Here's the statement from GU (Q2 PR from mid August)
Business Outlook for Fiscal Year 2009
The second quarter was a difficult one for Gushan, with increasing pressure on margins, as well as reduced production and sales volume, largely associated with uncertainty over the consumption tax issue.
Although biodiesel selling prices have stabilized since the end of the first quarter, the Company was not able to raise prices significantly despite the recovery of world oil prices and the resulting increases in the Chinese Government's Guidance Prices during the quarter, due to the fact that the demand for diesel remained weak during the period. In addition, the Company's raw material costs started to trend upwards during the quarter as suppliers began to demand higher margins. As a result, the Company's gross margins have deteriorated. Going forward, so long as the Chinese economy and world oil prices continue to recover, the Company expects its biodiesel selling prices to increase, but the extent of such increase will continue to be dependent on the demand and supply of diesel in China. In terms of costs, Gushan is continuing its efforts in negotiating lower raw material costs with its suppliers. The Company is also actively looking to source more alternative feedstocks such as jatropha and castor bean oils. Such efforts include cooperating with suppliers to process these oils and at the same time securing fixed price supply contracts.
Due to the suspension of production at Fujian Gushan beginning April 19, 2009, the Company's production and sales volume of biodiesel have significantly decreased. As a result, Gushan's revenues and profitability have been adversely affected. Given current biodiesel prices and margins, production at Fujian Gushan is expected to remain suspended pending the clarification of the consumption tax issue by the PRC SAT. If Sichuan Gushan is eventually required to pay consumption tax, Gushan may also suspend production at Sichuan Gushan. To date, none of the Company's other production plants have received consumption tax assessments, however no assurance can be given that Gushan will not receive such assessments for its other plants. If at any time such request is received, Gushan will evaluate the appropriateness of a suspension of production at additional plants on a case-by-case basis. In the meantime, the Company is seeking to expand alternative sales channels, including sales to the chemical industry, which are not subject to consumption tax. In addition, Gushan is stepping up its research efforts to develop new products for the chemical industry in order to mitigate the potential adverse impact from the consumption tax issue. However, no assurance can be given that these efforts will be successful.
As a result of the above, the Company expects that the second half of 2009 will continue to be challenging for Gushan's business operations.
Despite such a challenging market environment, Gushan's production expansion plans as set out in the previous quarter's earnings release remain intact as the Company continues to believe in the long-term prospects of its business and also has the financial strength to pursue such plans. Construction of the new production plants in Chongqing and Hunan is complete. These two plants, both of which have annual biodiesel capacities of 30,000 tons, are ready to commence production as and when the consumption tax issue is clarified with the respective local tax bureaus. The 50,000 tons expansion of the Shanghai plant is expected to be completed in the third quarter this year. The new plant in Sichuan, with an annual biodiesel production capacity of 50,000 tons and which is dedicated to use inedible oil, such as jatropha oil, as its raw materials, remains on target to commence production in the first half of 2010. As a result, Gushan targets to achieve a total annual biodiesel production capacity of 450,000 tons, or approximately 135 million gallons, by the end of 2009 and 500,000 tons, or approximately 150 million gallons, by the end of the first half of 2010. Given the still uncertain market environment, however, Gushan will continue to closely monitor its market situation and will make changes to its expansion plans as necessary.
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BTW, GU appears to be trying to copy what CCGY did and enter the specialty chemical market as well. That doesn't help CCGY's margins in that segment, if competition ramps up from GU. Plus, all this new capacity potentially coming online for biodiesel can't be good for pricing power......
AI
