Gushan Environmental Energy saw its biodiesel sales and gross operating profits surge in the third quarter, but suffered setbacks as various projects were delayed, feedstock costs stayed stubbornly high, biodiesel prices started to fall and foreign exchange trading blew a big hole in its balance sheet, the US-listed Chinese biodiesel giant said late Wednesday.
     Gushan, which is China's biggest biodiesel producer by total production
capacity, said it sold 63,632 mt of biodiesel in China in the last quarter, up
44.8% from the 43,948 mt it sold in the third quarter of 2007 and up 6.2% from
the 59,921 mt it sold in the second quarter of 2008.
     The average selling price of its biodiesel was Yuan 6,344/mt ($934.30/mt)
last quarter, compared with average feedstock costs of Yuan 2,729/mt -- up
from Yuan 4,521/mt and Yuan 1,832/mt respectively in the same quarter of 2007.
     Costs surged because of "general cost inflation, particularly in labor
and transportation, in China, as well as a general increase in prices charged
by its suppliers," said Gushan.
     Worryingly for its longer-term health, Gushan said suppliers of the
vegetable oil waste and used cooking oil that it uses at its biodiesel plants
were very reluctant to cut prices, even though biodiesel prices are falling in
line with a drop in world diesel and oil prices.
     "If average prices for biodiesel continue to decrease and raw materials
prices do not decrease at a similar rate, the company's gross margins will be
adversely affected," Gushan warned shareholders.
     "The company is seeking to negotiate price reductions with its current
raw materials suppliers. The company is also actively exploring the
development of alternative feedstocks to diversify its raw material sources
and obtain more attractive pricing."
     Gushan said it would review its biodiesel expansion plans -- which have
already been delayed -- if the margin squeeze does not ease.
    
     FOREIGN EXCHANGE LOSSES HIT BALANCE SHEET
     The surge in sales and revenues lifted Gushan's operating profit to a
very respectable $19.9 million last quarter, up a healthy 37% from a year
earlier.
     But a variety of factors, including the end of tax holidays for some of
its operations and heavy losses from unexplained dealing in foreign exchange,
hit its balance sheet hard -- pushing net profit to $11 million, a drop of
14.6% year on year.
     The biggest hit came from foreign exchange trading. Gushan lost Yuan 44.8
million ($6.6 million) last quarter,  after seeing sizable holdings of New
Zealand dollars and euros slump in value against the US dollar. Gushan, which
didn't explain why it was dealing in the two currencies, said it converted all
holdings into US dollars in October -- and would take an extra hit of $7.6
million in fourth quarter results as a result. 
     "Under the current highly volatile market conditions, the company does
not expect to hold cash balances in currencies other than in RMB [Chinese
yuan], HK dollar and US dollar in the foreseeable future," it said.
    
     RESTARTS TWO PLANTS, DELAYS TWO NEW PROJECTS
     Looking across its operations, Gushan said it restarted its 50,000
mt/year (1,000 b/d) Beijing plant on September 21, after temporarily
suspending it on August 1 to respect traffic restrictions around the city
during the Olympics.
     Its 60,000 mt/year Sichuan biodiesel plant, which closed voluntarily in
the wake of a massive earthquake that devastated large parts of the region in
May, resumed production at nearly full capacity in the third quarter.
     But Gushan's plans to expand the Beijing plant to 100,000 mt/year, and
add two new plants in Chongqing and Hunan with 30,000 mt/year of capacity
each, have hit delays. None of that new capacity will be online until the
first quarter of 2009, it said, and warned that it could delay the projects
further if margins are squeezed.
     "The company is reviewing its 2009 expansion plans and may adjust such
plans, depending on pricing trends for biodiesel and raw materials," it said.
     Gushan already runs a total of five plants -- in Sichuan, Hebei, Fujian,
Beijing and Shanghai -- with an annual total biodiesel capacity of 290,000 mt.
     The expansion delays, along with maintenance work required to be carried
out in Fujian, Hebei and Sichuan, mean than Gushan will likely produce a total
of 230,000 mt of biodiesel this year, less than the 250,000 mt it had
previously forecast.
--Dave Ernsberger, dave_ernsberger@platts.com

(platts.com, Nov 12, 2008)