Domestic high power consumption chemicals are expected to fully enjoy the opportunity of electricity price arbitrage

First, electricity price arbitrage

In the context of the dual carbon target, the state has successively issued documents to promote energy conservation and carbon reduction in high-energy-consuming industries, and achieve green transformation and high-quality development of high-energy-consuming industries. On the supply side, high-energy-consuming industries will usher in increasingly strict supply restrictions, backward production capacity will be accelerated out of the clear, and leading enterprises are expected to rely on their own advantages to transform and upgrade, and further enhance industry concentration through capacity replacement; On the demand side, the domestic economic recovery is combined with strong exports, and the demand pattern continues to improve. High energy consumption industry internal product prosperity is expected to further differentiation. We believe that high-energy-consuming industries, especially resource-based chemicals with high power consumption, are expected to fully enjoy the electricity price resource arbitrage in the western region under the current background of high and volatile energy prices, and its profit center is expected to continue to rise.

1.1 Domestic chemicals with high power consumption are expected to fully enjoy the opportunity of electricity price arbitrage

1.1.1 Overseas electricity prices continue to rise, or will remain high in the next two years

Overseas electricity prices continue to rise, pay attention to the price arbitrage opportunities brought about by this round of energy prices. We are now in the second half of the inventory cycle and have moved from a price offensive posture to defense and repair. This round of resource goods represented by oil and gas continued to rise, although there is a disturbance in the international situation, but also more confirmed the current market consensus on inflation. From the level of industrial electricity prices in various countries, the supply shortage of overseas energy has continued to push up electricity prices since 2001, and the level of industrial electricity prices in major countries and economies in the world has increased significantly. As of February 2022, the average retail electricity price of the industrial sector in the United States reached $0.076 /KWh, up nearly 20% from the beginning of 21, and the price center continued to rise; The peak retail electricity price in Europe reached 0.28 euros /KWh (about 0.31 US dollars /KWh) in December, 21, an increase of more than 254% from the beginning of 21, 22 years into the price has fallen, but still maintained at a high level.

Europe still has a high proportion of fossil energy generation, and electricity prices will remain high in the next two years. In 2022, coal and natural gas power generation in Europe has rebounded from 2021, of which the total power generation from fossil energy reached 79.1TWH in February 22, an increase of 2TWh from 21, accounting for nearly 35% of the total power generation, and is expected to maintain a high proportion in the short term. The gas supply crisis since 2021 has caused the cost of electricity generated from natural gas in Europe (including carbon taxes and variable operating costs) to soar, and led to continued increases in electricity prices, including France (275 euros /MWh), Germany (221 euros /MWh) and other countries have hit record highs that year. Due to the long-term shortage of upstream capital expenditure, under the influence of the current mismatch of energy supply and demand and the geopolitical conflict between Russia and Ukraine, the short-term energy price downside is limited, and the price of electricity will remain high in the next two years.

2.1.2 High power consumption chemicals are expected to enjoy electricity price arbitrage in the western region

Higher energy prices significantly pushed up the cost of overseas products, while domestic export price increases remained low. Taking calcium carbide PVC products as an example, due to its high power consumption (a ton of electricity consumption of about 7,000 degrees), the cost of overseas products is greatly affected by energy prices. In the past two years, the export price of PVC products CFR in the country increased by only about 36%, far lower than the cost of overseas products in the same period (including energy costs up to 274%), and the subsequent export price of domestic PVC products has considerable room for improvement.

Compared with overseas, China's industrial electricity prices and power generation costs have significant advantages. In the overall cost structure of coal and natural gas power generation, the fuel cost accounts for about 60% and 70% respectively. According to the calorific value and power generation efficiency of each energy, we have calculated the power generation cost of coal and natural gas. According to our calculation results, as of March 31, 2022, China, especially the western region of the main energy generation cost, compared to Europe has a significant advantage, coal and natural gas per unit of power generation can save 0.71 yuan, 1.30 yuan, significant resource endowment.

Domestic high power consumption chemicals are expected to fully enjoy the price arbitrage in the western region. From the point of view of the electricity price level of provinces and autonomous regions, the western region has significant resource endowment. The average industrial electricity price in North China is 0.65 yuan /KWh, and the average industrial electricity price in eastern China is 0.58 yuan /KWh, while the average industrial electricity price in Northwest and Southwest China, represented by Ningxia, Inner Mongolia and Yunnan, remains below 0.37 yuan/KWH with low-price coal. Electricity prices in Xinjiang are as low as about 0.31 yuan/KWH. Taking yellow phosphorus and industrial silicon, which consume more power per unit, as an example, according to the current average industrial electricity price level in western China and Europe, the corresponding domestic single ton products can save energy costs of 2.3 and 20 thousand yuan respectively, which has a great price arbitrage advantage compared with overseas and other regions in China. If the electricity price in Xinjiang is 0.3 yuan and the electricity price in Europe is 2.3 yuan, the domestic price advantage of a single ton of industrial silicon is more than 26,000 yuan.

This round of rising energy prices significantly pushed up the cost of overseas products, chemicals are expected to repeat the situation in 2020, overseas because of high costs to reduce the load, and Chinese enterprises through low-cost export capacity transfer, earn a high difference. We have calculated the power consumption and comprehensive energy consumption of heavy point chemicals and sorted them according to the unit output value. At present, when foreign energy prices are high, varieties with higher comprehensive power consumption corresponding to unit output value are expected to obtain electricity price arbitrage opportunities by virtue of resource endowments in the western region, and product profitability is expected to be further enhanced. The top five key products we selected are: caustic soda, calcium carbide, industrial silicon, yellow phosphorus and synthetic ammonia, which are basically consistent with the above-mentioned varieties of supply contraction and stringent assessment.

1.1.3 The profit center of high energy consumption chemicals is expected to continue to rise in the future

The profit center of energy-intensive chemicals is expected to continue to rise. With the joint constraint effect of various supply-side control measures such as dual carbon policy, dual control of energy consumption, and production capacity indicators gradually emerging, the production capacity supply of some high-power consumption chemicals has experienced a strong contraction, while the demand side continues to improve with economic growth and export recovery. We expect that some enterprises that are leading in the western region and enjoy local resource endowments, especially in industries with gradually resource-based capacity attributes such as calcium carbide, caustic soda, yellow phosphorus and industrial silicon, will show stronger competitive advantages than other regions in China or overseas, and their profit centers will steadily rise in a longer time dimension.