Petrochemicals: China methanol demand to take off

13 August 2011 13:57  [Source: ICB]

Fuel blending could emerge as a much bigger end-use

Increasing use in fuel-blending and dimethyl ether sectors is likely to boost methanol growth as government formalizes plans  

A slowdown of the Chinese economy is unlikely to have a major impact on methanol, with demand in 2011 projected to grow by about 19% to nearly 24m tonnes. Growth will be driven primarily by the dimethyl ether (DME), fuel-blending and methanol-to-olefins (MTO)/methanol-to-propylene (MTP) sectors.

Methanol usage in these segments, which accounted for 34% of the total demand of 20m tonnes in 2010, is likely to rise by 50% this year - well above the 11% growth in the traditional end-user sectors of formaldehyde, acetic acid, and dimethyl formamide (DMF). Methanol producers have been waiting for the gasoline-blending sector to take off in China, which could happen this year as the government is widely expected to announce a national M15 standard, which would allow 15% methanol to be blended with gasoline.

BLENDED GASOLINE
The standard - due last year - has been delayed pending completion of trials.

Many market players also believed that the delay was because of the reluctance by state-owned refining majors Sinopec and PetroChina to promote methanol-blended gasoline.

Both companies, which own more than half of all gasoline stations in China, do not have a significant presence in the methanol business and have yet to build facilities that can produce blended fuel. However, with the Chinese government keen to develop a modern coal-based industry to reduce the country's dependence on costly crude oil imports, methanol will eventually take on a bigger role in fuel blending.

The government had introduced a M85 (85% methanol blend) standard in December 2009, but this was slow to take off as it required costly retrofitting of engines. But M15 gasoline can run on existing engines. Ten provinces, including Xinjiang, Hebei, Shanxi, Guizhou, Shannxi, Heilongjiang, Fujian, Zhejiang and Sichuan, have issued local standards for M15, pointed out Jiang Lianbao, secretary-general of the Alcohol Ether Fuel Standardization Association, which is responsible for testing methanol-gasoline blends.

Meanwhile, illegal blending continues to take place across the country and nearly 2.8m tonnes of methanol was used in the gasoline sector in 2010.

DME - THE KEY DRIVER
The other key driver for methanol is DME. This market has seen some hiccups this year after the Chinese government clamped down on its use in liquefied petroleum gas (LPG) blending because DME can corrode the rubber seals in gas cylinders, resulting in gas leaks. But the problem will soon be resolved, as the government has started drawing up national standards for DME-LPG blends, as well as specifications for the gas cylinders. These are likely to be ready by June 2012.

DME could also emerge as a much bigger end-use if producers are successful in their trials of using pure DME as a household fuel. However, large-scale replacement of LPG by DME is also likely to attract resistance from state-owned oil and gas companies, which are the major producers of LPG in the country.

Another segment that holds promise is the use of methanol to produce olefins. Two MTO/MTP plants have already started and a third plant is due to start this year. A number of projects have been lined up thanks to support from provincial governments.

Nearly 1m tonnes/year of MTO/MTP capacity has been planned in coastal provinces, while another 17m tonnes/year of capacity has been announced inland. But these projects are likely to proceed slowly. Whether or not these MTO/MTP plants can have stable operations is a major concern, said a source from major Chinese trading company Orient Salt. The technology is still in the early stages of commercialization and cost effectiveness untested.

Projects on the coast also have a problem securing methanol supplies as most of China's coal-based plants are inland. Securing commitment from a foreign methanol supplier for huge volumes will be a challenge and also exposes the Chinese MTO producer to global price fluctuations. Meanwhile, optimistic growth projections for methanol have spurred Chinese companies to propose new projects, despite overcapacity in the local industry.

BURDEN OF COAL HIKES
Total capacity in China in 2010 was about 42m tonnes/year, while production was only about 15m tonnes. Capacity is expected to rise above 50m tonnes/year by end-2011 and to exceed 60m tonnes/year in 2012. The average industry operating rate in 2010 was only around 36%, with many companies that run older plants suffering from the burden of a 10% hike in coal prices in 2010-11, as well as power shortages.

With an average delivery cost of around $330/tonne (€230/tonne) to the east coast, plants inland that are focused on the eastern China market usually only operate when methanol prices are above this level.

Meanwhile, the government has been working on restructuring the Chinese methanol industry by closing down old plants with small capacities and outdated technology while improving operating rates at larger plants. Earlier this year, it also set a minimum capacity of 1m tonnes/year for new coal-based methanol plants. The government is also keen that companies improve competitiveness, conserve energy and reduce emissions. These are vital for long-term survival.

By: Ken Yin

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