There is a lot of talk about China’s coal-to-olefins (CTO) capacity additions slowing down on rising concerns over emissions. A further factor is forecasts that CTO margins will weaken on more favourable naphtha cracking margins and more expensive coal prices because of mine closures.
So the conventional view is there will be an easy home for all the US polyethylene (PE) capacity being built. Such is the confidence over the scale of the export opportunity in China and emerging markets that we have seen more planned new cracker-PE projects in the US.
ASK THE RIGHT QUESTIONS
In the short term, it might be right that CTO capacity growth is slowing in China. Our latest forecast is that only 1m tonnes/year of coal-based PE will be added in 2017 versus earlier expectations of 2.1m tonnes/year.
But the risk to today’s consensus thinking is that we might end up with the wrong answers about the strength of China’s long-term PE imports – all because we do not ask the right questions.
Let’s start with emissions. There is no doubt that big integrated coal gasification complexes produce a lot of CO2 emissions. But one of the outputs can be synthetic natural gas (SNG) which is used to replace coal in power plants, thus improving air quality.
So a new complex is partly justified based on the net environmental advantage of SNG. This might support the economics of building downstream plants such as CTO.
WHO BENEFITS FROM THE DEFICIT?
It is risky to look at standalone CTO, or coal-to-PE, margins in isolation. If you forecast poor standalone margins over the next 10 to 20 years, this weakens the case for new investment. But to what extent do Chinese companies, and also the government, look at standalone margins versus margins across a whole gasification complex?
What if the money to be made from transportation fuels and SNG is expected to be so good that it in effect subsidises CTO? Turning coal into PE generates jobs downstream in plastic processing, and in manufacturing, particularly in poorer inland provinces where major coal reserves are located.
However, our base case is that only 61% of China’s PE demand will be met by local production by 2020 – up from 58% in 2010. This would leave room for imports of around 12m tonnes in 2020. Beyond 2020, we see levels at around 60% of total demand.
But even if China has big PE deficits in 2020 and beyond, other questions to ask are: Who will benefit from this deficit? Will it be the US or will it be fellow members of China’s One Belt, One Road (OBOR) initiative?