Commentary: China coal-to-olefins (CTO) investment to slow

With China coal-to-olefins (CTO) operations challenged by lower cost oil and improved naphtha-based competitiveness, the massive flow of investment into these plants is set to slow, even in a structurally tight Asia ethylene market.

Asia ethylene prices have risen strongly this year. In March, they hit more than an eight-month high with CFR Northeast Asia prices above $1,200/tonne. They have since come down to around $1,110/tonne.

And with relatively low crude oil prices (though recovering from their January lows), the prime beneficiaries have been naphtha-based producers.

Northeast Asia naphtha-based ethylene margins exceeded $700/tonne in March, are around $655/tonne as of late May, and are likely to be strong throughout 2016, said Yeow Pei Lin, ICIS deputy managing editor for Asia and Middle East. Yeow gave a presentation at the 2016 Asia Petrochemical Industry Conference (APIC) in Singapore. www.icis.com/APICpresentation.

Ethylene in Asia is structurally tight with cracker consolidations in Japan and production issues in Singapore and Indonesia, along with planned cracker maintenances, Yeow noted.

Total output losses in Asia are estimated to amount to 2.32m tonnes in 2016, higher than 2.2m tonnes in 2015, even as the impact from cracker turnarounds will be around 34% less year on year, she projected.

This includes production losses of 518,000 tonnes from Shell’s outage in Singapore; 345,000 tonnes from the closure of Asahi Kasei’s cracker in Mizushima, Japan; and 1.46m tonnes from cracker turnarounds.

For China coal-to-olefins/methanol-to-olefins (CTO/MTO), there are six projects expected to start up or ramp up (two having already started) in 2016. These have total ethylene capacity of 1.62m tonnes/year.

This amount will be dwarfed by the 7.4m tonnes/year of ethylene capacity to start up between end-2015 and 2016 in the rest of Asia and the Middle East, including major projects in India, Yeow pointed out. In 2017 and early 2018, three naphtha cracker expansions in China, South Korea and Malaysia are expected to add about 1.42m tonnes/year of capacity.

THE EFFECT OF SHALE GAS

With naphtha-based production becoming more competitive, and the wave of US shale gas-based cracker and derivatives capacity set to start up in 2017-2018, the once steady stream of China CTO/MTO project announcements has slowed to a trickle.

Much of the new US ethylene derivatives capacity, primarily in the form of polyethylene (PE), are targeted for export to Asia. The battle for Asia PE market share is set to intensify, with the US joining the fray and the Middle East remaining dominant, said Yeow.

Sitting high on the ethylene cost curve, there is little economic incentive to continue building these high capital cost CTO projects. However, social incentives still exist for building these plants to foster downstream plastic processing as well as upstream coal mining employment in China’s poorer interior regions.

Coal-based chemical production is not going away, but will be a smaller part of the overall picture than imagined a few years ago in the era of $100/bbl oil.

From an environmental standpoint, coal-to-chemicals plants are not sustainable, said Olivier Thorel, VP of global intermediates and ventures at Shell Chemicals, who noted that they produce 6-10 tonnes of CO2 per tonne of chemicals. “These are massive CO2 machines that make chemicals as a sidestream,” he said at APIC. “When we are dealing with climate change, this has to be taken into account.”

“It all comes back to sustainability drivers in the industry. Eventually there will be a cost of carbon and penalties,” said Kurt Aerts, VP of global specialty elastomers and butyl business at ExxonMobil Chemical.

However, China CTO/MTO will play a role, with more than 7m tonnes/year of ethylene capacity from these routes by 2020, said Ewe Ee Foong, vice president, Asia at ICIS Analytics & Consulting.