China Coal-To-Olefins Projects Not Just About Oil Prices

Business, China, Company Strategy, Environment, Olefins, Polyolefins

By John Richardson

dirtycoalCHINA will do what suits China from a national perspective. Remember this in all your new thinking about how its chemicals industry will behave in the future and I think you will be on the right tracks.

So, as in the past, you cannot afford to look at the cost-per-tonne economics of producing a particular chemical in isolation and assume that this alone will drive future investment decisions.

I therefore challenge the view put forward by UBS in a recent report where they argue that lower oil prices mean that less coal-based ethylene capacity was likely to go ahead in China. Cheaper crude, on paper at least, erodes the cost advantage that coal-based producers enjoy versus those who make their ethylene via naphtha (naphtha is, of course, made from crude).

The fall in oil prices has led the investment bank to lower its forecast for total ethylene capacity in China in 2019. It now expects 26.93m tonnes/year of C2s capacity to exist in China by the end of that year – 13% lower than its previous prediction.

The bank believes that these project cancellations or postponements will result in a sharp rise in ethylene and derivatives imports between 2014 and 2019. This might, as a result, create sufficient room for many of the US ethylene and polyethylene projects due on-stream over the next few years. It could also make some of the new cracker complexes being planned in Southeast Asia considerably more viable.

But I think it is important for reasonable people to disagree. This is an important debate. Here are some of the other arguments that I think are also worth evaluating:

  • Most of China’s coal-to-olefins (CTO projects are in rural areas where job creation is more important that profitability. Build a CTO plant and you create lots of employment downstream through polymer plants and plastic processing facilities etc.
  • And in the great scheme of things, adding a CTO complex to a huge coal gasification site in China might not be that major an investment decision. So the attitude might be, “OK, we already spending billions of dollars on building plants that use gasified coal to make synthetic natural gas, kerosene, gasoline, diesel, ammonia and methanol. Adding a CTO plant to this investment cost is therefore not such a big  deal, especially if the plant creates a bit of ‘societal value’ by diversifying a local economy.”
  • And let’s say that a lot of these new CTO plants are indeed built. How might they operate in the event of persistently low oil prices? Perhaps at higher rates than some people think because of the job creation factor.

But still, there is the issue of water consumption. Is there enough water to build these complexes the first place? Opinion remains divided on this issue, although I tend to favour the view that where there is a will, China will find a way.

If turning coal to gas and then all its downstream products is a strategic priority, then China will find a way of getting around this problem.  And I believe that building coal gasification complexes might well turn out to be a long-term strategic priority.

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