China Insight: Propane dehydrogenation projects boom, but risks loom

02 April 2012 00:00  [Source: ICB]

With a boom in investment in China for propane dehydrogenation (PDH) projects to produce propylene, the risk for overcapacity is rising. By 2014, when many of these plants are projected to come on line, propane supply may not be quite as abundant. In addition, propylene demand growth is likely to be slower than expected.

Propane, propylene spreadChina started building its first PDH project, with a capacity of 600,000 tonnes/year, in Tianjin in May 2010. Since then, ground has been broken on a number of similar projects.

Six PDH plants with a combined capacity of 3.35m tonnes/year are under construction, with start up scheduled in 2013-2014. Six more PDH projects are in the planning stage. If all these projects come on stream as scheduled, the country's total PDH capacity will reach 5.87m tonnes/year in 2014.

Globally, total PDH operating capacity is 5.26m tonnes/year, with a further 1.1m tonnes/year capacity - excluding China - expected to start operations by 2014. China is poised to become the world's largest producer of propane-to-propylene.

DEMAND FUELS INVESTMENT

Demand for propylene has grown rapidly in China in the past few years. The country's consumption reached 14m tonnes/year in 2011 and is expected to grow by 59% to 22.2m tonnes/year in 2015, representing a compound annual growth rate of 12%, according to data from ICIS C1 Energy.

Propylene is a by-product of crude refining and ethylene production from naphtha feedstock. Its yield ratio growth has been falling during the past few years, causing supply shortages when downstream demand soared.

About 52% (6.36m tonnes/year) of the domestic propylene output comes from naphtha crackers and 46% (5.63m tonnes/year) from refineries. The propylene yield ratio from naphtha crackers and refineries is about 33% and 2% respectively. However, the yield ratio can be more than 80% from PDH units. Most of the PDH projects are being built by polypropylene (PP) or acrylonitrile (ACN) producers, which need propylene as feedstock.

ATTRACTIVE MARGINS

The price gap between propylene and imported propane in China has been at about $500/tonne (CNY3,154/tonne) since 2007, according to ICIS C1 Energy data.

Based on this price differential, gross processing margins of PDH units are about $300/tonne after deducting other production costs of $190-200/tonne, as assessed by ICIS C1 Energy research. Most market players are optimistic about profits from these projects.

RISKS

Feedstock propane price increases and declines in downstream propylene figures will impose significant challenges for profit margins for PDH projects, once the majority of these come on stream in 2014, C1 Energy forecasts. In Asia, for instance, margins for PDH projects plunged to negative territory in February-March 2011, when propane prices hit record highs on the back of propane supply scarcity in the Middle East.

PROPANE SUPPLY PROBLEM

China's propane demand from PDH units is expected to hit 6.63-7.92m tonnes/year by 2014, and up to 90% of feedstock supply will come from the Middle East. Although propane output in the Middle East is expected to increase by 6m-7m tonnes/year by 2016, compared with 2011, most of the volume will become available in 2015-2016, resulting in tight supply in 2014 since demand in China will surge at this time.

China PDH projects

Some market players are looking to address the feedstock issue. In early February, Haiyue New Material in Zhejiang province began a feasibility study on taking domestic propane as feedstock for its PDH project that is scheduled to become operational in 2013, a company source said.

However, domestic propane supply, which suffers from low volumes and scattered distribution, will be unable to satisfy feedstock demand from China's new PDH projects.


Author: Lydia Yu and Ken Chen



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