07 May 2007 00:00 [Source: ICB]
CHINA'S COLOSSAL economic growth, and its rampant environmental destruction and a growing contribution to global warming, have consequences for the chemical industry that are somewhat less apparent than today's naphtha or ethylene prices.
Speculation about the consequences will intensify with the latest disturbing news from the International Energy Agency (IEA).
Less than three years ago, the Paris-based agency predicted that China would become the world's biggest emitter of greenhouse gases by 2025. Last November, it predicted that China would overtake the US as the world's biggest polluter by 2010.
But then last week, the agency once again revised its forecast. It now expects China to beat the US into first place by the end of 2007. This further revision was no doubt influenced by China's breakneck gross domestic product (GDP) growth of 11.1% in the first quarter of this year.
International pressure could mount on China, forcing it to clean up its act and maybe rein back its use of coal as a feedstock for power generation and chemicals production. The IEA has identified the increase in coal-fired electricity production as a major factor behind its latest prediction.
China is already a huge producer of polyvinyl chloride (PVC), and chemicals including ammonia, via coal as the primary feedstock. Will pressure be exerted by the international community on China to lessen its dependence on coal?
What will this mean for the 88 coal-to-methanol projects that have already received approval, and the scores more that are waiting for licenses? Some of these projects are due to be integrated to methanol-to-olefins and methanol-to-polymers production.
The foreign investors, such as Shell and Dow Chemical, which are involved in coal-based chemical projects in China, will argue, quite rightly, that modern coal gasification technologies minimise pollution.
Plus, if carbon sequestration can be perfected, it would make even more sense for China to make greater use of its abundant coal reserves rather than import ever-rising quantities of crude oil. The consequences of China's voracious appetite for crude already include chronic tight supply and price inflation which have finally become a threat to global growth.
Much of the methanol that is made from coal will be used to replace gasoline either directly or indirectly. Dimethyl ether (DME), which is made from methanol, produces less emissions than petroleum-based alternatives.
But China might be pushed into a knee-jerk legislative response because of international pressure that doesn't make economic or environmental sense. This could lead to approvals being a great deal harder to come by for any coal-based chemicals project.
This seems unlikely. While the odd measure might be introduced for the sake of international relations, China cannot afford to introduce legislation that slows its drive towards greater energy security or pushes GDP growth below 10% per year.
This is the minimum level of growth that is necessary to create the jobs needed to maintain social stability. Despite tight labour markets in certain provinces and sectors, overall unemployment is high as a result of World Trade Organization-driven reforms and mass migration from rural to urban areas. The rest of the world can also ill afford even tighter oil markets and an end to a China boom that has benefited many other economies.
China, therefore, needs more western support through the transfer of advanced technologies that reduce emissions. What it does not need is some patronising two-car-owning environmentalist from the Ruhr Valley telling the Chinese to buy fewer cars.
The scary thought is that if China doesn't get this support, it might continue pursuing growth at the expense of the environment. A caveat is that the Communist Party could be forced down a different path if rising protests against environmental degradation create a greater threat to stability than high unemployment. Elizabeth Economy, the environmental scientist, estimates that 400,000 people die prematurely in China every year because of pollution.
As for external consequences of reports such as the IEA's, western chemical companies might face legislation from their own governments restricting investments in China.
Shareholders, too, who live on both the Ruhr and Thames valleys, might also exert pressure for less investment in China when global warming turns their living rooms into miniature boating lakes.
Western governments and shareholders might also demand alternative investment strategies when China's environmental crisis is more widely understood.
The 2008 Beijing Olympics could mark the point of greater international awareness. Thousands of journalists accredited to the International Olympic Authority - and as a result not subject to Chinese government censorship - will be in China to report on much more than just the games.
Today's naphtha or ethylene price might be of more immediate importance than all this speculation. But what if you can't produce any more ethylene to serve the China market in five to 10 years time? Or what if you are forced to find alternative, cleaner ways of making ethylene that use renewable resources?
And what if the global recycling industry becomes so organised and so economically efficient that it halves virgin-resin demand growth in China?
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