Market outlook: China’s coal-to-olefins debate

Although CTO is forecast to grow swiftly, rising concern about air pollution, water scarcity and the safety of coal mining may slow its trajectory

You might well be confused at the end of this article, but this is the whole point of what you are about to read. It will demonstrate one indisputable truth: if you want to be involved with anything to do with the China chemicals sector, you cannot expect your life to be easy.

This particular example of confusion rests on a lack of consensus over the future of China’s coal-to-olefins (CTO) industry.

China’s coal sector and value chain, including CTC, is under increasing pressure Copyright: Rex Features

The process consumes a lot of water – between 15-20 tonnes for every tonne of olefins produced, which compares with 0.80-2.17 tonnes of water for every tonne of oil processed through a refinery, according to ICIS China analysis.This might not be an issue except that most of the CTO projects are located in north and northwest China where water is in tight supply.

The methanol-to-olefins (MTO) stage in the production process is also said by some industry sources to be commercially unproven. Production levels might, as a result, remain well below nameplate capacities. (Coal is first of all turned into synthesis gas and then methanol before conversion into olefins.)

What if this view is entirely wrong? What might this mean for global olefins supply and demand balances given the big volumes of capacity that, potentially, could be on-stream via this route over the next few years?

China has, for instance, six MTO/methanol-to-propylene (MTP) units already on-stream with a total capacity of 2.655m tonnes/year, according to ICIS China.

A further 14 MTO/MTP projects under construction, with a total capacity of 7.325m tonnes/year.

“China’s government has been telling us for years that there is no issue with water consumption in CTO and we believe them,” said a source with a global petrochemicals producer.

“Water consumption by CTO plants is only an incredibly small percentage of the total amount of water used in coal-related industries in general – some 0.5%.

“Turbines in coal-fired power stations are the biggest consumers of water across the whole coal value chain because they are often cooled by water. This is very easy to solve and is being solved through switching to cooling turbines with air.”

ENVIRONMENTAL ISSUES
Solving the water issues surrounding coal was a lot easier than the alternative for China – becoming ever-more dependent on oil and gas imports, he added. Coal has far more important uses than chemicals production, as the chart on page 23 indicates.

Increased production of gasoline, diesel and jet fuel made from coal would help reduce China’s dependence on imported crude.

Synthetic natural gas (see the bottom right hand corner of the chart) is also a substitute for natural gas imports, which arrive in China either by pipeline or via liquefied natural gas (LNG) tankers.

And synthetic natural gas ticks another box as it generates less carbon dioxide and particulate emissions than coal at the point at which it is used in power plants. “One of the government’s top priorities is to improve air quality in the cities, which, right now, is absolutely dreadful and a major cause of the poor air quality is using coal for power generation. This creates a lot of highly toxic particulate matter,” added the source with the global petrochemicals major.

Air pollution in China is not just a problem for China. In March, the World Health Organisation released a study that showed that 40% of the 7m people killed by air pollution globally in 2012 lived in the region dominated by China.

The report added that air pollution caused more deaths worldwide than AIDS, diabetes and road injuries combined.

Another very important box will be ticked by making more diversified use of China’s abundant coal reserves as an energy source: Job creation in China’s less-developed western provinces, where most of the CTO projects are located.

Big new integrated sites would produce transportation fuels, synthetic natural gas and chemicals etc. on a scale far greater than most overseas observers realised, added the source. “As for the argument that the MTO process is commercially unproven, this is just total nonsense. China has several proven MTO processes that work extremely well,” he said.

Olefins additions via coal would be so big over the next decade that there would be no incremental increases in China’s ethylene and propylene equivalent imports, he added.

(Ethylene and propylene equivalent is a calculation of the amount of C2s and C3s contained in derivatives such as polyethylene, polypropylene, ethylene glycol and propylene oxide.)

In other words, imports will remain stuck at roughly where they were in 2013. During that year, China imported 15.03m tonnes of ethylene equivalent and 6m tonnes of propylene equivalent, according to ICIS Consulting. So much, perhaps, for the argument that the slow development of China’s CTO industry will leave lots of room for US ethane-based cracker projects.

“We are instead heading for a period of severe olefins and derivatives oversupply, unless some of the 12 US cracker projects that have so far been announced are shelved,” added the source. “I think a lot of the views surrounding CTO represent a bit of wishful think, and, quite frankly, are uninformed. It is comforting to believe that China doesn’t represent that much of a threat, given that it has such big coal reserves .”

The good news is that only six of the 12 announced US crackers will be built over the next five years because of rising construction and labour costs, according to Dow Chemical’s CEO, Andrew Liveris, in comments he made during the company’s Q2 earnings call in July.

Longer term, though, if shale gas economics remain so enticing, further cracker start-ups seem likely.

COAL MINING SAFETY AN ISSUE
But maybe, to return to where we started, there is absolutely nothing to worry about oversupply driven by a flood of coal-based olefins capacity in China. “In the next five to 10 years we are not going to see a great deal of CTO capacity additions because community resistance to new chemicals plant in general is building. This is making the approvals process a lot more challenging,” said a source with a global polyolefins producer.

“Another issue is coal mining and its dreadful safety record in China.”

Officially, 1,049 people died or went missing as a result in coal-mining accidents in China in 2013, but some commentators believe that the real figure is far higher.

“A lot of the proposed CTO projects are in areas in western China where the government is already facing increasing protests from ethnic minorities, such as the Uighurs in the Xinjiang region,” added the second source.

“And in general in China, people are becoming much more safety conscious. This will lead to higher safety compliance costs at coal mines that continue to run, while more coal mines will have to shut down, making the coal feedstock costs for the CT0 process more expensive.”

He added that those who live in western China will not be prepared to sacrifice their own air quality for the sake of creating better air quality in the eastern towns and cities.

“These big, integrated coal-to-fuels and CTO sites generate a lot of pollution. So, the more synthetic natural gas you make at these sites, the greater their pollution levels. People in western areas will not tolerate this. They are not stupid.”

He also argues that CTO capital costs are way in excess of the costs of building naphtha crackers.

“If you add these capital costs to rising feedstock costs you have a very weak economic argument for going ahead with CTO projects,” he said.

“Further – on an operating cost basis, logistics costs for a CTO plant are very high, unless you own a coal mine and a railway. This doesn’t apply to the majority of the companies behind the CTO projects.”