22 November 2012 16:24 [Source: ICB]
Although coal-to-liquids technology in China will almost certainly become a strategic choice as an alternative source to oil, the actual replacement of oil with coal-based production of chemicals is still far-fetched. Market participants are aware of the long-term prospects for China's investment in coal-based chemicals, but believe the new technologies might take another three years before they are free of the problems of unstable operations.
There are four pathways for coal-to-liquid projects:
Sixteen MTO and MTP projects spread across China and with a total capacity of around 10m tonnes/year are due to come on stream from 2012-2015. For comparison, China's total methanol consumption stands at about 30m tonnes/year in 2012.
China is expected to require about 24m tonnes in additional supply over the next three years to feed into these mammoth MTO projects.
By 2015, MTO/MTP is expected to account for more than 17% of China's methanol demand, assuming all the other projects come on line as planned.
MTO and MTP, along with dimethyl ether and gasoline blending, are lumped together as the nontraditional uses of methanol.
For methanol's traditional downstream sectors - such as acetic acid, formaldehyde, methyl tertiary-butyl ether (MTBE), poly-acetal (POM), methyl methacrylate (MMA) and methyl amines - consumption is estimated to grow at a slower pace of 7-8%, largely in line with China's now slowed economic growth.
Four of the 16 MTO/MTP projects - with a combined capacity of 1.76m tonnes/year - have started production this year. But none of them are running at full capacity, partly because of the poor petrochemical markets this year amid the global economic slowdown.
Construction of the remaining 12 projects is ongoing, but industry players doubt their successful start-up in the near term.
An expected sharp increase in demand for methanol because of the MTO projects would help boost the price of the chemical. But in MTO projects, methanol will still serve as a cheaper alternative to naphtha as feedstock for polyolefins production.
Methanol prices in China were assessed at $360-365/tonne (€281-285/tonne) CFR (cost and freight) China in the final week of October, up $2/tonne from the previous week, according to ICIS. On the other hand, Asia's naphtha prices were at $960.50-963.50/tonne.
Coal-produced methanol provides the country with a strong cost advantage over naphtha-based petrochemical production during times when oil prices are high. But the projects entail heavy investments and the technology remains at an early stage; hence major hurdles to the industry's development still need to be overcome.
China's coal reserves, though huge, are being depleted fast and producers find that selling coal offers better profitability amid rising prices. The Chinese government is also restricting the granting of approvals on new projects to ensure a more efficient use of resources and aimed at preventing methanol overcapacity in the country.
China's National Development and Reform Commission (NDRC) has set a minimum capacity of 500,000 tonnes/year for coal-to-chemical projects.
From the ecological point of view, coal-to-olefin projects spell heavy pollution in a period when economies are targeting to reduce their carbon footprint. In terms of logistics, high costs in transporting the petrochemicals derived from coal are likely as project sites are too far away from major consumer markets.
"It is a long way off from mass-scale development," one trader in Singapore says.
COAL TO MEG
One industry consultant estimates the cost of producing MEG from naphtha, China's present feedstock, at more than Chinese yuan (CNY) 6,000/tonne ($949/tonne), assuming a WTI crude oil price of $90/bbl, while producing it in the Middle East would cost only $480/tonne - or about $600/tonne, if freight costs and tariffs were included.
For the coal-based case, the consultant assumes a lignite coal price of CNY300/tonne and estimates the cost at only CNY4,500/tonne if production facilities operate at full load, after overcoming technical hurdles.
Market participants, however, warn that the technology is still new and it took one of the Tongliao plants as long as two years before production stabilized. ICIS last assessed MEG prices in China at $1,040/tonne CFR China in late October.
According to Chemease, petroleum made from coal could be profitable as long as delivered prices of coal remain below CNY450/tonne. There are around five projects totalling more than 9m tonnes/year, according to Chemease.
An industry consultant, however, warns that the technology incurs a huge capital outlay. But, the potential is as big as the gasoline market, says another market observer.
There has been significant DME overcapacity in China and it is unlikely there will be other investments in this sector. The total nameplate capacity is around 10m tonnes/year and the operating rates in China average around 30-40%.
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