<DOCUMENT>
<TYPE>20-F
<SEQUENCE>1
<FILENAME>t301832.txt
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
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FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-13750
GRAPHIC OMITTED
(Exact name of Registrant as specified in its charter)
JILIN CHEMICAL INDUSTRIAL COMPANY LIMITED
(Translation of Registrant's name into English)
THE PEOPLE'S REPUBLIC OF CHINA
(Jurisdiction of incorporation or organization)
NO. 9 LONGTAN STREET, LONGTAN DISTRICT, JILIN CITY, JILIN PROVINCE, PRC
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section
12(b) of the Act.
Title of Each Class Name of Each Exchange on which Registered
AMERICAN DEPOSITARY SHARES NEW YORK STOCK EXCHANGE
CLASS H ORDINARY SHARES, THE STOCK EXCHANGE OF HONG KONG LIMITED
PAR VALUE RMB 1.00 PER SHARE
Securities registered or to be registered pursuant to Section
12(g) of the Act.
NONE
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(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
NONE
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(Title of Classes)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
964,778,000 H SHARES
2,596,300,000 DOMESTIC INVESTED SHARES
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
- --
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
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<PAGE>
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS......................3
PART I.....................................................................5
Item 1. Identity of Directors, Senior Management and Advisers.........5
Item 2. Offer Statistics and Expected Timetable.......................5
Item 3. Key Information...............................................5
Item 4. Information on the Company...................................14
Item 5. Operating and Financial Review and Prospects.................37
Item 6. Directors, Senior Management and Employees...................48
Item 7. Major Shareholders and Related Party Transactions............54
Item 8. Financial Information........................................59
Item 9. The Offer and Listing........................................60
Item 10. Additional Information.......................................62
Item 11. Quantitative and Qualitative Disclosures about Market Risk...75
Item 12. Description of Securities Other than Equity Securities.......76
PART II ..................................................................76
Item 13. Defaults, Dividend Arrearages and Delinquencies..............76
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds.79
Item 15. Controls and Procedures......................................76
Item 16A Audit Committee Financial Expert.............................77
Item 16B Code of Ethics...............................................77
Item 16C Principal Accountant Fees and Services.......................77
Item 16D Exemptions from the Listing Standards for
Audit Committees..........................................78
Item 16E Purchases of Equity Securities by the Issuer and
Affiliated Purchasers.....................................78
PART III .................................................................79
Item 17. Financial Statements.........................................79
Item 18. Financial Statements.........................................79
Item 19. Exhibits.....................................................79
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this annual report which does not relate to
historical financial information may be deemed to constitute forward-looking
statements. These statements are made under the "safe harbor" provisions of the
U.S. Private Securities Reform Act of 1995. You can identify these
forward-looking statement by terminology such as "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project,"
"believe," "intends to" or similar expressions. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical results and those presently anticipated or projected.
We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Factors that
could cause our actual results in the future to differ materially from any
opinions or statements expressed with respect to future periods include, but are
not limited to, crude oil allocation and pricing, increased foreign competition,
effects of PRC macroeconomic policy and the PRC transport system. We do not
undertake any obligation to update this forward-looking information, except as
required under applicable law.
EXCHANGE RATES
Unless otherwise specified, references in this annual report to "US dollars" or
"US$" are to United States dollars, references to "HK dollars" or "HK$" are to
Hong Kong dollars and references to "Renminbi" or "RMB" are to Renminbi yuan,
which is the legal currency of the PRC.
Translation of amounts from Renminbi to US dollars for the convenience of the
reader have been made in this annual report, except as otherwise noted, at the
exchange rate published daily by the People's Bank of China, or the PBOC Rate,
on December 31, 2004 of US$1 = RMB 8.2765. No representation is made that the
Renminbi amounts could have been or could be converted into US dollars at that
rate or at any other rate.
OTHER CONVENTIONS
As used in this annual report, unless context otherwise requires, the following
terms have the meaning set forth below:
"Combined Offering" means the initial global public offering of our securities
in 1995.
"Parent" or "Parent Company" means prior to November 5, 1999, Jilin Chemical
Group Corporation, or Jilin Group, and from November 5, 1999, PetroChina Company
Limited, or PetroChina.
"PRC" or "China" means the People's Republic of China.
"Predecessor" means Jilin Chemical Industrial Complex as the operator of the
chemical businesses transferred to us in the Restructuring.
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<PAGE>
"Restructuring" means transfer to us, effective as of October 1, 1994, of the
principal chemical businesses and certain assets and liabilities of the
Predecessor, including certain ancillary and businesses support functions, and
the formation of us as the wholly-owned subsidiary of Jilin Chemical Group
Corporation.
"Rated Capacity" is the output capacity of a given production unit or, where
appropriate, the throughput capacity, calculated by estimating the number of
days in a year that such production unit is expected to operate, including
downtime for regular maintenance, and multiplying that number by an amount equal
to the unit's optimal daily output or throughput, as the case may be.
"Tons" or "ton" means metric ton(s) and "t/a" means tons per year.
"We", "our" and "us" are references to Jilin Chemical Industrial Company
Limited, and unless the context otherwise requires, joint ventures we control
and, prior to the Restructuring, relate to the chemical business carried on by
the Predecessor.
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<PAGE>
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The following financial data as of December 31, 2003 and 2004 and for each of
the years ended December 31, 2002, 2003 and 2004 are derived from our audited
consolidated financial statements included elsewhere in this annual report. The
financial data as of December 31, 2000, 2001 and 2002 and for each of the years
ended December 31, 2000 and 2001 are derived from our historical consolidated
financial statements not included in this annual report. You should read the
selected financial data set forth below in conjunction with our Consolidated
Financial Statements and the corresponding notes thereto and ITEM 5. OPERATING
AND FINANCIAL REVIEW AND Prospects. Consolidated Financial Statements have been
prepared in accordance with International Financial Reporting Standards
("IFRS"), which differ from accounting principles generally accepted in the
United States of America ("US GAAP"). For a discussion of the significant
differences between IFRS and US GAAP, see ITEM 18. FINANCIAL STATEMENTS --
CONSOLIDATED FINANCIAL STATEMENTS -- NOTE 31.
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF SHARES)
2000 2001 2002 2003 2004 2004(a)
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(RMB) (RMB) (RMB) (RMB) (RMB) (US$)
STATEMENTS OF OPERATIONS DATA
Amounts in Accordance with IFRS:
<S> <C> <C> <C> <C> <C> <C>
Net sales: 13,396,247 12,518,532 13,138,387 20,652,809 31,857,423 3,849,142
Petroleum products 5,410,401 5,207,953 5,166,188 9,320,066 13,377,835 1,616,363
Petrochemical and organic
chemical products 5,830,795 5,386,480 5,750,075 7,783,091 12,768,259 1,542,713
Synthetic rubber 878,455 781,690 782,559 1,133,031 1,793,689 216,720
Chemical fertilizers and inorganic
chemical products 458,212 107,090 123,325 164,861 664,246 80,257
Other 818,384 1,035,319 1,316,240 2,251,760 3,253,394 393,089
Income/(loss) from operations (334,593) (1,308,480) (506,036) 895,318 2,593,028 313,300
Interest expenses (641,124) (598,882) (474,370) (429,782) (270,071) (32,631)
Net income/(loss) (835,990) (1,817,369) (1,023,099) 427,609 2,544,510 307,438
Basic and diluted earnings/(loss)
per share (0.24) (0.51) (0.29) 0.12 0.71 0.09
Amounts in Accordance with US GAAP:(b)
Net income/(loss) (782,117) (2,160,673) (685,579) 369,709 2,486,408 300,418
Basic and diluted earnings/(losses)
per share (0.22) (0.61) (0.19) 0.10 0.70 0.08
CASH FLOW DATA
Net cash provided by/(used for)
operating activities (545,537) 1,772,458 1,329,003 3,578,324 3,074,779 371,507
Net cash used for investing activities (1,396,895) (867,158) (863,352) (722,137) (567,842) (68,609)
Net cash provided by/(used for)
financing activities 1,924,700 (1,097,347) (469,763) (2,853,493) (2,527,807) (305,419)
OTHER FINANCIAL DATA
Depreciation and amortization 867,028 966,795 1,108,522 1,032,007 1,147,278 138,619
Purchase of property, plant and
equipment (1,396,985) (866,858) (791,725) (675,078) (642,091) (77,580)
Capital Stock 3,561,078 3,561,078 3,561,078 3,561,078 3,561,078 430,264
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
As of December 31,
2000 2001 2002 2003 2004 2004(a)
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(RMB) (RMB) (RMB) (RMB) (RMB) (US$)
BALANCE SHEET DATA
Amounts in Accordance with IFRS:
<S> <C> <C> <C> <C> <C> <C>
Net working capital 1,302,811 (2,061,875) (5,256,695) (5,660,445) (4,301,022) (519,666)
Fixed assets 11,417,297 10,426,277 10,687,084 9,929,535 9,368,990 1,131,999
Total assets 17,973,843 13,829,838 13,665,141 12,665,589 13,594,197 1,642,506
Short term debt (including current 3,043,831 3,541,485 5,536,685 4,101,999 3,086,075 372,872
portion of long-term debt)
Long term debt (excluding current portion) 7,580,101 5,985,563 3,826,805 2,407,898 896,015 108,260
Owner's/shareholders' equity 5,873,895 3,106,046 2,082,947 2,510,556 5,055,066 610,773
Amounts in Accordance with US GAAP: (b)
Fixed assets 10,336,870 10,407,165 10,995,294 10,170,684 9,519,956 1,150,239
Owner's /shareholders' equity 5,086,452 2,924,327 2,240,200 2,609,909 5,096,317 615,757
<FN>
(a) Translated solely for convenience into US dollars based on the exchange
rate prevailing on December 31, 2004 as quoted by the People's Bank of
China of US$1 = RMB 8.2765.
(b) Amounts for 2000 have been restated.
</FN>
</TABLE>
DIVIDENDS
The following table sets forth certain information concerning the dividends paid
by us since 2000:
DIVIDEND PERIOD DIVIDEND AMOUNT (PER SHARE)
JANUARY 1 - DECEMBER 31
RMB US$ EQUIVALENT
2000 No dividends No dividends
2001 No dividends No dividends
2002 No dividends No dividends
2003 No dividends No dividends
2004 No dividends No dividends
EXCHANGE RATES
The PRC government imposes control over its foreign currency reserves in part
through direct regulation of the conversion of Renminbi into foreign exchange
and through restrictions on foreign trade. See ITEM 10. ADDITIONAL INFORMATION.
The noon buying rate in New York City for cable transfers in foreign currencies
as certified for customs purposes by the Federal Reserve Bank of New York on May
16, 2005 was US$1.00 = RMB8.2765. In addition, the following table sets forth
certain historical information concerning exchange rates between Renminbi and US
dollars for the periods indicated:
NOON BUYING RATE
(EXPRESSED IN RMB PER US$)
PERIOD AVERAGE((1))
2000............................... 8.2784
2001............................... 8.2770
2002.............................. 8.2770
2003............................... 8.2771
2004............................... 8.2768
NOTES: (1) The average rate means the average of the exchange rates on the last
day of each month during that period.
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<PAGE>
NOON BUYING RATE
(EXPRESSED IN RMB PER US$)
PERIOD HIGH LOW
------ ---- ---
November, 2004..................... 8.2765 8.2764
December, 2004..................... 8.2767 8.2765
January, 2005...................... 8.2765 8.2765
February, 2005..................... 8.2765 8.2765
March, 2005........................ 8.2765 8.2765
April, 2005........................ 8.2765 8.2765
CAPITALIZATION AND INDEBTEDNESS
Not Applicable.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable.
RISK FACTORS
THE PRICE OF CRUDE OIL, OUR PRINCIPAL RAW MATERIAL, IS SUBJECT TO THE
CONTROL OF THE PRC GOVERNMENT.
Crude oil is our primary raw material. In the PRC the price of crude oil is
subject to a system of government control adopted in 1998. Under this pricing
scheme, the State Planning Commission (together with its successor, initially,
the State Development and Planning Commission and subsequently, the National
Development and Reform Commission) has established, on a monthly basis, a single
indicative price for each grade of domestic onshore crude oil based on
comparable international market prices inclusive of any duties that would have
been imposed had the oil been imported. To this single state indicative price, a
surcharge within certain government stipulated guidelines is imposed on all
domestically produced onshore crude oil as determined and agreed to by China
National Petrochemical Corporation, or CNPC, and China Petrochemical Group
Corporation, or Sinopec Group, to reflect any transportation and other
miscellaneous costs that would have been incurred in having the oil delivered to
various refineries. Accordingly, since June 1998 we have been purchasing crude
oil at prices that reflect the applicable state indicative price plus the
applicable surcharge. We believe that this oil pricing regime has resulted in
costs of crude oil that more closely reflect trends in international markets;
however, there may be a lag in timing between the changes in international
prices and any changes to the state indicative price, which may expose us to a
potentially higher price than the then current international market price. While
we believe that the current pricing policy will not change in the foreseeable
future, any changes in this pricing scheme could affect the price of our crude
oil and could adversely affect our operating results. As the PRC oil pricing
scheme reflects prices of crude oil in international markets, the cost of our
crude oil is subject to fluctuations in the price of crude oil in international
markets. These fluctuations may materially and adversely affect our operating
results. See ITEM 4. INFORMATION ON THE COMPANY -- RAW MATERIALS AND ENERGY
SUPPLY -- CRUDE OIL.
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<PAGE>
WE ARE DEPENDENT ON OUR PARENT FOR SUPPLIES OF OUR PRINCIPAL RAW
MATERIALS.
We are required to purchase crude oil and cracking feedstock, the raw materials
for the production of ethylene such as naphtha and light industrial oil, through
our Parent. Therefore neither the availability nor prices of crude oil nor other
cracking feedstock can be predicted by us, and no assurance can be given that
limited availability of crude oil or other cracking feedstock or substantially
higher prices will not have a material adverse effect on our operating results.
Since July 1998, PetroChina has been responsible for allocating all of our crude
oil from domestic sources. Our Parent has confirmed to us its intention to
allocate to us sufficient amounts of crude oil and other cracking feedstock
necessary to meet our needs for 2005.
OUR OPERATIONS HAVE BEEN AND MAY CONTINUE TO BE ADVERSELY AFFECTED BY
THE CYCLICAL NATURE OF THE PETROLEUM AND PETROCHEMICAL MARKET AND BY THE
VOLATILITY OF PRICES OF PETROLEUM AND PETROCHEMICAL PRODUCTS.
Most of our revenues are attributable to petroleum and petrochemical products
which have historically been cyclical and sensitive to the availability and
price of feedstock's and general economic conditions. Regional and global
markets for many of our products are sensitive to changes in industry capacity
and output levels, cyclical changes in regional and global economic conditions,
the price and availability of substitute products and changes in consumer
demand, which from time to time have had a significant impact on product prices
in the regional and global markets. Historically, the markets for these products
have experienced alternating periods of tight supply, causing prices and margins
to increase, followed by periods of capacity additions, possibly resulting in
oversupply and declining prices and margins. As tariffs and other import
restrictions are reduced and the control of product allocation and pricing
relaxed in China, the domestic markets for many of our products have become
increasingly subject to the cyclical nature of regional and global markets.
Historically, international and domestic prices of petroleum and petrochemical
products have fluctuated widely due to many other factors that are beyond our
control. Although we have implemented various measures to overcome the
unfavorable market conditions, including streamlining internal management and
reducing expenses, our business and results of operations and financial
condition may continue to be adversely affected if the results of those measures
fail to offset the adverse effects of the market conditions.
Pursuant to PRC law, our domestic-listed shares were suspended from trading on
the Shenzhen Stock Exchange on April 30, 2003 as a result of our reporting of
three consecutive years of net losses from January 1, 2000 to December 31, 2002.
Following our report of net profits for the period ended June 30, 2003, our
domestic-listed shares resumed trading on September 25, 2003 on the Shenzhen
Stock Exchange under the "special treatment" category provided under PRC law.
Following the release of our financial results for the year ended December 31,
2003, which recorded net profits for the year, our domestic-listed share no
longer face the risk of delistment unless we record another three years of
consecutive losses. However, for the year 2004 our domestic-listed shares
continued to trade under the "special treatment" category due to net asset value
lower than share par value and faced trading suspension for any trading day if
there is trading price volatility of 5% or more in that trading day. According
to financial results for the year ended December 31, 2004, our net asset per
share is higher than the par value of A shares.
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<PAGE>
Therefore, Shenzhen Stock Exchange cancelled its special treatment to our A
shares on March 28, 2005. The trade name of our A shares was changed thereafter
from "ST Jihua" into "Jilin Chemical", and the limit to daily fluctuation of
share price also changed from 5% to 10%. In general, PRC law provides that
companies listed on the Shenzhen Stock Exchange will face trading suspension if
there is trading price volatility of 10% or more in that trading day. Although
the suspension of trading of our domestic-listed shares will not directly affect
the listing and trading of our foreign-invested share listed on the Hong Kong
Stock Exchange, or the H Shares, and our American Depositary Shares listed on
the New York Stock Exchange, or the ADSs, the trading prices for H Shares and
ADSs may be directly affected due to lack of liquidity of our Domestic Shares.
WE HAVE SIGNIFICANT ACCOUNTS OF FOREIGN CURRENCY DEBTS RELATED TO THE
ETHYLENE PROJECT.
In November 1993, we participated in the construction of a highly integrated
petrochemical complex, consisting of 11 principal facilities and related
ancillary and support facilities centered around an ethylene production facility
with a Rated Capacity of 300,000 tons, which we refer to in this annual report
as the Ethylene Project.
Total investment in the Ethylene Project was approximately RMB 19.88 billion of
which approximately US$889 million in foreign exchange was borrowed by us and
Jilin Group between 1993 and 1997. As a result, both we and Jilin Group have
significant indebtedness denominated in foreign currencies. Further to an
agreement between us and Jilin Group effective September 30, 1998, Jilin Group
assumed the foreign currency loans borrowed by us and agreed to make periodic
loan repayments on our behalf and in turn, we agreed to pay Jilin Group the
Renminbi equivalent of such repayments at an exchange rate determined as at
September 30, 1998. We re-assumed these foreign currency loans effective January
1, 2000. As a result, we will have significant financial risks with respect to
our ability to service and repay the foreign exchange indebtedness, given that
almost all of our revenues at the present time are received in Renminbi.
Fluctuation in the Renminbi exchange rate against the relevant borrowed
currencies may result in significant foreign exchange gains or losses for us. As
of December 31, 2004, the outstanding foreign exchanged indebtedness was RMB
1,063 million.
WE RELY ON OUR PARENT TO PURCHASE THE PRODUCTS PRODUCED BY THE ORIGINAL
FOUR FACILITIES.
While we own four of the Ethylene Project's 11 facilities, or the Original Four
Facilities, PetroChina and Jilin Group own five and two of the remaining seven
facilities, respectively, or the Additional Seven Facilities. As ethylene and
certain other products of the Original Four Facilities are sold to our Parent as
feedstock for the Additional Seven Facilities, the ability of our Parent to
operate profitably the Additional Seven Facilities will directly affect the
financial performance of the Original Four Facilities and success of the
Ethylene Project as a whole. Because of the impracticability of transporting
ethylene and certain other products to be produced by the Original Four
Facilities, we will not have alternative customers for the majority of these
products in the event that our Parent is unable to purchase them as feedstock
for the Additional Seven Facilities.
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<PAGE>
WE ARE BECOMING INCREASINGLY SUBJECT TO FOREIGN COMPETITION.
Historically, the PRC government has provided the PRC chemical industry (except
for chemical fertilizers) with certain protection from foreign competition
through three primary practices: maintaining relatively high import tariffs,
imposing import license requirements and controlling the availability of foreign
exchange required to pay for imported products. These practices affect the
majority of the product types produced by us. These tariffs and import
restrictions are intended, in part, to protect domestic producers of these
products, such as us.
China became a member of the World Trade Organization, or WTO, on December 11,
2001. As part of its WTO accession commitments, the PRC government will
gradually eliminate import quotas and import license systems, reduce tariffs,
and permit foreign invested enterprises to engage in domestic distribution and
retail for all of our major products. China will also eliminate state trading
for our major products exclusive of petroleum products and chemical fertilizer.
Increased competition from imported products resulting from China's accession to
the WTO may have a material adverse effect on our business and operations. We
do, however, believe that our products have been and will continue generally to
be competitive with imported products in the PRC. Tariff reductions, however,
could reduce our profit margins or otherwise negatively impact our revenue from
certain products, including a small number of significant products. The PRC
government may also reduce the tariffs imposed on production equipment that we
may import in the future, as well as the restrictions on availability of
imported raw materials (such as crude oil) currently enforced by the PRC. We are
unable to determine accurately at this time the net effect on our business and
results of operations of China's accession to the WTO.
THE OUTBREAK OF AN EPIDEMIC MAY AFFECT OUR BUSINESS.
The outbreak of Severe Acute Respiratory Syndrome, or SARS, in the PRC in early
2003 has had a negative impact on the PRC economy. The outbreak of avian
influenza in certain east and southeast Asian countries in early 2004 had a
tendency to spread to other countries. If there is an outbreak of SARS or avian
influenza or other widespread health problem, the forecasted economic growth in
the PRC may be negatively affected and our revenues, cost of revenues and
results of operations would be negatively impacted. If the outbreak leads to
quarantine of a significant number of our employees or closure of our facilities
and other properties, our business would be seriously harmed. Although we will
take necessary preventative measures in respect of our facilities and other
properties, the development and spread of an epidemic is usually unpredictable
and we will be unable to quantify the potential impact of any epidemic on our
operations and financial performance. We have implemented preventative measures,
including establishing a personal hygiene policy among our staff and increasing
our premises' disinfecting program, and we will continue to carefully monitor
the situation.
POLITICAL AND ECONOMIC POLICIES OF THE PRC GOVERNMENT COULD AFFECT OUR
BUSINESS.
The economy of China differs from the economies of most countries belonging to
the Organization for Economic Co-operation and Development in a number of
respects, including:
o structure;
o level of government;
o level of capital reinvestment;
o control of foreign exchange; and
o allocation of resources.
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<PAGE>
Before its adoption of reform and open-door policies beginning in 1978, China
was primarily a planned economy. Since that time, the PRC government has been
reforming the PRC economic system, and has also begun reforming the government
structure in recent years. These reforms have resulted in significant economic
growth and social progress. Although the PRC government still owns a significant
portion of the productive assets in China, economic reform policies since the
late 1970s have emphasized autonomous enterprises and the utilization of market
mechanisms. We currently expect that the PRC government will continue these
reforms, further reduce governmental intervention with enterprises and rely more
heavily on market mechanisms to allocate resources. Although we believe these
reforms will have a positive effect on our overall and long-term development, we
cannot predict whether certain changes to China's political, economic and social
conditions, laws, regulations and policies will have any adverse effect on our
current or future business or results of operations.
CERTAIN CHANGES IN FOREIGN EXCHANGE REGULATIONS MAY ADVERSELY AFFECT
OUR FINANCIAL CONDITION.
We receive almost all of our revenues in Renminbi, which is not freely
convertible into foreign exchange. However, we require foreign currency to fund
a portion of our operations. For example, we require, and expect to require in
the future, US dollars to purchase equipment for expansion projects. We will
also need foreign currency to repay foreign currency loans related to the
Ethylene Project. In addition, profits will need to be converted into United
States dollars, Hong Kong dollars and other currencies in the amounts needed for
us to pay dividends and discharge obligations denominated in foreign currency.
Under the existing foreign exchange regulations in China, domestic enterprises
and institutions are permitted to buy foreign exchange from State-designated
banks at designated times upon presentation of appropriate documentation
establishing the existence of import contracts or payment notes of overseas
financial institutions. Such enterprises and institutions also are permitted to
purchase foreign exchange for the import of certain products subject to quotas,
import permits and registration controls. Domestic enterprises are permitted to
apply to purchase foreign exchange for the payment of dividends that have been
authorized as payable in foreign currency. Conversion and payment must be
effected through certain documentation, including a written resolution on profit
distribution passed by the enterprise's board of directors and evidence that the
enterprise has paid all required PRC taxes. However, uncertainty exists as to
whether the PRC government may restrict access to foreign currency for the above
transactions if foreign currency becomes scarce in the PRC.
Foreign exchange transactions which are included in our capital account,
including principal payments in respect of foreign currency-denominated
obligations, continue to be subject to limitations and require the prior
approval of the State Administration of Foreign Exchange, or SAFE. These
limitations could affect our ability to obtain foreign exchange through debt
financing, or to obtain foreign exchange for capital expenditures.
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<PAGE>
FLUCTUATION OF THE RENMINBI COULD MATERIALLY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The value of the Renminbi is subject to changes in the PRC government's policies
and depends to a large extent on China's domestic and international economic and
political developments, as well as supply and demand in the local market. Since
1994, the official exchange rate for the conversion of Renminbi to US dollars
has generally been stable, and the Renminbi has appreciated slightly against the
US dollar. However, we cannot give any assurance that the value of the Renminbi
will continue to remain stable against the US dollar or any other foreign
currency. Any devaluation of the Renminbi may adversely affect the value of, and
dividends payable on, the H Shares in foreign currency terms since we receive
revenues and express our profits in Renminbi.
THE PRC LEGAL SYSTEM IS NOT FULLY DEVELOPED.
THERE ARE UNCERTAINTIES REGARDING THE INTERPRETATION
AND ENFORCEMENT OF PRC LAWS AND REGULATIONS
The PRC legal system is based on statutory law. Under this system, prior court
decisions may be cited as persuasive authority but do not have binding
precedential effect. Since 1979, the PRC government has been developing a
comprehensive system of commercial laws and considerable progress has been made
in the promulgation of laws and regulations dealing with economic matters, such
as corporate organization and governance, foreign investment, commerce, taxation
and trade. Because these laws, regulations and legal requirements are relatively
new and because of the limited volume of published case law and judicial
interpretations and the non-binding nature of prior court decisions, the
interpretation and enforcement of these laws, regulations and legal requirements
involve some uncertainty.
OUR SHAREHOLDERS MAY NOT ENJOY PROTECTIONS THAT THEY
MAY BE ENTITLED TO IN OTHER JURISDICTIONS
As substantially all of our business is conducted in the PRC, our operations are
governed principally by the laws of the PRC. As a PRC company with shares listed
and traded outside the PRC, we are subject to the PRC Special Regulations on the
Overseas Offering and Listing of Shares by Joint Stock Limited Companies issued
by the PRC State Council on August 4, 1994 and amended from time to time, or the
Special Regulations, and to the Mandatory Provisions for Articles of Association
of Companies Listing Overseas issued by the then PRC State Council Securities
Commission and the State Commission for Restructuring the Economic System on
August 27, 1994, or the Mandatory Provisions. The Mandatory Provisions contain
certain provisions that are required to be included in the articles of
association of PRC companies to be listed abroad and are intended to regulate
the internal affairs of those companies. The PRC Company Law promulgated by the
PRC National People's Congress and made effective on July 1, 1994 and the
Special Regulations, in general, and the provisions for the protection of
shareholders' rights and access to information, in particular, are less
developed than those applicable to companies incorporated in Hong Kong, the
United Kingdom, the United States and other developed countries or regions.
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The PRC Company Law is different in certain important aspects from company laws
in Hong Kong, the United States and other common law countries or regions,
particularly with regard to investor protection, including in such areas as
derivative actions by minority shareholders and other minority protections,
restrictions on directors, financial disclosure, variations of class rights,
procedures at general meetings and payments of dividends.
The limited nature of investor protection under the PRC Company Law is
compensated for, to a certain extent, by the introduction of the Mandatory
Provisions and certain additional requirements that are imposed by the Listing
Rules of The Stock Exchange of Hong Kong Limited, or the Listing Rules, which
are intended to reduce the scope of differences between Hong Kong company law
and the PRC Company Law. The Mandatory Provisions and those additional
requirements must be included in the articles of association of all PRC
companies applying to be listed in Hong Kong. Our Articles of Association have
incorporated the provisions required by the Mandatory Provisions and the Listing
Rules. Despite the incorporation of those provisions, our shareholders may not
enjoy the full extent of protections that they may be entitled to in other
jurisdictions.
WE ARE CONTROLLED BY OUR PARENT, WHOSE INTERESTS MAY DIFFER FROM THOSE
OF OUR OTHER SHAREHOLDERS.
As of April 29, 2005, our Parent owned 67.29% of our issued share capital, and
is our controlling shareholder. Our Articles of Association provide certain
protection against the abuse of a controlling shareholder's powers by
stipulating that, in addition to any obligation imposed by law, a controlling
shareholder shall not exercise its voting rights in a manner prejudicial to the
interests of the minority shareholders with respect to certain enumerated
matters of fundamental importance to shareholders. However, we cannot give any
assurance that our Parent, as controlling shareholder, will always vote its
shares in a way that benefits our minority shareholders.
WE MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL REGULATIONS.
We are subject to PRC national and local environmental protection regulations
which currently impose fees for the discharge of waste substances, require the
payment of fines for pollution, and provide for the closure by the PRC
government of any facility that fails to comply with orders requiring us to
cease or improve upon certain activities causing environmental damage. Due to
the nature of our business, we produce significant amounts of waste water, gas,
and solid waste materials during the course of our production. We believe our
environmental protection facilities and systems are adequate for us to comply
with the existing national, provincial, and local environmental protection
regulations. However, PRC national, provincial, or local authorities may impose
additional or more stringent regulations which would require additional
expenditure on environmental matters or changes in our processes or systems.
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OUR INSURANCE COVERAGE MAY NOT BE ADEQUATE TO COVER RISKS RELATED TO
OUR PRODUCTION AND OTHER OPERATIONS.
The amount of our insurance coverage for our buildings and equipment is less
than their value, and we have no plans to increase the coverage. The amount of
our insurance coverage for our inventory is also less than its book value, and
we also have no plans to increase this coverage. In accordance with what we
believe is customary practice among chemical producers in the PRC, we insure
only high risk assets, such as production property and equipment, inventory and
explosive or otherwise hazardous facilities. However, our underinsurance of
properties, facilities and inventory in accordance with this PRC practice
exposes us to substantial risks so that in the event of a major accident, our
insurance recovery may be inadequate.
We do not currently carry third party liability insurance to cover claims in
respect of bodily injury, property or environmental damage arising from
accidents on our property or relating to our operations. We also do not carry
business interruption insurance as such coverage is not customary in the PRC.
Losses incurred or payments required to be made by us which are not fully
insured could have a material adverse effect on our financial condition. See
ITEM 4. INFORMATION ON THE COMPANY -- INSURANCE.
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT
Our legal name is Jilin Chemical Industrial Company Limited. We were established
on December 13, 1994 as a joint stock limited company in the PRC pursuant to the
PRC Company Law. Our executive offices are located at No. 9 Longtan Road,
Longtan District, Jilin City, Jilin Province, People's Republic of China. Our
telephone number is (86 432) 390-3912.
We and Jilin Group were established from the Predecessor. We were established as
a joint stock limited company in the PRC as a result of the Restructuring. The
Restructuring was carried out in preparation for the Combined Offering and in
order for us to conduct a focused line of business as a large-scale diversified
chemical enterprise. As a result of the Restructuring, we became a wholly-owned
subsidiary of Jilin Group and the Predecessor transferred to us its principal
chemical businesses and certain assets and liabilities together with certain
ancillary and business support functions. Until July 1998, Jilin Group was a
State-owned enterprise under the administrative control of the Jilin Provincial
Government. In July 1998, as a result of the restructuring of the PRC
petrochemical and chemical industries approved by the PRC State Council, or the
Industry Restructuring, Jilin Group became a wholly-owned subsidiary of CNPC.
Effective November 5, 1999, as part of a reorganization of CNPC, or the CNPC
Reorganization, Jilin Group transferred to PetroChina all of its ownership
interest in us, represented by Domestic Shares constituting 70.25% of our entire
capital stock, causing PetroChina to become our Parent. Following the issuance
of 150,000,000 additional Domestic Shares on January 27, 2000, PetroChina
remains our controlling shareholder holding approximately 67.29% of our issued
share capital. See "Business Overview -- The PRC Chemical Industry and Relevant
Markets".
The Predecessor was a large-scale chemical industrial enterprise, with a special
emphasis on the production of coal chemical and salt chemical products, which
also operated an oil refining facility and an ethylene facility. The Predecessor
also constructed 30 major chemical industrial production facilities and, in
November 1993, began construction of the Ethylene Project. During our
development, we have replaced and modified our production facilities from time
to time in order to maintain the facilities in as advanced and efficient a state
as possible, given the limitations on the availability of resources in the PRC.
None of our current principal production facilities were operational prior to
1972.
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Our most significant development project has been our participation in the
Ethylene Project. The Ethylene Project is designed as a vertically integrated
complex and is comprised of 11 production facilities and certain ancillary and
support facilities. All facilities comprising the Ethylene Project have been
engaged in commercial production since October 1998. While we own four of the
Ethylene Project's 11 facilities, or the Original Four Facilities, PetroChina
and Jilin Group own five and two of the remaining seven facilities,
respectively, or the Additional Seven Facilities. We were granted an option by
our Parent to acquire all or part of the Additional Seven Facilities, which
expired on December 31, 2002 unexercised by us. Therefore, we no longer have the
option to acquire the Additional Seven Facilities.
In 2001, we expanded the Rated Capacity of our principal ethylene production
facilities from 300,000 t/a to 380,000 t/a, which increased the aggregate Rated
Capacity of our ethylene production facilities to 530,000 t/a and significantly
increased our capability to produce downstream, higher-margin ethylene-based
chemical products. We have become one of the largest ethylene manufacturers in
the PRC.
BUSINESS OVERVIEW
THE COMPANY
We are located in Jilin Province in north-eastern China. North-eastern China
contains a substantial concentration of the PRC's largest industrial complexes,
several of the PRC's most significant oilfields (including our two sources of
crude oil, Daqing oilfield, which is the PRC's largest producer of crude oil, in
Heilongjiang Province, and Fuyu (Jilin) oilfield in Jilin Province) and a
relatively well developed rail system. Growth and development of the industrial
base in north-eastern China has had and is expected to continue to have a
significant impact on the demand for our products. We believe that our location
in north-eastern China provides us with the strategic advantages of proximity to
a substantial customer base, ready access to sources of crude oil, our principal
raw material, and ready access to transportation needed for the transport of
both raw materials and products.
We are one of the largest producers of basic chemicals and chemical raw
materials, and one of the largest diversified chemical enterprises in the PRC.
We are also one of the largest producers of ethylene in the PRC, accounting for
approximately 10% of China's ethylene production in 2004. Our principal
businesses consist of the production of petroleum products, petrochemical and
organic chemical products, synthetic rubber, chemical fertilizers and inorganic
chemical products, and other chemical products. We are the PRC's leading
producer of certain synthetic rubber products and certain petrochemical and
organic chemical products, and we believe we have a strong market position with
respect to most of our principal products. As a result of our efforts to phase
out technologically obsolete production facilities, we ceased production of
dyestuff, certain dye intermediate products and some chemical fertilizer
products in 2000.
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In 2004, we had sales of approximately RMB31,857.42 million (US$3,849.14
million) and a profit before income taxation of approximately RMB 2,356.6
million (US$284.7 million). Of our 2004 sales revenue, 41.99% consisted of sales
of petroleum products, 40.08% of sales of petrochemical and organic chemical
products, 5.63% of sales of synthetic rubber products, 2.09% of sales of
chemical fertilizers and inorganic chemical products, and the remaining 10.21%
consisted of sales of other chemical products and other goods and services.
We currently comprise 11 operating units, of which six are major production
units and the remaining five units perform ancillary functions. The six major
production units are:
-- a petroleum refinery with facilities to produce petroleum products;
-- an organic synthesis plant with facilities to produce petrochemical
and organic chemical products and synthetic rubber;
-- a calcium carbide plant with facilities to produce petrochemical and
organic chemical products;
-- a dyestuff plant with facilities to produce aniline, a benzene
derivative used in the manufacture of dyes;
-- a chemical fertilizer plant with facilities to produce chemical
fertilizers and other chemical products; and
-- an ethylene plant to produce ethylene.
The five units performing ancillary functions are:
-- a power plant to supply a portion of our electricity and steam needs;
-- a waste water treatment plant;
-- a railway transportation branch;
-- a sales and marketing branch; and
-- a procurement branch.
Our H Shares, par value RMB 1.00 per share, are listed and trade on the Hong
Kong Stock Exchange. Our ADSs, each representing 100 H Shares, which are held by
The Bank of New York as depositary, are listed and trade on the New York Stock
Exchange under the symbol "JCC." Certain of our Domestic Shares, par value RMB
1.00 per share, are listed on the Shenzhen Stock Exchange which were suspended
from trading on April 30, 2003, but resumed trading on September 25, 2003 on the
Shenzhen Stock Exchange under the "special treatment" category provided under
PRC law. On March 28, 2005, Shenzhen Stock Exchange cancelled its special
treatment to our domestic-listed shares. As of April 29, 2005, PetroChina was
our controlling shareholder holding approximately 67.29% of our issued share
capital.
THE PRC CHEMICAL INDUSTRY AND RELEVANT MARKETS
The chemical industry in the PRC constitutes a basic industrial sector which has
been a major focus for development by the PRC government. In the four segments
of the chemical industry in which the vast majority of our products fall
(petroleum products, petrochemical and organic chemical products, synthetic
rubber products, and chemical fertilizers and inorganic chemical products), per
capita consumption in the PRC remains significantly lower than that in major
OECD countries. We believe that, as the PRC economy undergoes further
industrialization and development of consumer markets, demand for chemical
products will increase and decrease as general economic activities in the PRC
change but on average continue to grow at rates that are high relative to more
industrialized countries.
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Although historically the PRC government has asserted substantial control over
all aspects of the chemical industry, during the past decade, the PRC government
has implemented various economic liberalization measures which have materially
affected the PRC chemical industry in areas such as cost and allocation of raw
materials, product pricing and marketing and distribution of products. China's
accession into WTO is expected to continue this trend, particularly in areas of
import and distribution of raw materials. A portion of the PRC chemical industry
and certain of our product markets, including petroleum products and chemical
fertilizers, remain under various degrees of control by the PRC government. We
expect, and are preparing for, liberalization measures to continue and a more
competitive environment to develop. See "Business Overview -- Competition."
In the first half of 1998, the PRC government carried out the Industry
Restructuring to restructure and consolidate many of the then existing
governmental agencies in the chemical and petrochemical industries. Prior to the
Industry Restructuring, various governmental agencies had responsibilities for
administrative oversight of the chemical and petrochemical industries including
the Ministry of Chemical Industries, China National Petrochemical Corporation
and China National Oil and Gas Corporation. Pursuant to the Industry
Restructuring, the PRC government created the State Oil and Chemical Industries
Bureau, or the SOCIB, and transferred to SOCIB most of the responsibilities for
the national-level oversight then held by Ministry of Chemical Industries, China
National Petrochemical Corporation and China National Oil and Gas Corporation.
In July 1998, the PRC government created CNPC from China National Oil and Gas
Corporation and Sinopec Group from China National Petrochemical Corporation.
CNPC and Sinopec are currently the two corporate entities which operate a
majority of the entire petrochemical and chemical business in the PRC. Jilin
Group then became a subsidiary of CNPC, a State-owned enterprise currently
authorized to conduct business in the petrochemical industry in the northern and
western regions of China and also to oversee the exploration of oil and natural
gas resources. As a result of the Industry Restructuring, we are one of the
group companies that are owned or otherwise affiliated with CNPC. Effective
November 5, 1999, as a result of the CNPC Reorganization, PetroChina became our
new Parent Company.
In February 2001, SOCIB was dissolved by the PRC government and its functions
were assumed by the State Economic and Trade Commission. In March 2003, the
State Economic and Trade Commission was dissolved by the PRC government, and its
functions in directing the reform and management of State-owned enterprises were
assumed by the State Assets Regulatory and Management Commission, its functions
in industry planning and policy making were assumed by the National Development
and Reform Commission, and its functions in administering domestic trade,
coordinating and implementing import and export plans of critical industrial
products and raw materials were assumed by the Ministry of Commerce. We are
currently subject to the industrial oversight of these three new government
agencies at the national level.
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CRUDE OIL AND PETROLEUM PRODUCTS
Crude oil and petroleum products are regarded as key commodities of strategic
significance to the PRC economy by the PRC government, which has traditionally
exercised a high degree of control over their production, distribution, pricing
and import and export. The PRC government maintains state plans consisting of
minimum production targets for certain domestic products. Pursuant to the state
plans with respect to the production and distribution of domestic crude oil and
most petroleum products, the PRC government sets production levels for domestic
oilfields, establishes import quotas and allocates crude oil to refineries and
other crude oil users. As part of its WTO accession commitments, the PRC
government will gradually eliminate import quotas and restrictions on domestic
distribution for crude oil and petroleum products. Nevertheless, crude oil and
petroleum products are still subject to state trading and petroleum products are
still subject to government guidance pricing. See "Business Overview -- Product
Pricing", "Business Overview -- Raw Materials and Energy Supply -- Crude Oil."
and "Business Overview -- Competition".
CHEMICAL FERTILIZERS
Due to the importance of agriculture to the PRC's economy, the production,
allocation, pricing and import and export of chemical fertilizers in the PRC
have always been subject to the PRC government control. Prior to March 1998, the
National Development and Reform Commission, based on suggestions from the
Ministry of Chemical Industries, set annual production and allocation plans for
chemical fertilizers. Thereafter, the SOCIB was established and assumed such
advisory role of the Ministry of Chemical Industries. In February 2001, the
SOCIB's responsibilities have been assumed by the State Economic and Trade
Commission. In March 2003, the State Economic and Trade Commission's
responsibilities have been assumed by the State Assets Regulatory and Management
Commission, the National Development and Reform Commission and the Ministry of
Commerce. Although some chemical fertilizers are subject to government guidance
pricing, the prices of the chemical fertilizers produced by us are not subject
to such controls. See "Business Overview -- Product Pricing."
BUSINESS STRATEGY
Our strategy is focused on meeting the significant challenges and taking
advantage of the significant opportunities that we expect to encounter as the
PRC chemical industry changes and develops in the coming years. Generally, we
expect that the PRC economy will for the foreseeable future sustain growth
comparable to what has been recorded in recent years. As this economic growth
continues, we expect that both industrial and consumer-based demand for
chemicals and chemical-based products will grow. We also expect that, generally,
the economic liberalization which has been undertaken by the PRC government will
continue and is accelerating as a result of China's accession to the WTO. On
this basis, the PRC chemical industry is expected to become increasingly
deregulated, thereby providing for market forces and competition to become
increasingly important factors in determining our financial performance and
growth prospects.
In order to capitalize on these opportunities, we focus on three primary
strategic objectives. First, increasing the production capacity of certain
products by acquiring additional capacity and improving the production
efficiency of existing facilities through the use of new technologies. Capacity
expansion should enable us to build a stronger competitive position in those
products through greater economies of scale and market share gains. Second,
increasing profitability by adjusting product mix and introducing new
higher-margin products. Adjusting product mix should give us flexibility needed
to take advantage of greater cost efficiencies through vertical integration and
to increase sales of higher-margin products. Third, becoming more market- and
customer-oriented through delivery of superior service. We intend to strengthen
the incentive and management of the our sales staff and continue to improve the
quality of service through the entire sales process, from marketing to
after-sales support. We believe that by pursuing and fulfilling these strategic
objectives we will achieve significant competitive advantages and strengthen our
market position in the PRC chemical industry.
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In terms of production capacity expansion, we have completed our most
significant expansion initiative, the construction of the Original Four
Facilities of the Ethylene Project in 1997. These four facilities substantially
increased our production capabilities for a number of the important chemical raw
materials, including ethylene and propylene, and for synthetic rubber products.
In addition, we increased the Rated Capacity of our butanol and 2-ethylhexanol
facility from 70,000 ton Rated Capacity to 130,000 ton Rated Capacity in 1999
and 2000. We expanded and renovated our synthetic ammonia and catalytic cracking
facility during the period from 2000 to 2002, our principal ethylene facility
and aromatic abstraction facilities in 2001 and our styrene facility from 2001
to 2002. We acquired the remaining 35.0% equity interest in Jilian, our
jointly-controlled entity, in December 2002 for total consideration of RMB 135
million and integrated its business of manufacturing petrochemical products into
our business. Jilian was subsequently dissolved in the same month. In 2003, our
300,000 t/a synthetic ammonia facility commenced operation upon completion of
technical upgrade. We also acquired certain assets from Jilin Group. In 2004, we
have completed energy saving renovations to the 150,000 ton Rated Capacity
ethylene facilities and atmospheric and vacuum distillation units. Other than
the aforementioned project, we did not make any other material capital
expenditures and divestitures between January 1, 2001 and December 31, 2004.
Our capital expansion projects were and are expected to be financed with
operational income and commercial loans. We do not plan to make any material
investment in 2005.
Our domestic sales network is served by two regional sales centers in Guangzhou
and Shanghai, which are responsible for establishing and overseeing sub-regional
sales offices in the region. Through this network, we are able to improve our
services to and communications with existing customers, and develop new
customers and promote new products.
PRINCIPAL PRODUCTS
Our principal products consist of four categories, petroleum products,
petrochemical and organic chemical products, synthetic rubber, chemical
fertilizers and inorganic chemical products. Beginning the second half of 2000,
we ceased production of dyestuff and certain dye intermediate products as a
result of our phasing out technologically obsolete production facilities.
Our production processes are highly integrated, and many of our petroleum
products and petrochemical and organic products are consumed internally as
feedstock for the production of our downstream products. The table below sets
forth our principal products, on the basis of 2004 sales volume and net sales
revenue (for third party usage only). For the purpose of this table, with
respect to "other" products in each main category of our products, no single
product constitute more than 1.0% of net sales in 2004. "Other products" do not
include those products under the category of "other" for each main category of
our products. "N/A" represents sales volume for certain products, the
measurement of which in tons does not provide a meaningful comparison vis-a-vis
products in other product categories. Sales volume under the category of "total"
does not include sales volume under the category of "other products".
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<TABLE>
<CAPTION>
2004
-----------------------------------
NET SALES % OF NET
SALES VOLUME REVENUE SALES
-----------------------------------
PRINCIPAL PRODUCTS (`000 TONS) (RMB MILLION)
PETROCHEMICAL AND ORGANIC CHEMICAL PRODUCTS
<S> <C> <C> <C>
Ethylene 381.62 3,044.11 9.56
Propylene 210.87 1,248.60 3.92
Styrene 138.81 1,232.45 3.87
Aniline 69.30 1,188.55 3.73
O-xylene 116.61 679.23 2.13
Octanol 58.48 428.41 1.34
Alcohol ether 39.56 393.15 1.23
Butyl acrylate 24.35 351.08 1.10
Acetic anhydride 55.02 323.60 1.02
Acetic acid 64.10 293.48 0.92
Ethanol 6.96 18.08 0.06
Xylene 2.11 10.71 0.03
Other 707.16 3,556.81 11.17
PETROLEUM PRODUCTS
Diesel oil 2,740.05 7,440.06 23.35
Gasoline 1,032.55 2,602.08 8.17
Residue 1,102.57 1,835.57 5.76
Catalytic diesel oil 347.77 889.77 2.79
Solvent oil 6.30 19.91 0.06
Other 240.09 590.45 1.86
SYNTHETIC RUBBER
Styrene - butadiene rubber 104.32 1,469.98 4.61
Other 27.09 323.71 1.02
CHEMICAL FERTILIZERS AND INORGANIC CHEMICAL PRODUCTS
Inorganic chemical products and other 553.31 663.38 2.08
Nitrosamine 0.67 0.87 0.00
OTHER PRODUCTS N/A 3,253.39 10.22
Total 8,029.67 31,857.42 100
</TABLE>
We introduced no new products in 2002, 2003 and 2004.
PRODUCT PRICING
The majority of our products are priced according to market demand. The prices
of certain products, however, remain subject to the PRC government control. In
particular, certain petroleum products are subject to sale at prices determined
by the PRC government. In 2002, 2003 and 2004, 75.0%, 58.9% and 61.9%,
respectively, of all petroleum products sold by us were subject to the PRC
government pricing control. In 2002, 2003 and 2004, the percentage of our total
sales revenue attributable to sales of products subject to price controls was
38.9%, 51.4%, and 51.0% respectively.
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Our petroleum products are subject to guidance prices established by the
National Development and Reform Commission, which are adjusted from time to time
and permit price variations within a narrow band of the guidance price. In
addition, with respect to gasoline and diesel oil following the Industry
Restructuring, the refining and sales division of PetroChina (Northeast) Company
Jilin division (CPSC), became the only entity authorized to purchase and
distribute these products in north-eastern China. As a result, currently we are
permitted to sell our gasoline and diesel oil only to CPSC. The terms of the
sale of gasoline and diesel oil to CPSC are based on the prices set by
PetroChina on behalf of the PRC government. Accordingly, our principal petroleum
products continue to be subject to governmental controls.
With respect to our products which are not subject to price control, our product
pricing decisions are currently made at each operating unit, with reference to
prices in the major PRC chemical commodities markets in Jilin Province and other
parts of the PRC. We believe that, for the principal products with respect to
which we have pricing discretion, our production facilities have relative
economies of scale which may not be present in the operation of many of our
competitors and that, therefore, when we sell our products at similar price
levels to such competitors, our profitability is generally equal to, or better
than, the profitability of such competitors in the domestic market.
PRODUCTION PROCESS
Our production processes are primarily based on the processing of petroleum.
PETROLEUM PRODUCTS
Our petroleum products are produced from crude oil, which is processed by
atmospheric and vacuum distillation, catalytic cracking, deasphalting with
solvent, liquefied petroleum gas separating and reforming and hydrogenating into
gasoline, solvent oil, diesel oil, chemical light oil and residual oil.
PETROCHEMICAL AND ORGANIC CHEMICAL PRODUCTS
Our petrochemical products are produced from chemical light oil, which is
separated by a cracking process into ethylene, propylene, hydrogenated gasoline
and C4 fraction. A portion of the ethylene is processed to produce ethylene
oxide and acetaldehyde, which are then further processed to produce acetic acid,
acetic anhydride and alcohol polyoxy ethylene ether. The rest of our ethylene is
used to produce styrene. A portion of our propylene is processed to produce
butanol and 2-ethylhexanol. The rest of the propylene is used to produce acrylic
acid and its esters. Benzene, toluene and xylene are extracted from hydrogenated
gasoline through the aromatics unit. Butadiene is extracted from C4 fraction
through the extraction facility. Butadiene is further processed to produce
butene-1 and MTBE.
In our coal chemical production processes, coal is first converted into coke and
coke is for commercial sales, and the sideline coal gas will be used as fuel for
internal consumption.
In our salt chemical production process, salt is first converted into chlorine
and hydrogen through an electrolysis process, with the chlorine then being
liquefied into liquid chlorine to be used by our organic silicon facility. The
electrolytic fluid is then used to produce caustic soda after a further
evaporation process.
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SYNTHETIC RUBBER
The butadiene, styrene, acrylonitrile and organic silicon monomers produced by
our petrochemical products facilities are processed through a polymerization
process into styrene-butadiene rubber, acrylonitrile-butadiene rubber,
ethylene-propylene rubber, organic silicon rubber and other types of synthetic
rubber.
CHEMICAL FERTILIZERS
Our chemical fertilizers use residual oil as raw material by using the hydrogen
separated from synthesis gas and nitrogen separated from air through an air
separation unit to produce ammonia.
THE ETHYLENE PROJECT
Our most significant development project has been our participation in the
Ethylene Project. The Ethylene Project was initially conceived to address
existing shortfalls in production and expected increases in domestic demand for
ethylene. The Original Four Facilities of the Ethylene Project and their
technological upgrades have increased our annual Rated Capacity by 380,000 tons
to 530,000 tons, making us one of the largest ethylene producers in the PRC.
The Ethylene Project as a whole produces, in addition to ethylene, substantial
quantities of relatively high value-added downstream products such as acetone,
phthalic anhydride, a-advanced alcohol, toluene, xylene, ethylene-propylene
rubber, ABS, polyethylene, phenol, acetone, phthalic anhydride and ethylene
glycol.
The Ethylene Project is designed as a vertically integrated complex and is
comprised of 11 production facilities and certain ancillary and support
facilities. The core of the Ethylene Project is a 300,000 ton Rated Capacity
ethylene production facility. Of the Original Four Facilities owned and operated
by us, the ethylene facility and the hydrocracking facility mainly produce raw
materials. The integrated aromatics facility and the ethylene-propylene rubber
facility, and the Additional Seven Facilities, mainly produce downstream
petrochemical products. Each of the Original Four Facilities began commercial
production in 1997. Four of the Additional Seven Facilities, including the
polyethylene facility, the ethylene glycol facility, the phenol acetone facility
and the phthalic anhydride, began commercial production in 1997. The remaining
three of the Additional Seven Facilities began commercial production in 1998.
Since its completion and commissioning to service, the Ethylene Project has
substantially increased our production capacity and the production capacity of
Jilin Group and PetroChina.
As part of the CNPC Reorganization, five of the Additional Seven Facilities,
namely the phthalic anhydride facility, the phenol acetone facility, the
ethylene glycol facility, the polyethylene facility and the ABS facility, were
transferred to PetroChina. The (alpha)-advanced alcohol facility and the
acrylonitrile facility remain with the Jilin Group. In connection with the CNPC
Reorganization, PetroChina and the Jilin Group have each confirmed that each
will have sole responsibility for the operation of the Additional Seven
Facilities that it respectively owns.
The total investment required for the Ethylene Project, including capitalized
interest, was approximately RMB 19.88 billion, including approximately US$889
million in foreign exchange loans. All facilities under the Ethylene Project
have been constructed on the premises of our six production units, except for
the ABS facility, which was constructed on a separate site due to space
availability and engineering restrictions. The Original Four Facilities consist
of the ethylene, hydrocracking and integrated aromatics facilities and an
ethylene-propylene rubber facility.
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We had agreed with our Parent to apportion the 11 Ethylene Project facilities
among ourselves primarily because the aggregate capital expenditures which were
required to construct all 11 Ethylene Project facilities, if paid entirely by
one company, would likely have required that company to incur very substantial
indebtedness and foreign exchange exposure over a two to three year period. The
Original Four Facilities were assumed by us because three of the facilities,
namely the ethylene, hydrocracking and integrated aromatics facilities, form the
core of the entire Ethylene Project and produce products which will be used as
feedstock by the remaining facilities; furthermore, the ethylene-propylene
rubber facility will add to the variety and production volume of synthetic
rubber, a category of products already being produced by us.
The Original Four Facilities are operated at full capacity only to the extent
that the Additional Seven Facilities are commercially operating because the
majority of the products of the Original Four Facilities will be used as
feedstock for the Additional Seven Facilities; in addition, it is impractical to
transport ethylene and certain other products produced by the Original Four
Facilities to customers other than Additional Seven Facilities, all of which are
located next to the Original Four Facilities. We will not have alternative
customers for the majority of these products in the event Jilin Group and
PetroChina are unable to purchase them as feedstock for the Additional Seven
Facilities. The ability of Jilin Group and PetroChina to operate profitably the
Additional Seven Facilities will directly affect the financial performance of
the Original Four Facilities and the Ethylene Project as a whole.
ORIGINAL FOUR FACILITIES
All of the Original Four Facilities utilize imported technology except the
hydrocracking facility, which utilizes advanced PRC technology. The
ethylene-propylene rubber facility is among the largest of its kind in the PRC.
The total investment expended to construct the Original Four Facilities, all of
which was borne by us, was approximately RMB 7.30 billion, including
approximately US$408 million in foreign exchange.
ETHYLENE FACILITY
The expanded 380,000 ton Rated Capacity ethylene facility utilizes proprietary
technology imported from Linde AG of Germany and sources raw materials from our
hydrocracking, atmospheric and vacuum distillation, integrated aromatics and
catalytic cracking facilities to produce:
-- ethylene, which is used as feedstock for production of a-advanced
alcohol, polyethylene, ethylene glycol and ethylene-propylene rubber,
and
-- propylene, which is used as feedstock for production of phenol,
acetone, acrylonitrile and ethylene-propylene rubber.
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HYDROCRACKING FACILITY
Our 600,000 ton Rated Capacity hydrocracking facility utilizes technology
obtained from the Luoyang Petrochemical Engineering Company (an affiliate of
Sinopec Group) and raw materials provided by our atmospheric and vacuum
distillation and catalytic cracking facilities to produce feedstock for the
ethylene and integrated aromatics facilities. The light diesel oil produced by
the facility can also be used to produce low freezing point, high-grade diesel
oil.
INTEGRATED AROMATICS FACILITY
The 400,000 ton Rated Capacity integrated aromatics facility utilizes
proprietary technology imported from UOP Corporation of the United States and
feedstock from our ethylene, hydrocracking, atmospheric and vacuum distillation
and reformation facilities for production of benzene, toluene, o-xylene, xylene,
heavy aromatics and aromatics extraction. Benzene and o-xylene are used as raw
materials for the Ethylene Project's phenol-acetone facility and phthalic
anhydride facility. Aromatics extraction and heavy aromatics are used as
cracking materials for our ethylene facility. Toluene and xylene are sold by us
to unrelated parties.
ETHYLENE-PROPYLENE RUBBER FACILITY
The ethylene-propylene rubber facility utilizes proprietary technology imported
from Mitsui Petrochemical Co. of Japan. This facility uses ethylene and
propylene produced by our ethylene facility to produce 20,000 tons of
ethylene-propylene rubber per year.
THE ETHYLENE PROJECT OPTION
We were granted an option from PetroChina and Jilin Group to purchase any one or
more of the Additional Seven Facilities for a price based on the net asset value
of the relevant facility or facilities. We did not exercise this option, and it
expired on December 31, 2002.
We continue to supply substantial amounts of ethylene and other products of the
Original Four Facilities as feedstock to some or all of the Additional Seven
Facilities at market prices. Additionally, the Original Four Facilities share
certain infrastructure, research and other support facilities with the
Additional Seven Facilities. We pay a proportional amount of the costs for such
support facilities utilized in connection with the Original Four Facilities.
Similarly, to the extent that the Additional Seven Facilities share certain of
our existing infrastructure or support facilities, each of PetroChina and the
Jilin Group reimburses us for the relevant proportion of its corresponding
costs. We believe that the Additional Seven Facilities are not competitive with
our business.
FINANCING FOR THE ETHYLENE PROJECT
Total investment for the Ethylene Project was approximately RMB 19.9 billion
(including approximately US$889.0 million in foreign exchange), of which
approximately RMB 7.3 billion (including approximately US$408.0 million in
foreign exchange) was required for the Original Four Facilities, and
approximately RMB 12.6 billion (including approximately US$481.0 million in
foreign exchange) was required for the Additional Seven Facilities, of which
approximately RMB 2.8 billion was needed for ancillary and support facilities.
The total investment was calculated to include interest capitalized during the
construction period.
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The Ethylene Project was approved by the National Development and Reform
Commission. The bulk of the foreign exchange portion of the funding for the
entire Ethylene Project was in the form of export credit in connection with the
import or licensing of foreign technology and equipment, with the balance
provided by the Bank of China primarily to fund interest payments and for
working capital during construction. At the time, Renminbi loan funding for this
purpose was provided by PRC state banks and provincial financial institutions at
the direction of the National Development and Reform Commission in coordination
with the then Ministry of Chemical Industries and the Jilin Provincial
Government. As for the balance of the Renminbi funding for the entire Ethylene
Project, we have relied primarily on cash generated through operations and
proceeds from our Combined Offering and Jilin Group has relied primarily on the
sale of corporate bonds.
The foreign exchange requirement for the entire Ethylene Project was
approximately US$889 million, all of which was borrowed by us and Jilin Group
between 1993 and 1997. As a result, we both have significant indebtedness
denominated in foreign currency. Further to an agreement between us and Jilin
Group effective September 30, 1998, Jilin Group assumed the foreign currency
loans borrowed by us and agreed to make periodic loan repayments on our behalf
and in turn, we agreed to pay Jilin Group the Renminbi equivalent of such
repayments at an exchange rate determined as at September 30, 1998. We
re-assumed some of these foreign currency loans effective January 1, 2000. These
loans were denominated in Renminbi in our financial statements until January 1,
2000. As a result, we have significant financial risks with respect to our
ability to service and repay the foreign exchange indebtedness, given that
almost all of our revenues at the present time are received in Renminbi.
Fluctuation in the Renminbi exchange rate against the relevant borrowed
currencies may result in significant foreign exchange gains or losses.
Prior to the Restructuring, all of the loan funding commitments for the Ethylene
Project were arranged by the Predecessor. After the Restructuring, all of the
funding commitments for the Ethylene Project were for the account of our Parent.
In respect of the Original Four Facilities and to the extent that funds were not
borrowed by us, funds were first made available to our Parent, and equal amounts
were then lent by our Parent to us on the same terms as to principal and
interest payments as the original funds advanced to our Parent. The Parent
obtained all necessary consents from lenders and the relevant regulatory
authorities for such lending.
RAW MATERIALS AND ENERGY SUPPLY
Our Parent is our largest supplier for raw materials and energy. In 2004, the
costs of raw materials purchased from our Parent accounted for 67.4% of our
total raw material costs and 64.9% of our total raw material and energy costs.
In 2004, total costs of raw materials and energy accounted for approximately
74.6% of our total cost of sales. In 2004, the costs of raw materials purchased
from our five largest suppliers, including our Parent, accounted for 90.5% of
our total raw material costs and 87.1% of our total raw material and energy
costs.
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CRUDE OIL
CRUDE OIL SUPPLY AND PRICING
Crude oil is our primary raw material. Prior to February 2001, SOCIB was
responsible for industry and market oversight of China's petrochemical industry.
In February 2001 SOCIB was dissolved and its responsibilities were transferred
to State Economic and Trade Commission. Currently, Sinopec Group and CNPC
determine the allocations of crude oil among the enterprises under their
respective ownership and control.
The pricing for domestic onshore crude oil is determined with the participation
of the PRC government. Under the current pricing scheme, the National
Development and Reform Commission on a monthly basis establishes a single
indicative price for each grade of domestic onshore crude oil based on
comparable international market prices inclusive of any duties that would have
been imposed had the oil been imported. To this single state indicative price, a
surcharge within certain government stipulated guidelines is imposed on all
domestically produced onshore crude oil as determined and agreed to by CNPC and
Sinopec Group to reflect any transportation and other miscellaneous costs that
would have been incurred in having the oil delivered to various refineries.
Accordingly, we purchase domestic onshore crude oil at prices that reflect the
applicable state indicative price plus the applicable surcharge. We believe that
the pricing regime for domestic onshore crude oil has resulted in costs of
domestic onshore crude oil that reflect trends in international markets,
however, the timing of the adjustments to the indicative price may result in
prices that differ significantly from the then current international market
prices. While we believe that the current pricing policy will not change in the
foreseeable future, there can be no assurance that the PRC government will not
make significant changes in the future to the current crude oil pricing
policies. We began to purchase and use imported oil in 2000. The price of
imported oil is determined by PetroChina based on the then existing
international market price.
The following table shows the volume and purchase prices for the crude oil
purchased by us during the years ended December 31, 2002, 2003 and 2004. For
purposes of this table, price refers to a weighted average ex-works price and
includes value added tax of 17%:
2002 2003 2004
VOLUME (TONS) 4,508,600.0 5,547,700 6,712,527
PRICE (RMB PER TON) 1,740.0 1,768 2,629
CRUDE OIL ALLOCATION
Under PRC crude oil pricing and allocation policies, PetroChina is responsible
for allocating all of our crude oil from all sources.
In 2004, we processed 6.41 million tons of crude oil and expect to process
approximately 7.00 million tons of crude oil in 2005. Subsequent to the Industry
Restructuring, our Parent develops an annual plan for the allocation and
distribution of crude oil and cracking feedstock among its various subsidiaries,
including us. Our Parent has confirmed to us its intention to allocate to us
sufficient amounts of crude oil and other cracking feedstock necessary to meet
our needs for 2005, including for the full operation of the Ethylene Project in
2005.
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As we are required to purchase crude oil and cracking feedstock through our
Parent, we are able to predict the availability or prices of crude oil or other
cracking feedstock. Limited availability of crude oil or other cracking
feedstock or any substantially higher prices could have a material adverse
effect on our operating results.
SOURCES OF CRUDE OIL
Our principal sources of crude oil supplies are Daqing oilfield, the largest
source of crude oil in China, in Heilongjiang Province and Fuyu (Jilin) oilfield
in Jilin Province. These two oilfields are controlled by our Parent and each
supplied 29% and 50% of our crude oil purchase amount in 2004 while imported
crude oil accounted for the remaining 21%. We anticipate that the Daqing and
Fuyu (Jilin) oilfields will continue to be the principal sources of our crude
oil and that imported crude oil will not become a major source although we
expect to increase our usage of imported crude oil in 2005.
Due to the current PRC government policy relating to imports of crude oil, we
currently are not permitted to directly import crude oil, and the imported crude
oil purchased by us in 2004 was allocated and purchased from our Parent. As the
supply of domestic onshore crude oil is lagging behind the demand created by the
rapid economic growth in China, we believe that by increasing our use of crude
oil from alternative sources, we will gradually reduce our dependence on
domestic onshore crude oil and diversify our risk of not being able to acquire
sufficient crude oil for our production.
With China's accession into WTO, the PRC government has undertaken to open to
foreign investment domestic distribution of crude oil and gradually increase
quotas for non-state traded crude oil. We anticipate those measures will
generally expand crude oil supply sources for domestic petrochemical companies.
However, if PetroChina does not change its current policy to allocate crude oil
to us, those policy changes will not materially affect our crude oil supply.
TRANSPORT OF CRUDE OIL
The crude oil from the Daqing and Fuyu (Jilin) oilfields is transported through
an oil pipeline and by rail transportation. We constructed our own pipeline in
October 1995 to transport crude oil. As a result, we reduced our use of rail
transportation, enhanced our total transport capacity and satisfied the
increased crude oil requirements of the Ethylene Project. The pipeline connects
to the supply of oil from the Daqing and Fuyu (Jilin) oilfields. During 2004, we
transported by the pipeline approximately 4.56 million tons or 68.0% of our
crude oil. The transport capacity of the pipeline is 4.00 million tons of crude
oil per annum. We expect that we will continue to receive the rail transport
capacity necessary to meet our increased transportation needs for both incoming
raw materials and supplies and outgoing product shipments.
In 2004, in order to satisfy our transportation requirements for raw materials
and products, we obtained PRC railway transport capacity of 10.77 million tons,
of which approximately 2.11 million tons were used for crude oil transportation.
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STABILITY OF CRUDE OIL SUPPLY
In the past, we have not experienced any material disruption of production due
to lack of crude oil supplies. We have crude oil storage tanks adjacent to our
production facilities which are capable of storing approximately 200,000 tons of
crude oil, constituting 10 to 12 days of our crude oil requirements at current
production rates. Generally, in order to ensure that production will not be
affected by a temporary suspension of crude oil supplies, we store approximately
100,000 tons of crude oil or, when transport delays related to adverse weather
are anticipated in the winter, 120,000 tons of crude oil.
COAL
We utilize coal as an indirect raw material for our power plant.
Coal is in abundant supply and is of good quality in north-eastern China where
we are located. We purchase coal directly from mines in Jilin Province and
neighboring Heilongjiang Province. Generally, we store an amount of coal
sufficient to support one month of our coal requirements at current production
rates. We have in the past obtained, and believe that in the foreseeable future
we will be able to obtain, adequate supplies of coal for both production and
fuel purposes.
NAPHTHA
In 1999, we began using naphtha as a lower-cost alternative to some of the light
industrial oil we produce and use in the ethylene production process. This has
resulted in cost savings for us and has also allowed us to sell more of our
light industrial oil as diesel at a relatively high profit margin. In 2004, we
used approximately 548,000 tons of naphtha, most of which was purchased from
PetroChina. We intend to continue to use naphtha as one of our principal raw
materials in the future.
OTHER RAW MATERIALS
The other principal raw materials which we purchase are salt and naphthalene.
All of our naphthalene is purchased from outside sources. We believe that our
naphthalene sources will continue to provide an adequate supply of naphthalene
to meet our needs in the foreseeable future.
ELECTRICITY AND STEAM
Electricity is our main source of energy. In 2004, we purchased approximately
1.27 billion kilowatt hours of electricity from the PRC's north-eastern power
grid. Generally, the price of electricity in the PRC is set by the PRC
government, although under certain state regulations electricity consumed by our
chemical fertilizer production facilities is purchased at a preferential rate.
Our power plant is used primarily to produce a portion of our annual
requirements for steam. In 2004, we produced approximately 90.9% of our steam
requirements internally and purchased the remaining steam requirements from a
non-affiliated entity.
Our power plants consist primarily of several coal-fired power generating units
and their total power generation capacity is 149,000 kilowatts at any one time.
They generated an aggregate of 472 million kilowatt hours in 2004. Because of
the increasing demand for electricity in north-eastern China due to economic
growth, no assurance can be given that shortages of electricity within the
north-eastern grid will not occur in the future.
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SALES AND MARKETING
Domestic sales accounted for approximately 99.7%, 99.3% and 99.2% of our sales
revenue in 2002, 2003 and 2004, respectively. Due to the high transportation
costs and limited rail transport capacity in the PRC and the structural
development of the PRC chemical industry, sales of our products are concentrated
in the north-eastern and northern regions of China. The following chart
describes the sales of our products by geographic areas:
SALES (RMB BILLION)
NORTH-EASTERN NORTHERN EASTERN AND
CHINA CHINA SOUTHERN CHINA OTHER AREAS
2002 10.38 1.71 0.92 0.13
2003 17.66 1.76 1.06 0.17
2004 22.30 5.42 3.82 0.32
North-eastern China was the first area in which PRC industries, especially heavy
industries, emerged and developed. Since then, industrial development has
continued in the north-eastern region while the northern region of China has
also developed as an industrial base. Owing to our established reputation and
experience in these regions, plus our geographic advantages, the north-eastern
and northern regions of China have become and remain the largest markets for our
products.
Among our products, virtually all petroleum products can only be sold in
accordance with the distribution scheme set by the National Development and
Reform Commission. Accordingly, for most of our petroleum products, marketing
decisions are limited and competition among producers is minimized. Under the
current distribution scheme, our petroleum products are primarily sold to our
Parent. See "Business Overview -- Product Pricing" and "Business Overview --
Competition."
Except for our petroleum products, our products can be freely sold and marketed
throughout the PRC and are generally sold to large- and medium-sized
manufacturing enterprises and large trading companies in the north-eastern and
northern regions of the PRC with whom we typically have long-standing trading
relationships. While these long-standing relationships provide us with a
generally dependable and stable customer base, we are continuously focusing on
developing new customers, with an emphasis on finding additional manufacturing
customers. We develop new customers and market our products through our domestic
sales network comprising regional sales centers and sub-regional sales offices.
As part of our efforts to become more market- and customer-oriented, in 2004, we
continued to direct greater resources towards developing our sales and marketing
capabilities. See "Business Overview -- Business Strategy."
Prior to 2001, our sales policy required our customers to make payments upon
delivery and we discontinued delivery of products to customers who did not make
timely payments. In 2001, we implemented a new sales policy requiring our
customers to provide payment in full before delivery.
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In 2004, revenue from sales to our five largest customers accounted for 75.3% of
our total sales revenue. As a result of the CNPC Reorganization, a significant
number of our existing customers became subsidiaries of our Parent and our
Parent in turn became our largest customer. Revenue from sales to our Parent,
purchaser of our petroleum products and petrochemical and chemical fertilizer
products, accounted for 69.9% of our total sales revenue. Of our five largest
customers, the other four were purchasers of our petrochemical and organic
chemical products. Other than our five largest customers, none of our other
customers purchased products accounting for more than 1.00% of our total sales
revenue in 2004.
Jilin Group's subsidiary, Jilin Chemical Import and Export Company, currently
acts as our agent for the import of equipment and technology and raw materials
and it also purchases all of our products for export. In 2002, 2003 and 2004,
our sales revenue from exports through Jilin Chemical Import and Export Company
amounted to approximately US$4.6 million, US$9.8 million and US$31.89 million,
respectively, which accounted for approximately 0.3%, 0.4% and 0.8% of our total
sales revenue, respectively. Due to sufficient domestic demand for most of our
products, we do not have any plans to increase our exports of these products
significantly in the near future.
PRODUCT TRANSPORT
Approximately 85.0% of our products were transported by rail in 2004. In 2004,
we used aggregate rail transport capacity of 10.77 million tons, approximately
10.36 million tons of which were obtained from the PRC railway system with the
remainder available from our internal railway system. Approximately 5.25 million
tons were used for the transport of our products, and the balance for the
transport of raw material and supplies. The development of the PRC railway
system still lags behind the development of the PRC economy as a whole and
discrepancies between capacity and volume of transportation are severe in many
areas of the PRC. Whether a company is allocated sufficient railroad cars to
transport its products is largely dependent on the destination of the cargo and
the approval of the railroad authority at such destination. Currently, most of
our customers are located in, and, therefore, most of our products are
transported to, either north-eastern or northern China, where capacity is
readily available to it.
The vast majority of our products are in liquid form, requiring them to be
loaded into industrial chemical tank cars when transported by rail. In order for
us to utilize the annual rail transport capacity received by us most
efficiently, we require a substantial number of industrial chemical tank cars.
We believe that the tank cars we currently own, together with our established
internal railway system and other facilities in our railway transportation unit,
will satisfy our product transportation equipment needs in the foreseeable
future.
COMPETITION
Since approximately 99.2% of our sales revenue in 2004 was generated from sales
in the PRC, we focus on competition primarily with respect to the domestic PRC
market, and in particular, the northern and north-eastern regions of China. In
general, we believe that our current primary competitive advantages with respect
to most of our products include product quality and diversity, economies of
scale and proximity to raw materials and our long-standing relationships with
our customers. With the exception of our petroleum products, which are at
present subject to allocation and price restrictions imposed by the PRC
government and therefore do not face substantial competition in the market, all
of our products are subject to competition in the domestic market. See "Business
Overview -- Product Pricing."
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PETROLEUM PRODUCTS
Our petroleum products are currently subject to allocation and pricing control
by the PRC government and, therefore, competition in the petroleum product
marketplace in which we compete is minimized. Prior to the PRC's accession into
WTO, import of petroleum products were also subject to strict import quotas and
import licenses. As part of its WTO accession commitments, the PRC government is
expected to eliminate many barriers to competition, including the import quotas
and import license requirements for the import of petroleum products and
restrictions on foreign invested enterprises to provide domestic distribution
and retail services for petroleum products. Although petroleum products will
continue to be subject to pricing control of the PRC government, it is not clear
whether the government's control over allocation of petroleum products will
change; the implementation of new policies and elimination of those
anti-competition barriers could significantly increase competition in the
markets for our products from both foreign and domestic competitors.
PETROCHEMICAL AND ORGANIC CHEMICAL PRODUCTS
We are one of the largest producers of petrochemical and organic chemical
products in the PRC. We have become one of the largest producers of ethylene in
the PRC with the commissioning to service of the Ethylene Project in 1998,
although most of the ethylene produced is used internally. Our petrochemical
products, including ethylene, constitute a broad range of the basic raw
materials for the organic chemical industry.
We believe that we are one of the largest suppliers of petrochemical and organic
chemical products in the north-eastern and northern regions of the PRC. We
believe that our competition in this marketplace is limited to a few large
petrochemical product manufacturers also serving these regional markets.
SYNTHETIC RUBBER
We believe that we are one of the largest PRC producers of synthetic rubber. Of
the major synthetic rubber products produced in China, styrene-butadiene rubber
comprises one of the largest shares of the PRC synthetic rubber market. We
believe that, including us, there are only three major styrene-butadiene rubber
producers in the PRC.
CHEMICAL FERTILIZERS
Due to the importance of agricultural development in the PRC and the significant
contribution that the chemical fertilizer industry makes to such development,
the PRC government has historically maintained significant control over the
chemical fertilizer market. In 2004, the prices of chemical fertilizers remained
the same as in late 2003. To protect domestic producers of chemical fertilizers,
in 2004 the PRC government continued to implement certain measures to control
the import of chemical fertilizers. However, import quotas and import licenses
for import of chemical fertilizers will gradually be eliminated after the PRC's
accession into WTO.
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FOREIGN COMPETITION AND WTO
Historically, the PRC government has provided the PRC chemical industry (other
than chemical fertilizers) with certain protection from foreign competition
through three primary practices: maintaining relatively high import tariffs,
imposing import license requirements and controlling the availability of foreign
exchange required to pay for imported products. These tariffs and import
restrictions are intended, in part, to protect domestic producers of these
products, such as us and they affect the majority of the product types produced
by us. These protective actions, however, are effective only to the extent that
they are fully and consistently implemented. To the extent they are not
implemented, imported products can have a significant effect on the pricing and
demand for our products. Imports remain a significant factor in determining the
prices of many of our products.
In recent years, the PRC government has implemented a policy of gradually
lowering import barriers and reducing tariffs. As part of its WTO accession
commitments, the PRC government will gradually eliminate import quotas and
import license systems, reduce tariffs, and permit foreign invested enterprises
to engage in domestic distribution and retail sales for all of our major
products. The PRC will also eliminate state trading for our major products
exclusive of petroleum products and chemical fertilizer. We expect those
measures to increase competition from imported products.
Although we believe that our products have been and will continue generally to
be competitive with imported products in the PRC, increased competition from
imported products resulting from the PRC's WTO accession may still have a
material adverse effect on our business and operations. Based on our wide range
of production capabilities and our familiarity with regional customers and
markets, we believe that we are well-positioned to meet potential foreign
competition. The tariff reductions, however, could reduce profit margins or
otherwise negatively impact our revenue from certain products, including a small
number of our significant products. The ultimate impact of any tariff reductions
on our business and results of operations will depend on a variety of factors,
including general market conditions for various products, our ability of to
increase production efficiency or lower our costs and the extent to which other
import barriers remain intact.
The PRC government may also reduce the tariffs imposed on production equipment
that we may import in the future, as well as the restrictions on availability of
imported raw materials (such as crude oil) currently enforced by the PRC
government. We are unable to determine accurately at this time the net effect on
our business and results of operations of the PRC's accession to WTO.
ENVIRONMENTAL PROTECTION
We are subject to PRC national, provincial and local environmental protection
regulations. According to the PRC Environmental Protection Law, the State
Environmental Protection Administration sets national environmental protection
standards, while local environmental protection bureau may set stricter local
standards. Enterprises must comply with local standards if local environmental
protection bureau have set their own standards. Since neither the Jilin
Provincial Government nor the Jilin City Government has set standards regarding
the discharge of water, gases and solid waste materials, the standards set by
the State Environmental Protection Administration for the discharge of these
materials are those which regulate our operations.
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The State Environmental Protection Administration sets discharge standards for
emissions into the air and water and delegates to the Jilin City Environmental
Protection Bureau the responsibility for monitoring enterprises in Jilin with
respect to the discharge of waste water, gases and solid waste materials. The
PRC Environmental Protection Law also provides schedules of base-level discharge
fees for various polluting substances. If the polluting substances exceed a
certain limit, the Jilin City Environmental Protection Bureau may charge the
polluting entity additional discharge fees and issue an order to cease or reduce
such discharge levels which, if not obeyed, may result in fines. The PRC
Environmental Protection Law also provides that, where pollution is causing
environmental damage, the Jilin City Government has the authority to issue an
order requiring the polluting entity to cure the problem within a certain
period. Non-compliance with such an order may result in the facility being shut
down. We have never incurred any fines, nor have we ever received such an order.
Due to the nature of our business, we produce significant amounts of waste
water, gas and solid waste materials in the course of our production. We believe
that our environmental protection facilities and surveillance and management
systems are adequate to enable us to comply with applicable environmental
protection laws and regulations in all material respects. We have made
substantial efforts with respect to the prevention and treatment of pollution,
including the construction and maintenance of a comprehensive waste water
treatment plant, a sludge incinerator and a waste residue dump. Currently, our
waste water treatment plant has a daily treatment capacity of 240,000 tons and
provides waste water treatment services for us, our Parent and certain other
companies in the same area. We charge fees for the services we provide to our
Parent and other companies based on the amount and quality of the waste water to
be treated. In addition to our environmental facilities, we have an
environmental management and surveillance system, including a comprehensive set
of environmental protection procedures and a substantial professional
environmental protection staff.
We conduct a detailed analysis of the solid waste generated by our facilities
and dispose of such solid waste in accordance with applicable national,
provincial and local environmental protection regulations. The PRC Environmental
Protection Law regarding the discharge or disposal of solid waste specify that
certain toxic wastes may not be buried directly in the ground and measures must
be taken to prevent leakage. Violations of such provisions can result in fines.
However, we have not been fined for any such violations.
Our environmental protection-related expenses consist of pollutant discharge
fees paid to the Jilin City Environmental Protection Bureau and costs related to
the upgrading and maintenance of our environmental protection facilities. In
2002, 2003 and 2004, our environmental protection-related expenses were
approximately RMB 88.29 million, RMB 70.70 million and RMB 82.73 million,
respectively.
We believe that our environmental protection facilities and systems are adequate
for us to comply with the existing national, provincial and local environmental
protection regulations. However, there can be no assurance that national,
provincial or local authorities will not impose additional or more stringent
regulations which would require additional expenditure on environmental matters
or changes in our processes or systems.
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RESEARCH AND DEVELOPMENT
Prior to 2004, our research and development department engaged in the research
and development of technologies, products, processes and equipment for our
businesses. Our research and development aided our ability to develop new
products and improve product quality. Our expenditures for research and
development were approximately RMB 3.9 million and RMB 1.8 million in 2002 and
2003, respectively. The decrease in our research and development expenditures
for 2003 was a result of our streamlining the research and development team. In
2004, in order to enhance our standards of research and development, we
entrusted an experienced research institution under our controlling shareholder
to undertake the research and development work for us. As of December 31, 2004,
we paid approximately RMB 2.7 million to such research institution. We
introduced no new principal products in 2004.
INSURANCE
We maintained insurance coverage of approximately RMB 8.1 billion on our
properties and facilities and RMB 179 million on our inventory in 2004. We have
no plans to increase this coverage. The book value of our buildings and
equipment, including projects under construction, was approximately RMB 9.37
billion as of December 31, 2004. The amount of the coverage of our inventory is
also less than its book value, which was approximately RMB2.6 billion as of
December 31, 2004. In accordance with what we believe is customary practice
among chemical producers in the PRC, we insure only high-risk assets, such as
production property and equipment, inventories and explosive or otherwise
hazardous facilities. However, the underinsurance of our properties, facilities
and inventory in accordance with this PRC practice exposes us to substantial
risks such that, in the event of a major accident, our insurance recovery may be
inadequate.
Beginning November 1, 1999, we began participating in the insurance programs
established by CNPC and approved by the PRC government. See ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - RELATED PARTY TRANSACTIONS - CNPC
INSURANCE PROGRAMS.
We do not currently carry any third party liability insurance to cover claims in
respect of personal injury, property or environmental damage arising from
accidents on our property or relating to our operations. We also do not carry
business interruption insurance, as such coverage is not customary in the PRC.
Losses incurred or payments required to be made by us which are not fully
insured could have a material adverse effect on our financial condition.
ORGANIZATIONAL STRUCTURE
We are a subsidiary of PetroChina which held approximately 67.29% of our issued
share capital as of April 29, 2005. PetroChina is one of the largest companies
in China in terms of sales and engages in a broad range of petroleum-related
activities. PetroChina is currently listed on the Hong Kong Stock Exchange and
New York Stock Exchange.
As of December 31, 2004, we had the following subsidiaries:
NAME OF SUBSIDIARY DOMICILE OWNERSHIP INTEREST
HELD BY (%)
Jilin Jihua Jianxiu Company Limited PRC 99.0%
Jilin Jihua Jinxiang Pressure Vessel
Inspection PRC 94.0%
Jilin Xinhua Nitrochloro-benzene PRC
Company Limited 75.0%
Jilin Winsway Chemical Industrial
Store and Transport Limited PRC 70.0%
Jilin City Songmei Acetic Acid Co., PRC 66.0%
Ltd.
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PROPERTY, PLANTS AND EQUIPMENT
Our corporate headquarters and production and ancillary facilities occupy an
area of approximately 8.5 square kilometers in Jilin City, Jilin Province,
located in north-eastern China. The total gross floor area of our production and
other facilities is approximately 1.5 million square meters. We own all of the
buildings and facilities on our premises and have freely transferable land use
rights for a term of 50 years in respect of the land upon which such buildings
and facilities are located.
PRINCIPAL PRODUCTION FACILITIES
The table below sets out our principal production facilities, their Rated
Capacities, their utilization rates in 2004, the years in which they first
became operational and the sources of their technologies. For purposes of this
chart, utilization rates which exceed 100.0% represent facilities which are
currently operated at a rate higher than their respective designed Rated
Capacities.
<TABLE>
<CAPTION>
ANNUAL RATED UTILIZATION RATE YEAR OF FIRST SOURCE OF
FACILITY CAPACITY OPERATION TECHNOLOGY
(`000 TONS) (%)
<S> <C> <C> <C> <C>
1. Atmospheric and vacuum
distillation 5,300 121.13 1979 PRC
2. Wax oil catalytic cracking 1,400 103.80 1979 PRC
3. Heavy oil catalytic
cracking 700 98.86 1990 PRC
4. LPG separating 250 114.04 1992 PRC
5. Secondary ethylene facility 150 101.56 1982 PRC
6. Principal ethylene 380 112.66 1996 Germany
facility
7. Synthetic ethanol 100 5.68 1982 Germany
8. Acetaldehyde 160 75.47 1982 Germany
9. Acetic acid 210 60.34 1982 PRC
10. Butanol and 2-ethylhexanol 120 104.72 1982 Germany
11. Acetic anhydride 50 105.73 1983 PRC
12. Styrene-butadiene rubber 80 131.88 1982 PRC
13. Aniline 66 110.60 1985 PRC
14. Concentrated nitric acid 100 106.79 1992 PRC
15. Styrene 140 115.73 1997 USA
16. Hydrocracking 600 120.18 1996 PRC
17. Integrated aromatics 400 124.32 1996 USA
18. Ethylene-propylene rubber 20 108.78 1997 Japan
</TABLE>
The annual Rated Capacity of these facilities occasionally changes from time to
time as a result of technical upgrades, renovations or expansions of the
facilities. For example, in 1998, we started a technological renovation of our
synthetic ammonia facility with a Rated Capacity of 300,000 tons as part of our
efforts to achieve economies of scale for production of synthetic ammonia. The
project was completed in December 2002.
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To date, our capital expansion projects have been financed with operating income
and commercial loans. In general, we believe that most of our principal
production facilities are more advanced than similar facilities of other
companies in the PRC. We further believe that, on the whole, our current and
future production facilities are adequate for conducting our current and planned
future business.
ANCILLARY FACILITIES
We have a principal power plant which was built in 1980 and is used primarily to
provide heat to our facilities, with the provision of electrical power being of
secondary importance.
Currently, the principal power plant is equipped with four steam boilers which
provided approximately 32.6% of our steam requirements in 2004. The power plant
has three power generators with a total installed capacity of 125,000 kilowatts
which generated electricity of 457 million kilowatt hours in 2004.
Our waste water treatment plant was built in 1979. The plant has the capacity to
process 240,000 tons of waste water daily, which can satisfy not only our needs,
but also the needs of our Parent and certain other companies in the same
geographical area.
Our railway transportation unit was formed in 1958. Currently, the railway
transportation unit consists of 6 traffic control stations, 15 locomotives, 744
industrial chemical tank cars and an established internal railway network which
links many of our facilities. This railway transportation unit provides
transportation among our production facilities and facilitates the production of
our downstream products. We believe that our railway transportation unit can
enable us to utilize our allocated rail transport capacity in the most efficient
fashion.
MAINTENANCE
The maintenance of our production facilities follows a scheduled maintenance
program. Our facilities operate 24 hours a day. We historically shut down our
production facilities once every two years for maintenance, we have now modified
our maintenance schedule so that we shut down our production facilities once
every three years. We believe that such shutdowns are consistent with achieving
the most efficient use of our facilities. We undertake maintenance projects,
both major and minor, on an as-needed basis. In 2002, we spent approximately RMB
560.0 million on maintenance of our facilities, which included our biennial
maintenance program, general repairs and replacement of spare parts, as well as
labor costs and subcontractors' fees which were primarily paid to third parties.
In 2003 and 2004, we spent approximately RMB 264.6 million and RMB 351.9
million, respectively, on facilities, including expenses for general
maintenance, replacement of parts and components, and labor cost and
subcontractor expenses paid to third parties. Total maintenance expenses
accounted for approximately 1.22% of our total cost of sales in 2004.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OPERATING RESULTS
This discussion should be read in conjunction with the information contained in
ITEM 18. FINANCIAL STATEMENTS. For numerous reasons, including those relating to
the economic reform programs of the PRC government, changes in the PRC
government policies concerning crude oil supply, pricing and allocation and the
introduction of new taxes or changes in existing taxes such as consumption tax,
income tax and value added tax, our consolidated financial statements may not be
indicative of our future financial results.
Our historical financial performance has been affected significantly by factors
arising from operating in a planned economy which are beyond our control.
Although government controls have relaxed over time, controls over allocation
and pricing of crude oil and petroleum products still exist. We believe that
these controls are intended to enable the PRC government to control and moderate
the effect of changes in availability and pricing of crude oil and petroleum
products and should provide generally for greater stability in our operating
results with respect to crude oil costs and petroleum product sales.
The PRC entered into the WTO on December 11, 2001. As part of its WTO accession
commitments, the PRC government has agreed to gradually eliminate import quota
and import license systems, reduce tariffs, and permit foreign invested
enterprises to engage in the domestic distribution and retail for all of our
major products. The PRC will also eliminate state trading of our major products
exclusive of petroleum products and chemical fertilizer. These commitments, as
being carried out, are expected to gradually cause the prices of our raw
materials and products to become more aligned with those in the international
markets and thus affect the stability in our operating results.
In 2004, the world economy continued to improve. China's economy also continued
to grow rapidly. We experienced dramatic increases in product prices as well as
increases in sales volume of most of our major products due to significant rises
in the market prices of our petrochemical products and strong demand for our
petrochemical products. Demand for our products reflects China's continued
economic growth and market concerns about the rapidly rising price of crude oil.
CRITICAL ACCOUNTING POLICIES
We have identified the accounting policies below as critical to our business
operations and the understanding of our results of operations. For a detailed
discussion on the application of these and other accounting policies, see Note 2
to the consolidated financial statements. The application of these policies may
require management to make judgments and estimates that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts of
revenue and expenses during the reporting period. Management uses historical
experience and all available information to make these estimates and judgments,
and different amounts could be reported using different assumptions and
estimates.
o REVENUE RECOGNITION. Our revenue recognition policy is critical
because our revenue is a key component to our results. We follow very
specific and detailed accounting guidelines in measuring revenue.
However, certain judgments affect the application of our revenue
policy. Should changes in conditions cause management to determine
these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.
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o PROVISION FOR ACCOUNTS RECEIVABLES. Accounts receivables are carried
at original invoice amount less provision for impairment. We
specifically analyze historical bad debts, ageing receivables,
customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances
may be required.
o INVENTORIES. Inventories are stated at the lower of cost or net
realizable value. We estimate net realizable value based on intended
use, current market value and inventory ageing analyses. We write down
our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may be
required.
o PROPERTY, PLANT AND EQUIPMENT. We record property, plant and equipment
initially at cost less accumulated depreciation. Subsequent to their
initial recognition, the value of property, plant and equipment are
carried at revalued amount, being the estimated fair value at the date
of revaluation less accumulated deprecia