INSIGHT: China coal chems challenge Mid East

08 February 2007 16:23  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--The debate about whether or not China will become the new Middle East through its use of coal to produce ultimately polymers is intensifying.

There are 88 coal-to-liquids (CTL) projects that have gained approval and a further 20-30 where approvals are pending. The projects involve either indirect or direct liquefaction of coal (indirect involves a gasification step first), followed by in some cases integration through to methanol to olefins and olefins to polymers production.

This is reminiscent of the investment splurge in China’s polyester capacity before the end of the quota system that had limited exports of textiles and clothing from the developing to the developed world.

Investors, many of whom had no experience in the polyester sector, didn’t bother to properly assess the risks because of cheap or even free capital. The end result was a long period of low operating rates, shuttered plants and abysmal profitability.

But one could argue that there are major differences between the polyester and CTL sectors.

Firstly, Shell, Dow Chemical and Sasol are involved in this investment wave. Proper due diligence should therefore have been conducted on at least their projects.

But secondly, and more importantly, the processes could enjoy a huge feedstock advantage because of China’s 188bn tonnes of coal reserves.

China’s government might have also managed to bolt the stable door before the horse bolted. Last July, the National Development and Reform Commission issued a circular ordering suspension of new CTL and associated chemicals projects. In addition, projects with a total annual capacity of 3m tonnes/year and methanol projects below 1m tonnes/year were banned.

Nevertheless, the three overseas majors are only involved in a small number of the projects. This means that most of the cash pouring into the sector is local, low cost and as a result highly speculative.

And what kind of advantage will cheap coal deliver to final margins when logistics have been taken into account?

Most of the projects are located in western China where, as yet, there are no big polymer markets. The majority of the finished product will therefore have to be moved by rail, road or river to the east – where the big demand exists.

Another key component of the sector’s competitiveness will be the oil price. CTL production costs of plants close to coal mines are estimated at equivalent to $27-35/bbl, rising to $45-50/bbl when distribution costs and taxes are included.

Some consultants believe that freight costs will prohibit commodity grade production, forcing a focus on speciality grades and lower-volume plants.

Other consultants, however, point to the successful economics of moving coal-to-acetylene based vinyl chloride monomer (VCM) to make polyvinyl chloride (PVC) on the eastern coast. Much of this PVC is then being exported at highly competitive prices. Acetylene-based capacity increases are so big that China is expected to become a net PVC exporter by 2011-12.

But the Middle East doesn’t make much PVC and produces relatively little ethylene dichloride or VCM. As a result, most of the competition China faces is from naphtha-based ethylene to PVC production.

This is certainly not the case with linear-low density polyethylene (PE) and high-density PE. Huge quantities of both the polymers are already produced in the Middle East with a great deal more very competitive gas-based capacity due over the next years.

The Middle East will also triple its polypropylene capacity to 9.5m tonnes/year by 2011, representing an increase in global market share to 11% from 6%. You can obtain more details of Middle East capacities through subscribing to ICIS insight Asia’s Middle East Report.

This leaves low-density PE (LDPE) as an opportunity because the Middle East is not a major producer. But LDPE investment costs can be higher than for other polymers and the technology is more tightly controlled.

In addition, and perhaps most fundamentally, doubts are still being expressed over the commercial viability of methanol to olefins technologies. And you cannot assume that the crackdown on investments in this emerging sector will prove effective. Implementing central government legislation is always a challenge in China.

In the end, though, whoever is right, fuel markets may consume most of the methanol – the intermediate product in these processes. The main reason for the investments in coal technology is greater energy security through substituting oil-based fuels.

But what if China does make polymers in abundance from coal and the economics work? This would be the biggest shift in the industry’s dynamics since somebody drove through the Saudi desert, looked at all the gas flares, and said: “Hey, this is a bit dumb”.

By: John Richardson
+65 6780 4359

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