Why should you pay attention to US ethane resources?

Wanhua Chemical's current business structure is mainly polyurethane, petrochemical and fine chemical new materials, and the company has established strong core competitive advantages in their respective fields. Polyurethane: Since the 90s, Wanhua Chemical has achieved global leadership in terms of scale, technology, and cost through continuous cultivation of the MDI business, which has extremely high barriers in the industry, and has continued to obtain ROE returns that clearly surpass the industry. In recent years, the company has also focused on consolidating and improving the global competitiveness of TDI, and the market has a high degree of alpha recognition for the company's isocyanates and even the polyurethane sector. Fine chemicals and new materials: Wanhua continues to invest in R&D to overcome many “stuck neck” technologies and achieve rapid expansion of the new materials business. Some new material products have achieved profit returns comparable to MDI, and the market's recognition of this business is quite good. Petrochemical: The company's PO/AE integration project was put into operation in 2015, marking the company's expansion into the petrochemical (refining and chemical) business. The first phase of the ethylene project was fully launched in 2020. It is expected that the second phase of ethylene and the Penglai PDH project will be put into operation by the end of 2024, and the scale of the petrochemical business sector will grow rapidly. Due to the large differences in the product structure of the refining and chemical business in the market, it is difficult to compare the strengths and weaknesses horizontally. However, due to front-end raw materials, the cost advantage of overseas ethane is expected to be maintained for a long time, so refining and chemical companies with procurement, transportation, and processing overseas ethane resources are expected to maintain competitiveness for a long time. In this report, we will sort out the advantages of US ethane resources and the current layout of Wanhua to explore how Wanhua's alpha advantage in the petrochemical business is evident.

Ethane cracking: five advantages create a strong moat

Ethylene is an important intermediate chemical product in the C2 industry chain. In China, its downstream products are mainly polyethylene, and it is also used to produce other widely used chemical products and intermediates, such as polyvinyl chloride and ethylene glycol. According to upstream raw materials, ethylene production processes can be divided into three categories: gas head (NGL product), oil head (naphtha), and coal head (coal or methanol), while domestic ethylene production capacity is mainly based on oil head, supplemented by coal head, and gas head production capacity has not yet been applied on a large scale.

According to research by the Changjiang Petrochemical team, as a supplement to the crude oil route, the ethane cracking process route has five advantages: 1) Ethane prices are seriously underestimated due to long-term surplus of ethane resources in the US, and ethane cracking has a very obvious raw material cost advantage; 2) After the US shale oil and gas revolution, serious excess ethane resources and insufficient export capacity at port terminals made their prices underestimated. Companies that first have high-quality scarce resources such as pipelines and terminals and have supporting transportation fleets will have a first-mover advantage in ethane cracking. Later entrants will have a first-mover advantage in ethane cracking. Postponing ethane cracking As the project progresses, the first companies to enter have priority and continue to enjoy the excess benefits brought by high-quality and low-cost ethane resources; 3) Ethane cracking has the characteristics of high ethylene yield, low investment intensity and short processing process. The processing cost is much lower than traditional crude oil routes and coal-to-olefin routes. The complete cost of domestic production is at the same level as the United States, where the raw materials are located, and it has a great leading edge in the global ethylene production cost curve; 4) Although there are many excess ethane resources in the US, the resources are inherently exclusive. Further resource constraints; 5) In the context of carbon neutrality, excellent carbon negative function is the foundation for ethane cracking and growth.

With a comprehensive layout, Wanhua Petrochemical α is expected to be significantly strengthened

In the production process, the company's ethylene phase II project is about to be launched. Other ethylene projects are also expected to use imported ethane resources to optimize costs; very large ethane carriers (ALEC), judging from ALEC projects under construction around the world, Jiangnan Shipyard has obtained more than 70% of orders due to its leading strength. Several companies, such as Wanhua Chemical, Shandong Ocean Group, Satellite Chemical, and Inex, will monopolize ALEC orders in the next few years, and the ALEC process will also become a bottleneck for overseas ethane resource transportation in the future; port resources, based on existing ALEC ship traffic (based on 3 round trips per year), the amount of US ethane that can be transported every year is about 4.23 million tons, and the ALEC transportation volume under construction is about 7.16 million tons. After the construction of the US ethane port project is completed, the export capacity of ethane will reach 16.51 million tons/year. On August 5, 2020, Wanhua Petrochemical, a subsidiary of Wanhua Chemical, and ADNOCL&S, a shipping logistics company under the Abu Dhabi National Petroleum Corporation, officially announced the establishment of a strategic joint venture to launch comprehensive cooperation. Companies with very large ethane vessels will have a clear first-mover advantage, and Wanhua is expected to benefit from this. ADNOC has strong strength, and its global layout helps Wanhua obtain rich resources.

Investment advice: Maintaining a “buy” rating

Wanhua Chemical's polyurethane position is prominent. The industry layout is ahead of schedule. The petrochemical business continues to increase, and the acquisition of ethane resources will significantly enhance the competitiveness of the petrochemical business. The petrochemical sector is expected to usher in a revaluation. The petrochemical sector is expected to experience steady growth in new fine chemical materials. The net profit attributable to the company in 2024-2026 is estimated to be 187.7/235.8/26.68 billion yuan, respectively, maintaining a “buy” rating.

Risk warning

1. Downstream demand recovery falls short of expectations; 2. The progress of new projects falls short of expectations; 3. Risk of safety accidents; 4. Risk of project management; 5. Risk of profit forecasting assumptions not being true or falling short of expectations.