China’s coal-based chemicals are a trade-off

Often called a “pillar” of the Chinese economy, textile manufacturing rises from a foundation that is not entirely within the country’s control chemical feedstocks. China’s major resource advantage is inexpensive skilled labor, not raw materials, and it must procure huge volumes of chemical intermediates abroad because it has too little petroleum and natural gas to make them at home.

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China does, however, have some of the largest coal reserves in the world. It also has leaders eager to protect the economic gains of the last decade. And though China acquired its newfound wealth through capitalistic methods, its industrial policy continues to reflect Mao Zedong’s vision for the country, including his focus on self-sufficiency.

The result has been a proliferation of coal-to-chemical projects.

To date, most have targeted the fuel market with products such as synthetic oil, methanol and dimethyl ether (DME), but many of the more recent examples are aimed at the higher value-added markets for plastics and fibers.

About six coal-to-olefins (CTO) projects in China are expected to come on stream by 2016, according to an analysis by ICIS, most supporting the manufacture of polyethylene and polypropylene resins. Another 13 coal-to-chemical projects are at various stages of development.

FEEDSTOCKS FOR FIBERS

Several coal-to-chemical plants will feed into the production of synthetic fiber, particularly polyester, which has quickly increased its share of the textile market as cotton yields fail to keep pace with demand.

About 80% of China’s polyester consumption is used to make fibers, and Chinese producers have responded to the positive demand outlook with huge expansions. By the end of 2012, the country’s polyester production capacity will reach 41.5m tonnes/year, a 40% increase over 2010, according to a recent report from Beijing-based investment firm China International Capital Corp. (CICC).

“” width:=”” />As the new capacity ramps up, so too will demand for polyester’s key feedstocks, monoethylene glycol (MEG) and purified terephthalic acid (PTA). China’s MEG requirements are already surging. Rising to 9m tonnes in 2010 from about 5m tonnes in 2005, they single-handedly lifted global demand from 16m tonnes to 21.3m tonnes in the same period.

CICC expects China’s MEG requirements to exceed 10m tonnes in 2012 – almost half of the 22m tonne global market. “Even if the polyester industry’s operating rate is as low as 65%, its MEG demand will still reach about 9.2m tonnes,” the firm says.

China, which had about 3.6m tonnes/year of MEG capacity in 2010, cannot meet its own needs. The country imported 6m tonnes in 2010, more than 40% from Saudi Arabia.

Domestic producers could add production capacity, but the traditional ethylene-based process, being tied to oil and natural gas, puts them at a severe disadvantage to foreign producers – hence the excitement surrounding coal-to-MEG.

The coal-based process, which proceeds by way of dimethyl oxalate produced from syngas, promises to turn the tables.

China already has its first coal-to-MEG facility, a 200,000 tonne/year operation in Inner Mongolia. Tongliao Jinmei Chemical, a subsidiary of Danhua Chemical Technology, finished its construction in 2009, but the subsequent debugging process has taken two years a reminder that the technology is new.

As of December 15, the plant was operating at 70%, and the first deliveries were being made to customers in east China. Technical problems struck again at the end of that month, but the plant was restarted on January 13.

A second coal-to-MEG facility, at Hebi in Henan province, is expected to start up during the second half of 2012. The 250,000 tonne/year unit is a joint venture among China’s Wuhan Engineering, Haiso Technology and Hebi Baoma.

CAN COAL BE COMPETITIVE?

CICC has analyzed the cost of production and concluded that China’s coal-to-MEG projects will have a strong competitive position.

CICC estimates the cost of producing MEG from naphtha, China’s present feedstock, at more than Chinese yuan (CNY) 6,000/tonne ($949/tonne, €740/tonne), assuming a WTI crude oil price of $90/bbl. Producing MEG from shale-derived ethane in North America would cost $750/tonne, the firm says, while producing it in the Middle East would cost only $480/tonne – or about $600/tonne, if freight costs and tariffs were included.

For the coal-based case, CICC assumes a lignite coal price of CNY300/tonne.

“We estimate the cost at only CNY4,500/tonne if production facilities operate at full load, after overcoming technical hurdles,” the firm states. “That would mean a gross margin of more than 40% at a tax-excluded MEG price of nearly CNY8,000/tonne.”

ICIS assessed MEG prices in China at CNY8,4508,550/tonne on January 13.

The cheaper, Middle Eastern ethane-based process “will not pose a threat,” CICC says. “As the Middle East’s supply of cheap ethane tightens, an increasing amount of heavy feedstock for ethylene cracking [will have been] used. Meanwhile, the mining cost of non-associated gas resources remains high, and the natural gas pricing mechanism faces reform. The Middle East’s cost advantage in petrochemical products will likely wane.”

Polyester’s other main feedstock, PTA, has been the focus of a massive building program that will lift Asia’s total capacity to 43.7m tonnes this year – a 26% increase over 2011 China alone will gain six worldscale plants.

However, actual production volumes are necessarily limited by the availability of precursor paraxylene (PX), and supplies have tightened as refineries shift toward lighter feedstocks.

Coal-based PX could be the answer. PetroChina is installing 600,000 tonnes/year of coal-based PX capacity at a new facility in east China that is to start up in 2016. The company also plans to start up a 1m tonne/year PX complex in Yangzhou the same year.

A NEW TAKE ON AN OLD PROBLEM

China’s use of coal as a chemical feedstock is not new. An earlier wave of investment brought many facilities for the coal-based production of ammonia (for urea and ammonium nitrate), calcium carbide (for acetylene, used to make vinyl chloride monomer and other intermediates) and methanol.

The Chinese government initially encouraged these capital investments, but it struggled to rein them in when the flood of new capacity rolled past demand.

Investment in methanol was particularly excessive. A study by Roland Berger Strategy Consultants notes that, by 2008, China’s methanol capacity had reached 20m tonnes, whereas only 11.3m tonnes were being produced. In the first half of 2009, only about 40% of the coal-to-methanol facilities were in operation.

“Plans to utilize methanol capacities in methanol-to-olefin downstream projects might further contribute to overcapacities in products like MEG,” the firm cautions.

Government orders aimed at curbing coal-to-chemicals investment have become an almost annual ritual. The most recent, in April 2011, prohibited CTO projects of less than 500,000 tonnes/year and coal-to-methanol projects of less than 100m tonnes/year.

Kai Pflug, CEO of Shanghai-based Management Consulting – Chemicals, is skeptical about long-term prospects for China’s investment in coal-based chemicals. Too many companies, many without any clear advantage, are rushing into a business for which both the cost of entry and the risk of failure are very high, he says.

“Many technologies employed in coal chemistry are at an early stage of development,” Pflug says. “Thus, there is a substantial risk of individual investments becoming obsolete even if the coal chemical segment is successful as a whole.”

These issues could be overcome, he says, but there is a greater problem – the very idea that the country would benefit from using its coal for anything other than energy.

China’s coal reserves are quite limited, he notes. They may seem large but, per capita, they are below average. At the present rate of extraction, they are expected to last just 38 years.

At the same time, he adds, producing chemicals from oil is considerably more energy efficient than doing so from coal.

“It is much more sensible to get the full energetic value from coal by using it as a fuel for power stations than to lose a high share of this energy in the conversion process,” Pflug says.

China’s coal producers and chemical manufacturers are largely unfazed by such arguments – and they could be right, when business decisions are shaped as much by government policy as by supply and demand.

That situation will not change soon. The country’s leaders, often praised for taking the long view, have unleashed the entrepreneurial energies of the Chinese people, but they have not freed China’s economy, and their vision for the future is unlikely to include a diminished role for themselves.