has grown at a rate of approximately 20%, with the driving factor for production growth changing from capacity to operating rate. In 2024, the national new capacity is only one set of 300,000 tons, and the future release rate of capacity may remain low. 3) Coal-based synthetic ammonia: Currently, coal accounts for 79% of the raw materials for synthetic ammonia. Since 2022, with the landing of capacity replacement projects and the widespread application of synthetic ammonia, China's synthetic ammonia capacity has stabilized and rebounded. In 2023, China's synthetic ammonia capacity was 74.11 million tons/year, an 8.6% increase over the previous year, and is expected to continue to increase capacity in the future. Industrial policies and energy security promote the expansion of coal-based fuels, and recent large projects have made progress. (1) Restrictions on coal chemical industry policies limit the expansion of coal-based chemical raw materials. In July 2023, the National Development and Reform Commission and other authorities issued the "Notice on Promoting the Healthy Development of the Modern Coal Chemical Industry", which will severely limit the expansion of coal-based chemical raw materials in the future. However, the "Notice" immediately removes the concepts of restricting coal gas and coal oil production. (2) Expanding coal production is a necessary path for China's energy independence. In 2023, China's external dependence on crude oil/natural gas was 72%/42%. (3) Xinjiang has abundant coal resources, with proven recoverable reserves of 19 billion tons, ranking fourth in the country; Xinjiang has low coal mining costs, with open-pit coal mines accounting for 22% of the national total, significantly higher than Xinjiang's 9.7% share of raw coal production. Currently, the growth rate of coal production in the eastern and central regions is slowing down, and policies are guiding Xinjiang to upgrade from a coal emergency reserve base to a coal supply guarantee base. In the future, Xinjiang's coal production is expected to continue to expand. Against this background, coal chemical industry is an important means of coal consumption, and more projects are expected to be implemented in Xinjiang in the future. (4) Large projects have made marginal progress. On October 8, 2024, State Energy Group's Hami Energy Integration and Innovation Base project started construction, with an initial investment of 90 billion RMB. The expansion of modern coal chemical industry is positive for the demand for gasifiers, cryogenic equipment, air separation equipment, instrumentation, and other equipment. Equipment accounts for 55% of the investment in modern coal chemical projects. (1) Gasifiers are the core equipment for coal gasification, with high technological barriers. The import price of a gasifier capable of processing 250,000 tons of raw coal per year is close to 100 million RMB, while the domestic gasifier is about one-third of the imported one in terms of value. Pulverized coal gasification is gradually dominating the domestic market. Domestic Space furnace has a market share of over 50% in the pulverized coal gasification process, but there are still overseas products such as GSP furnaces and Shell furnaces in application in China. (2) Air separation equipment is heavily used in modern coal chemical projects. Approximately 8.9/1.9/1.2 thousand Nm3/h of air separation units are used for 10 billion cubic meters of coal-based gas/10,000 tons of coal-based ethylene glycol/10,000 tons of coal-based synthetic ammonia annual production capacity, with a domestication rate of over 70%. Hangzhou Oxygen Plant Group dominates the market and its technology is on par with global leaders. (3) Cryogenic equipment is used for gas liquefaction, separation, purification, etc. Currently, international gas giants are mainly responsible for the construction of cryogenic equipment in coal chemical projects, with very few domestic players. There are technical barriers in core components such as plate-fin heat exchangers in the cryogenic equipment. (4) Turbine compressors are high-end fans used in large-scale industrial processes. The market size in 2020 was 10.5 billion RMB, with the main players being Shenyang Blower, Shaanxi Blower, and overseas giants. (5) Instrumentation accounts for about 4% of the investment in modern coal chemical projects. The competition is very fragmented, with foreign companies dominating the high-end market. For example, in the control valve market, the domestic substitution rate is above 50%.