Market outlook: China's huge methanol potential

30 August 2013 16:24  [Source: ICB]

Gasoline and olefins to be major demand drivers as Beijing pursues energy-security agenda

Everything is relative, of course, and relative to the growth seen in 2009-2011, China's methanol market feels a little becalmed.

 Methanol use in gasoline blending is on the rise

Copyright: Alamy

In 2009, growth soared to more than 30%, according to research by ICIS China . In 2010, the growth rate it fell to 28% and was around 36% in 2011, whereas last year it fell to 16% and is expected to also be at these levels in 2013.

By the standards of any other country, a 16% growth rate and a market that it is expected to be worth 38m tonnes in volume terms by the end of this year still represents quite staggering success.

A lot has been mentioned of the economic problems besetting China as its economy transitions from one heavily focused on investment to one that is much more reliant on consumption as a driver of GDP.

But to some extent, as a result of soaring demand for methanol as a blendstock in gasoline, and its increasing use in the methanol-to-olefins (MTO) process, the product seems immune from the overall macro problems.

LOCAL COAL
Energy security is a major driver of methanol consumption in gasoline and olefins. The reason is because methanol in China is predominantly produced from local coal, displacing oil imports.

In terms of margins, the methanol-into-gasoline business can be very good. For instance, in July of this year, the domestic gasoline price was more than double that of methanol and profit margins were well in excess of 8%, according to industry sources.

In terms of growth, the gasoline potential remains enormous. Once the central government introduces a national M15 (up to 15%) standard for blending methanol into gasoline, demand is expected to soar. At the moment, individual provinces have their own standards and industry observers have been waiting for two years for an M15 announcement from Beijing.

It is not only direct blending of methanol that is driving demand for methanol into gasoline. China has also seen a rapid increase in demand for the methanol and C4s derivative, methyl tertiary-butyl ether (MTBE), which is used an octane booster, and as an oxygenate.

China also has a big dimethyl ether (DME) industry, another methanol derivative, which is a replacement for liquefied petroleum gas (LPG) and is often blended with LPG. However, DME, as is the case with several methanol derivative sectors in China, is blighted by oversupply.

METHANOL-TO-OLEFINS
Turning to global olefins markets, a case can be made for tighter supply over the next decade, even though the US is planning seven ethane-based worldscale crackers for start-up by 2020. Elsewhere, however, there seems to be a lack of project activity. Hence, the case can be made for building lots of coal-based MTO plants in China, on the basis of both supply and demand and energy security.

Like the US with its abundant shale gas, China has lots of coal.

And at least on a variable-cost basis, if not a capital-cost basis, MTO can be highly competitive with cracking naphtha to make petrochemicals.

THE WATER CHALLENGE
But, as we have discussed in our regular China Monthly column, the MTO process is water intensive, as it takes 15-20 tonnes of fresh water to make one tonne of olefins from coal. Oil refining, however, uses 0.80-2.17 tonnes of water for each tonne of crude oil processed. Most of China's MTO projects are in the western provinces, where water is in tight supply.

"According to Greenpeace, government plans for increasing coal [supply] to the power and the CTO industries in Inner Mongolia would increase water demand by 141% by 2015 versus 2010, resulting in depleted aquifers and increased pollution," wrote Morgan Stanley in a 5 August report. "We estimate Chinese CTO expansion will account for 20% of global ethylene supply-growth over the next five years, but tighter environmental regulations could become a risk."

Some CTO projects are still awaiting final government approval because of water issues, added industry sources.

But where there is will, there might well be a way: Where investments have gone ahead, they are being treated as pilot projects for studying efficient ways of recycling waste water.

Because government institutions are behind this research, there is considerable confidence amongst industry observers and players that the water challenge will be solved in time for the first major wave of MTO start-ups, which is due to take place in 2015-2016.

SHARP FALL IN IMPORTS
As a result, the long-term success of methanol in China looks pretty assured.

And over the past few months, switching to an analysis of the short-term market conditions, prospects have improved.

In June, domestic pricing was depressed on weak downstream demand. But a combination of scheduled and unscheduled lost production at overseas and local plants, a lower-than-expected ramp-up in domestic output and an improvement in the performance of some downstream sectors, has led to a rebound since mid-July.

In June this year, China's methanol imports were just 270,000 tonnes with the July number expected to be around 280,000 tonnes. This compares with shipments that averaged some 450,000 tonnes/month in January-May.

This was the result of overseas production problems, including a lower-than-usual operating rate at Petronas's PLM2 plant in Malaysia since March. Iranian production is also said to have been reduced as a result of technical difficulties.

There have also been four unplanned shutdowns in northwest and southwest China. In June, local production totalled 2.6m tonnes and only 2.5m tonnes in July - less than had been anticipated by the market.

MTO PROJECT START-UPS
Further support to the market is likely to be provided by the start-up of the Wison 295,000 tonne/year MTO project at Nanjing, Jiangsu province in China, which is expected to take place in late August.

Wison's plant will add 600,000 tonnes/year to methanol demand in China if the facility runs at 100%. Most of the feedstock will be sourced, via rail, from inland China.

China's first MTO facility, which is based on domestic and imported feedstock - Skyford Chemicals at Ningbo in Zhejiang province - came on-stream earlier this year. If it runs at 100%, it will add 1.8m tonnes/year to methanol demand.

Skyford, which operates a 300,000 tonne/year polypropylene (PP) plant and a 500,000 tonne/year mono-ethylene glycol (MEG) facility downstream of its 600,000 tonnes/year MTO plant, is said to be very profitable.

The same cannot be said of the formaldehyde sector as a whole - another methanol derivative. Formaldehyde is heavily dependent on construction as a demand driver because of its widespread use in formaldehyde-based resins.

China has reduced the availability of credit for new construction projects, leading to lower operating rates at formaldehyde plants. Capacity utilisation averaged just 56% in June compared with an average of 64% in March, April and May.

In contrast acetic acid, which is again made from methanol, has seen an improvement in profitability.

In May, producers were losing money and in June they reached break-even. From July, thanks to an improvement in acetic acid pricing and lower methanol prices, they have been in the black.


Author: Ken Yin and John Richardson



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