China coal to benzene threatens

With naphtha prices so high, heavy aromatics and pygas feedstock for producing benzene are not only expensive but are also in tight supply due to operating rate cutbacks.

Longer term also, as we’ve already discussed here, there are major doubts over whether China will produce enough naphtha to operate all the petrochemical projects it is building when the priority is gasoline and diesel production.

The economics of naphtha and pygas-based benzene look seriously challenged, therefore, both in the short and long terms.

And as the extended article below warns, watch out for King Coal as China ramps up exceptionally economic coal-to-benzene production 15 January 2008 16:51 [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)–Benzene, the mother of all chemicals, was for so long regarded as an appalling investment option because of very weak margins.

Then the golden years arrived of 2003-2007 and yes, you’ve guessed it, a plethora of projects were announced.

It will come as no surprise to be told that this flood of new capacity will push the industry into a supply overhang. The more that things change, the more they stay the same.

But the day of reckoning might have been delayed by a few months, perhaps for the whole of 2008, by the resilience in Chinese imports that has taken consultants and industry players by surprise.

In September last year, for example, Bert De Guzman of DeWitt – in a paper presented to the consultancy’s Berlin conference – predicted that China would be 90,000 tonnes net short of benzene in 2007.

He forecast that this would swing to a 50,000 tonne long position in 2008, rising to 390,000 tonnes the following year with a whopping surplus of 500,000 tonnes predicted for 2010.

A big ramp-up in coal-based benzene production had been expected in 2007. In June-July last year, Shanxi Sanwei Group completed a 130,000 tonne/year benzene unit using hydrogenated coal as feedstock.

A further nine coal-based units with a total capacity of 487,000 tonnes/year were due for completion in 2007.

Some of these plants must have been delayed into 2008 as government data shows that imports up until 30 November totalled 221,000 tonnes.

As for Asia as a whole, De Guzman expects the region to be net long by 274,000 tonnes next year with a 1.379m tonnes surplus expected for 2010. This is despite the big increase in styrene capacity taking place over the next year and all the other derivatives additions.

Some 1.183m tonnes/year of Chinese coal-based benzene capacity is due on stream between the second half of 2007 and the end of 2009.

A co-product of coke production is benzole or coke oven light oil (COLO) – a liquid with high aromatics content. Supply of COLO is abundant because China accounts for 50% of global coke production.

COLO contains 65% benzene and around 1% or more sulphur which has to be reduced through hydro-treatment before it’s suitable as a feedstock for benzene.

But with crude oil at or in the region of $100/bbl and in danger of staying there for some time and increased demand for toluene for blending into gasoline, the cost of hydro-treatment is hardly a big deal.

Will heavy naphtha-based benzene producers be able to find, or afford, sufficient feedstock to run through their reformers over the next few years?

International eChem, the petrochemicals consultancy and Wood Mackenzie – a consultancy which specialises in oil, gas and refining – think quite possibly not.

“China could have a naphtha deficit of more than 35m tonnes by 2015,” warns Sap Roopra, head of downstream oil, Asia Pacific, for Wood Mackenzie.

The question will then be whether refiners – motivated primarily by serving the fuels market – will be willing and/or able to meet what could be a huge deficit.

International eChem and Wood Mackenzie have produced a study – Feedstocks for Profit – which examines these issues.

Any aromatics producer integrated upstream into a refinery might be in a better position, which is the case with many of the plants in China.

But the government’s priority is to maintain economic growth through ensuring sufficient supply of gasoline and other transportation fuels.

Last year’s riots in Guangdong, when petrol stations ran short of supplies, indicated that both social stability and economic growth are at stake.

Confirmation of where priorities lie was the recent government edict ordering a cut back in cracker operating rates. This has allowed refineries that supply naphtha to the crackers to raise their fuel production.

Clearly, therefore, if your feedstock comes from pygas you also face problems.

Feedstock constraints could be exacerbated by the amount of reformate or pygas-based capacity being added across Asia.

Three such plants are due on stream in China this year, representing 767,000 tonnes/year of capacity. Two further plants are schedule for start-up in 2010, adding a further 450,000 tonnes/year of potential output.

New capacity is being brought on stream by Aromatics Thailand Co in 2008. The country, according to De Guzman, will move into a net long position of 500,000 tonnes/year.

The benzene balance will be critical to the South Koreans and the Japanese as they are the two biggest exporting countries.

South Korea, for instance, exported 244,000 tonnes to China in 2006 and 140,000 tonnes up to 30 November last year and has a net surplus of 750,000 tonnes.

And with crude at such high levels, reformer and cracker economics have already suffered.

The obvious solution as this supply tsunami arrives is operating rate cutbacks by the naphtha-based players.

Will some of the new naphtha-based plants be able to run at all and what will this mean for the companies concerned who have to pay back their debts?

*DeWitt has just completed a project study – Worldwide Benzene from Coal. For more information please contact Bert de Guzman at bdeguzman@dewittworld.com

By: John Richardson
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