By John Richardson
Coal-to-chemicals is one of nine major industrial sectors that the China Banking Regulatory Commission has warned is blighted with overcapacity and other risks related to what it calls, rather disingenuously, “the economic cycle”.
Thus, the commission has advised the state-owned banks to exercise greater caution in extending further funding to these sectors.
The other sectors are real estate, engineering machinery, steel, nonferrous metals, cement, shipbuilding, wind-power equipment and photovoltaics.
China’s new leaders have to deal with imbalances in the real-estate sector and so the commission’s announcement seems to be part of their plan.
The collapse of China’s solar-panel maker Suntech points to problems in photovoltaics.
Suntech’s failure also llustrates massive over-investment across many industries, and the wider financial risk that central and local government-directed lending now poses to China’s financial system (this is a subject we shall look at in detail in a later post).
As for the decision on coal-to-chemicals, it could be argued that some of the bigger coal-to-olefins projects, backed by the politically well-connected large-scale coalminers, will be fine.
It might also be argued that job creation still remains the priority in China’s inland regions, where many of the coal-to-olefins projects are located. This pressing need might trump both financial and environmental concerns.
We don’t agree.
We think that very few of the numerous coal-to-olefins and methanol-to-olefins projects (those based on purchased methanol) will go ahead, given current political priorities.
The environment is one the top concerns of China’s new Politburo. This is a nationwide concern.
And the self-inflicted banking-sector crisis that China now faces, which has little do with “economic cycles” beyond its control, means that, as we have already said, funding for all sorts of industrial projects will become much-harder to come by.
We think that coastal-based methanol-to-olefins projects, based on imported feedstock, will be particularly vulnerable as there are major doubts over their viability.
One wonders what all of this means for conventional refinery-to-petrochemicals investments in China.