China: Location is the key to China's new generation of coal chemicals

16:50 PM | April 29, 2013 | —Clay Boswell

Pang: A severe logistical bottleneck cuts coal prices.

China is in the midst of a surge in coal-to-chemicals investment, says Paul Pang, managing director of IHS Chemical China. The competitiveness of these projects, which are based on a new generation of coal-to-chemical technologies, hinges on the peculiar economics of China’s coal market.

Pang and his team recently concluded a study on the topic, China Coal Chemical Industry Analysis 2012, which was published by IHS Chemical earlier this month. They find that more than 120 coal-to-chemical projects have been announced in China. Although the number likely to be realized is much lower, the new capacity will easily outpace shale-based expansion in North America, Pang says. Between 2013 and 2020, 13 million m.t./year of ethylene and propylene capacity will go online in the United States. During the same period, almost 20 million m.t./year of coal-based light olefin capacity will go online in China.

These coal-to-chemical projects are generally located far inland, but not because of the coastal regions’ high labor costs. Investors are instead pursuing low-cost feedstocks provided by stranded coal mines with poor access to traditional markets.

Stranded coal creates opportunity

Coal chemistry is not new in China. Owing to a paucity of petroleum and natural gas, China began using coal to produce an array of basic chemicals in the 1970s. Coal has since become a feedstock staple. In 2012, three-quarters of China’s methanol and ammonia capacity, 86% of its polyvinyl chloride capacity, and 26% of its benzene production were based on coal, according to IHS Chemical.

Most of this production is located near consuming markets in the eastern, central, and northern regions. It is far from the country’s coal deposits, which are concentrated 2,000–5,000 miles away in the central and far-western provinces and regions of Shanxi, Shaanxi, Inner Mongolia, and Xinjiang (map).

The northwest alone hosts 76% of the country’s total coal reserves, Pang says. Coal from that region is transported almost entirely by railway, mainly to several major ports in northern China, from which it is transported by ship to the east and south of the country. A substantial portion is also transported by rail directly to the central and some eastern regions. Rail capacity is severely limited, however, and the cost of bringing coal from the northwest to the east and south is very high. As a result, the coal price in the northwest is significantly below market prices in the east and south.

“Currently, there is a severe logistical bottleneck in bringing coal from the west [of China] to the market, [which] leads to stranded low-cost coal in the northwest. This low-cost coal creates opportunities for coal chemicals,” Pang says. Several new technologies for the production of coal-based olefins, monoethylene glycol (MEG), and ethanol are being commercialized on the basis of this difference in cost.

Shenhua Baotou began operating the world’s first coal-to-olefin (CTO) plant in August 2010, and Shenhua Ningmei started up the world’s first coal-to-propylene plant in May 2011. Sinopec brought a methanol-to-olefin plant online in October 2011, and Datang International started up a coal-to-propylene plant in January 2012. In total, China has 400,000 m.t./year of coal-based ethylene and 1.4 million m.t./year of coal-based propylene in operation, Pang says.

The world’s first coal-to-MEG (CTMEG) plant was brought online by GEM Chemical in December 2009. Four other CTMEG plants were started up in central China last year and early this year, raising China’s total coal-based MEG capacity to 800,000 m.t./year.

China’s ravenous manufacturing industries have supplied the momentum behind these projects. “The ‘new’ coal chemicals were developed to produce the key raw materials for which traditional petrochemicals cannot meet demand,” says Pang. “China imports a large quantity of these chemicals to meet growing demand from its consumer goods manufacturing sector.”

Significant cost advantages

For their new study, Pang and his colleagues modeled the cost competitiveness of coal-to-chemical manufacturing under a range of scenarios and at a variety of locations across China. To study CTO technology, four hypothetical plants were located in the far northwest (Xinjiang), the central northwest (Inner Mongolia), the north (Shandong), and the east (Shanghai). Each was integrated from coal to polyolefins with feedstock coal priced at the local market rate.

The analysis indicates that plants located in Shandong and Shanghai have no cost advantage and that they are not competitive with naphtha-based producers. However, the other two plants perform much better, at least on a cash-cost basis, Pang says. “The plants in Inner Mongolia and Xinjiang have a significant cost advantage over the other plants,” he says. “Even after taking into account CTO’s heavy capital cost, they still enjoy a significant cash margin. Compared to the domestic naphtha-based plant, they are clearly cost-advantaged.”

Their costs are, in fact, similar to those of Mideastern gas-based producers, says Pang. “However, this comparison is somewhat misleading,” he adds. “CTO plants have a much higher capital cost than a gas cracker or naphtha cracker. On average, CTO’s capital cost is about three times that of a naphtha cracker. When including capital cost depreciation, CTO’s cost advantage is much smaller.”

Three locations were modeled to study the CTMEG process: Xinjiang; Inner Mongolia; and Henan, in central China. Each hypothetical plant was integrated back to coal priced at the local rate.

The plants in Inner Mongolia and Xinjiang had a clear cost advantage, with good cash margins even after taking into account capital costs, says Pang. But the margin for the plant in Henan Province was mostly wiped out by the higher coal cost. The cost of CTMEG is less sensitive to coal costs compared with CTO, and variable and fixed costs carry more weight.

Pang concludes that, on a cash-cost basis, CTMEG in China is moderately competitive globally. “In 2012, a CTMEG plant located in Xinjiang had a lower cash cost than a naphtha-based plant, but a higher cost than a Middle East or US ethane-based plant,” says Pang. “A CTMEG plant in Inner Mongolia has a similar cost to a typical naphtha-based plant. A CTMEG plant in central China is among the highest-cost plants.”

Coal-to-ethanol (CTE) fared poorly, however. Plants were modeled for Inner Mongolia, Xinjiang, and Shanghai. “Without capital depreciation, the plants in Inner Mongolia and Xinjiang have a significant cost advantage and healthy cash margins,” says Pang. “However, after taking into account capital depreciation, their cost advantage diminishes to zero. This reflects the capital intensity of CTE plants. For the plant located in east China, its economic outlook is very poor.”

Coal-to-chemical projects in China face numerous challenges, Pang says. They include a water shortage in the arid northwest, very high upfront capital costs, voluminous waste generation, greater carbon emissions than petrochemicals, and the government approval process.

Of the more than 120 coal-to-chemical plants announced in China, 54 are olefin projects and 27 are MEG projects, but hurdles such as these are likely to prevent many of them from being built, Pang says. He estimates that 10–15 new olefin projects and 6 new MEG projects will be built between now and 2017.

“We believe that Chinese coal chemicals will find their competitive position by complementing petrochemicals, rather than overshadowing [them],” he says.