As China slows down pace of investments in coal-based petrochemicals, India is s

Investments in the petrochemical space hinge on the availability of key raw materials, of which olefins are among the most important. While countries that are blessed with cheap oil or natural gas are well placed to make these projects happen at attractive cost economics, other geologically less privileged need to adopt alternate strategies to tie up feedstock at competitive prices. Importing is one option, but that is not always practical and it does put paid to the idea of developing a higher degree of self-sufficiency.

Nowhere is the quest for alternate routes to petrochemical feedstock more evident than in China. Like India, the country has limited resources for oil and gas, despite several strategic tie-ups with leading suppliers in Russia, the Middle East, South America and parts of Africa. China’s self-sufficiency in crude oil, for instance, has fallen from about 60% in 2005 to about 25% now. The comparable figure for natural gas is 100% and 60%, but this is deceptive, as gas, unlike oil, cannot be moved without pipeline infrastructure tying suppliers to end-users.

Like India, China is well endowed with coal. The national production – the world’s largest – has been more than adequate to meet growing needs for all sorts of uses, including for generating power, and there is little prospect of the country running out of coal well into the future. Coal has also globally been a far less volatile commodity, especially in comparison to the other fossil fuels (oil and gas) and that gives a certain level of predictability when it comes to forecasting margins and returns for businesses that use it as raw material.

Coal to olefins

About two decades ago China turned back the pages of history in its quest to utilise coal for manufacturing chemicals. It first started with using coal for methanol production in a two-step process: gasification of coal to produce synthesis gas (syngas, a mixture of carbon monoxide and hydrogen); and the conversion of syngas to methanol through a well-understood, long practiced process. The methanol served both traditional markets for chemicals (formaldehyde, acetic acid etc.) and used as a blend in automotive fuels even in the absence of a clearly laid out policy for the same. Some quantities were also used for production of dimethyl ether that served as a substitute fuel for LPG.

But these developments did nothing to address the rapidly widening deficit for the two polyolefins – polyethylene (PE) and polypropylene (PP). Traditional routes to make ethylene and propylene – the two monomers – needed investment in naphtha/gas crackers or (especially for propylene) in fluid catalytic cracking facilities at refineries. Taking a cue from technology development programmes in the west (aimed at the China market), China’s research institutes then started an indigenous development programme aimed at developing a commercial scale process for converting methanol to olefins (MTO) and coal to olefins (CTO).

Rapid build-up of capacity

From the first plants built using imported MTO technology around 2010, the scale up has been dramatic and several have since been built. While some went all the way to coal, several on coastal locations came to be based on imported methanol (produced in gas-rich regions of the world).

Today, most of China’s MTO plants are based in the developed eastern coast, while the CTO plants are located mainly inland in the coal-producing northern and northwestern parts. According to estimates carried out by Wood Mackenzie, a consultancy, the dominant technology now in use by these plants is the DMTO technology developed by the Dalian Institute of Chemical Physics. This technology is used by 12 of the 29 plants online in 2017, and accounted for a cumulative 6.74-mtpa of total olefins capacity based on coal/methanol – a little more than half of all capacity using this route. In contrast, the share of Lurgi and UOP technologies – imported from the west – is only 12% and 11% respectively.

Formidable challenges going forward

But these plants now face several challenges with two dominating.

The first is the availability of water, especially in the coal-belt where most CTO plants are located. These regions are amongst the most water-stressed in the country and water will likely be a resource that could constrain any further build-up of capacity. The second challenge relates to the heavy carbon footprint that comes with using coal. CTO plants are reckoned to emit five times more CO2 into the atmosphere than a similar sized naphtha cracker, though the figure for MTO plants is a lot less. So far this has not mattered, but in a future scenario where some sort of carbon penalty (such as a carbon tax) is levied, CTO plants could be handicapped fairly severely as compared to steam crackers running on naphtha as feedstock.

Varying cost economics

The economics of CTO/MTO plants, relative to that of steam crackers, is another variable that could impact their future. CTO plants are highly capital intensive – more than twice the cost of a comparable naphtha cracker. A 600-ktpa olefin plant is reckoned to cost about $2.5-bn to build, while MTO plants of similar size cost about $0.7-bn or thereabouts. While feedstock costs dominate the ethylene cash cost for steam crackers, for coal-based plants the dominant cost is of utilities. As a consequence, while MTO and steam crackers are more sensitive to the price of feedstock (methanol and naphtha in the two instances), CTO plants are not as sensitive to coal prices (which in itself is more stable).

Overall, Wood Mackenzie estimates that the cash costs of ethylene for CTO plants are currently only marginally lower than for ethylene produced by steam cracking. While a low oil price environment is clearly beneficial for naphtha crackers, it does put MTO at risk, though this will vary depending on the derivatives produced.

Slowing pace of investments

For these environmental and economical reasons the pace of China’s development of a coal-based petrochemical industry is expected to abate after 2020. As of now few, if any, new MTO based projects are being planned, and CTO projects are expected to be mainly expansions of existing operations that have been approved in the 12th Five Year Plan. More and more of the additional olefin capacity needed to meet China’s growing needs for polymers and chemicals will instead come from steam crackers and by refiners switching to a petrochemicals mode of operation. CTO/MTO projects will have a small, but significant share of the pie.