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60 billion, 21.1 billion, 17.1 billion – is an investment boom in coal-based olefins on the way? Author/Source: Date: 2017-08-14 Clicks: 23 1 On August 6, 2017, the construction of the Zhongtian Hechuang coal-to-olefins project, with a total investment of around 60 billion yuan, was successfully completed. On August 6, 2017, the 120,000-ton/year batch-type high-pressure polyethylene plant of the Trina Solar Ordos Coal Deep Processing Demonstration Project, constructed by Sinopec Refining & Chemical Engineering Group’s Tenth Construction Company, was successfully commissioned after its initial feeding, and qualified products were produced. It marks the successful completion of the Zhongtian Hechuang project construction. It is reported that since the 120,000 tons per year batch-type high-pressure polyethylene plant built by Zhongtian Hechuang began operations in November 2014, thanks to the day-and-night efforts of the project team, various construction tasks have been completed, including the installation of 3,939 meters of underground pipelines, 1,654 tons of steel structures, 246 static equipment units, 163 dynamic equipment units, process pipelines with a total length of 97,857 inches, as well as 152,000 meters of electrical and instrumentation cables. The plant utilizes EXXON MOBILL autoclave process technology, with a capacity of 120,000 tons per year. This process uses ethylene as a raw material and an organic peroxide mixture as an initiator; under high temperature and pressure conditions, synthetic resin is produced through the free radical polymerization of ethylene. The low-density polyethylene products manufactured by this device have a low density, good flexibility, as well as excellent low-temperature resistance and chemical stability. These products are mainly suitable for thermoplastic processing methods such as coating, injection molding, extrusion, blow molding, and thermoforming. The Zhongtian Hechuang project is currently the world’s largest coal-to-olefins project, with a total investment of around 60 billion yuan. Upon completion, the capacity for producing olefins from methanol will reach 3.6 million tons per year, utilizing the S-MTO technology developed through a partnership between Sinopec Refining & Chemical Engineering and PetroChina Corporation. On June 30, 2016, after the main production unit of the Zhongtian Hechuang coal deep processing demonstration project was put into operation, the methanol unit produced qualified methanol at 2:30 a.m. on September 24. The loop polypropylene unit produced qualified polypropylene pellets at 9:20 a.m. on October 23, while the linear polyethylene unit produced qualified polyethylene pellets at 3:21 p.m. on October 26. The commissioning of the first series of units in this chemical project was successful from the very first attempt. The Zhongtian Hechuang Ordos Coal Deep Processing Demonstration Project was established through a joint venture by four shareholders (China National Coal Energy Group Co., Ltd. holds 38.75% of the shares, Sinopec Corporation holds 38.75% of the shares, Shanghai Sheneng Group Co., Ltd. holds 12.5% of the shares, and Inner Mongolia Manshi Coal Group Co., Ltd. holds 10% of the shares). The project was designed in its entirety by Sinopec Refining & Chemical Engineering (SEG), and it includes production units such as gasification, purification, methanol synthesis, methanol-to-olefins, and polyolefins, as well as supporting utility systems including air separation plants, power boilers, circulating water systems, and tank farms. Sinopec Ningbo Engineering Co., Ltd. (SNEC) serves as the main contractor, being responsible for the coal-to-methanol section; Sinopec Engineering Construction Co., Ltd. (SEI) is in charge of the olefin section, while Sinopec Shanghai Engineering Co., Ltd. (SSEC) is responsible for the three polyolefin units. On August 7, 2017, the coal-to-olefins project in Qinghai Province, with a total investment of around 21.1 billion yuan, was approved by the Qinghai Provincial Commission of Economy and Information Technology. On August 7, 2017, the Qinghai Provincial Commission of Economy and Information Technology issued a approval notice regarding the 600,000 tons per year olefins project of Qinghai Mining Group Co., Ltd. (Qing Jing Xin Tou [2017] No. 281). In June, the Ministry of Environmental Protection issued the “Reply on the Environmental Impact Report for the 600,000-ton/year Olefins Project of Qinghai Mining Group Co., Ltd.” (Document No. Huan Shen [2017] 64), officially approving the application for an environmental impact assessment for the project. In June, a new investor was brought in for Qinghai Mining’s 600,000-ton/year olefins project. Under the signed investment cooperation agreement, China Energy Engineering Group and Qinghai Provincial State Investment Company will jointly fund the construction of a 600,000-ton coal-to-olefins project in Qinghai. Qinghai Mining Group Co., Ltd.’s 600,000 tons per year olefin production project: Location – Golmud Industrial Park, Golmud City, Haixi Mongol and Tibetan Autonomous Prefecture, Qinghai Province. Developer – Qinghai Mining Group Co., Ltd. Project overview: Using local coal as raw material, this project employs processes such as gasification, methanol synthesis, and methanol-to-olefins conversion to produce 260,000 tons per year of ethylene and 415,400 tons per year of polypropylene. The construction contents mainly include: (1) Main projects: 10 production units, including air separation, coal gasification, shift reaction, low-temperature methanol washing, sulfur recovery, methanol synthesis, MTO, MTBE/butene-1, olefin conversion, and polypropylene. (2) Utility systems: circulating water system, thermal power station, flare system, etc. (3) Storage and transportation engineering: coal storage and transportation, tank farms, warehouses, etc. (4) Environmental protection projects: wastewater treatment systems, recycled water treatment systems, exhaust gas treatment facilities, etc. The total investment in the project amounts to 21.144 billion yuan, of which 1.593 billion yuan is allocated to environmental protection measures, accounting for 7.5% of the total investment. Qinghai Mining Group Co., Ltd. is a joint-stock company established by Qinghai Muli Coal Development Group Co., Ltd., in partnership with other original developers of the Muli coal mines such as Yima Coal Industry Group Co., Ltd., Qinghai Qinghua Mining, Metallurgy and Coal Chemical Group Co., Ltd., and China Railway Group Co., Ltd. Process flow: The 600,000 tons per year olefins project of Qinghai Mining Group Co., Ltd. covers an area of 251.2 hectares. It uses coal from the Yuka, Dameigou, and Muli coal mines as raw material, and through dry powder coal pressurized gasification and purification, purified gas is produced; this purified gas is then used in a methanol production facility to generate MTO-grade methanol intermediates ； MTO-grade methanol is first catalytically converted in an MTO unit to produce light olefins, which are then separated to yield products such as polymer-grade ethylene and polymer-grade propylene ； Polypropylene products are produced by polymerizing propylene and then extruding it into granules. Among them, ethylene is transported outside the comprehensive utilization product pipeline and sent via pipeline to the ethylene receiving area of the integrated salt lake magnesium project at the Chaharhan major industrial base, where it serves as a raw material for producing polyvinyl chloride (PVC) from the by-product chlorine gas generated in the second phase of Salt Lake Group’s integrated magnesium project. The product strategy for the future industrial base focuses on coal-to-olefins as the core production method. For ethylene, downstream products such as polyethylene and EVOC will be developed; for propylene, downstream products like polypropylene and polyacrylonitrile will be prioritized. Efforts will be made to establish four key industrial chains: \"Ethylene-chloroethylene-HDPE/LLDPE/CPE\", \"Ethylene-vinyl acetate-EVOC\", \"Propylene-polypropylene-appliances housings/plastic fittings/translucent PP\", and \"Propylene-polyacrylonitrile-polyacrylonitrile\", thereby forming the backbone for the development of a new type of coal chemical industry. Construction contents: The main components of the project include: a 1.8 million t/a coal gasification-based methanol production plant and a 600,000 t/a methanol-to-olefins plant. It produces 260,000 tons per year of ethylene and 415,400 tons per year of polypropylene; the by-products include 17,100 tons per year of sulfur, 4,550 tons per year of MTBE, 16,800 tons per year of butene-1, 14,400 tons per year of isobutane + C4+, and 9,400 tons per year of C5+ and C6+. The intermediate products are 1.89472 million tons per year of MTO-grade methanol (95%) and 640 tons per year of hydrogen. Auxiliary facilities include 4 thermal power plants with a capacity of 260 t/h, a central control room, a central laboratory, and a comprehensive office building. On August 8, 2017, the Shenhua Baotou coal-to-olefins upgrade project, with a total investment of around 17.1 billion yuan, was approved by the Inner Mongolia Development and Reform Commission. Six years later, Shenhua is expanding its investments in coal-to-olefins projects once again. On August 8, China Shenhua Energy Co., Ltd., which is on a suspension for restructuring (hereinafter referred to as “China Shenhua”), issued a statement stating that its Baotou coal-to-olefins upgrade project (hereinafter referred to as the “Phase II project”) has been approved by the Inner Mongolia Development and Reform Commission. The total investment in this project is approximately 17.15 billion yuan, with 5.145 billion yuan coming from project equity funds. Upon completion, the project is expected to produce 750,000 tons of coal-derived olefins per year, including 350,000 tons of polyethylene and 400,000 tons of polypropylene. China Shenhua stated that its subsidiary, Baotou Coal Chemical Company, will handle the necessary procedures related to resource utilization, safe production, and environmental protection in accordance with relevant regulations, and that the start-up and construction timelines for the project are uncertain. Cai Can, an energy and chemicals researcher at Cinda Futures, told a reporter from Caixin that after the project is approved, it must go through stages such as construction, environmental inspections, trial operations, and pilot production, which will take at least another two to three years. The site of the second-phase project is the Shenhua Science and Technology Park in Jiuyuan Industrial Park, Baotou City. Currently, Shenhua’s subsidiary Baotou Coal Chemical has an olefins production project (referred to as Project Phase I) in the industrial zone of Halingger Town in Baotou, with an annual production capacity of 600,000 tons of olefins, including 300,000 tons of polyethylene and 300,000 tons of polypropylene. According to the official website of China Shenhua Coal-to-Oil Chemical Co., Ltd., the first phase of this project was the world’s first and largest coal-to-olefins facility. The project was approved in December 2006, construction was completed in May 2010, and it began commercial operation in 2011. In January 2013, the project failed to pass the inspection by the environmental protection authorities, resulting in a shutdown order from the ministry. The second-phase project, originally named the Shenhua Baotou Coal-to-Olefins Expansion Project, will be planned and constructed on the basis of the space reserved for existing facilities and the supporting production infrastructure from the first-phase project. The project received support from Wang Zhonghe, the former Party secretary of Baotou. In June 2016, Wang Zhonghe traveled to Beijing to meet with Zhang Yuzhuo, then chairman of China Shenhua Group. He said that the first phase of the project had spurred the development of coal chemical industries in Baotou and contributed to regional economic growth, and he promised to treat the second phase as a top priority, providing full support for its initiation and accelerating the completion of the necessary procedures. The Shenhua Baotou coal-to-olefins project uses coal as raw material to produce methanol through coal gasification, converts methanol into olefins, and further transforms these olefins into polyolefin products such as polyethylene and polypropylene, thereby achieving clean conversion and utilization of coal. Olefin products represented by polyethylene and polypropylene are important basic compounds, which are primarily used in industries such as plastics, pipes, household appliances, automobiles, and organic solvents. “The financial prospects are fairly good. According to Cai Can, there are currently five main methods for producing olefins in China: oil-based production, coal-based production, the use of imported methanol, the use of imported propylene, and propane dehydrogenation. The most common methods are oil-based and coal-based production. For polypropylene, oil-based materials account for about 50%, while coal-based materials account for around 30% ； For polyethylene, about two-thirds is derived from oil, while around 20% comes from coal. Prema Viswanathan, associate director analyst for the chemicals industry at S&P Global Platts, told Caixin reporters that coal costs account for roughly 25% of the total costs associated with coal-to-olefins production, while crude oil costs make up 76% of the total costs for oil-to-olefins projects. Based on the above analysis, it can be seen that the profitability of olefin products is significantly affected by fluctuations in oil and coal prices. With coal prices expected to rise due to capacity reduction efforts, and oil prices remaining low, why is there a need to increase investment in coal-to-olefins projects? China's resource endowment is characterized by \"low oil reserves, limited gas reserves, and abundant coal reserves.\" To break free from these constraints, an energy strategy of replacing oil with coal was proposed. In 2004, China’s medium- to long-term energy development plan called for accelerating the progress of coal liquefaction projects, encouraging the development of related coal conversion initiatives. The \"13th Five-Year Plan for Energy Development\" issued by the National Development and Reform Commission at the end of 2016 explicitly states that it is necessary to \"develop deep coal processing in an orderly manner, and steadily advance pilot projects for the upgrading of coal-based fuels and coal-based olefins.\" In 2010, China’s first coal-to-olefins plant came online; coupled with rising oil prices at that time, ongoing technological improvements, and policy support, more and more such projects were launched. According to a report by Cinda Futures, as of the end of April 2017, 11 coal-to-olefins plants were in operation in China, with a total production capacity of around 7.27 million tons, and an annual output of approximately 6.17 million tons. What impact will rising coal prices and falling oil prices have on coal-to-olefins projects? Cai Can pointed out that with the sharp drop in oil prices in 2014 and the rise in coal prices over the past two years, companies may reconsider the planning and timing for the commissioning of coal-to-olefins projects. In fact, the implementation of existing coal-to-olefins projects has been delayed, and the uncertainty surrounding several units that were originally scheduled to come online within this year is also increasing. Although the profits from coal-based olefins remain considerable at present, they are much lower than before the decline in international oil prices. Viswanathan told Cai Xin reporters that the profitability of coal-based olefins dropped significantly, from $907 per ton in June 2014 (equivalent to about 5,596 yuan at the average exchange rate of 6.17 on June 1, 2014) to $283 per ton in April 2017 (equivalent to about 1,953 yuan at the average exchange rate of 6.90 on July 1, 2017). Cai Can pointed out that at the current oil price of $50 per barrel, the profits from coal-based olefins and oil-based olefins are roughly the same. In the first half of 2016, when oil prices fluctuated between $40 and $50 per barrel, coal-based olefins still managed to be profitable. She said that the threshold for the economic viability of coal-based olefins should be between $30 and $40. However, she also pointed out that it will take at least two to three years before the impact of the project can be seen. For Shenhua, the cost advantage associated with its own coal resources is an important factor ensuring the profitability of its coal-to-olefins projects. According to the environmental impact assessment report, the raw coal used in the second phase of the Baotou project comes from three coal mines: the Burtai Coal Mine, the Cuncauta No. 2 Coal Mine, and the Shangwan Coal Mine in Inner Mongolia. In fact, most coal-to-olefins projects are developed and operated by coal companies. According to rough estimates by industry experts, Shenhua benefits from lower costs associated with using its own coal mined at the source, with costs being around 300 yuan per ton or less. The cost of producing methanol through coal gasification is approximately 1,200 yuan per ton. When this methanol is further converted into olefins and then processed into polyethylene and polypropylene products, the cost is around 5,000–6,000 yuan per ton. Currently, the market price of polyethylene and polypropylene is around 8,000–9,000 yuan per ton, and prices have been on the rise since the beginning of this year. According to China Shenhua’s 2016 annual report, the sales prices of polyethylene and polypropylene in that year were 7,222 yuan per ton and 5,958 yuan per ton, respectively, while the unit production costs were 5,133 yuan per ton and 4,843 yuan per ton, respectively. The coal chemical industry business (i.e., the Baotou Phase I project) generated revenue of 4.83 billion yuan in 2016, a 13% decrease on a year-on-year basis; its gross margin was 21.3%, down 2.9 percentage points from the previous year, while its operating profit amounted to 255 million yuan. Primarily affected by low oil prices, the selling prices of olefin products have declined. Environmental challenges: Coal-based olefin production generates large amounts of waste materials and carbon dioxide during the manufacturing process, and finding ways to manage and supervise this issue represents a significant challenge. Viswanathan went even further, stating that environmental concerns are the most significant factor determining the future of coal-based olefin projects. She said that coal-based olefin projects are generally located in western regions with scarce water resources, and their water consumption is four to five times that of oil-based olefin projects. After the first phase of the project was put into operation, Shenhua faced strong criticism for discharging large amounts of wastewater directly into the Yellow River and contaminating its water sources. After being fined by the Ministry of Environmental Protection in January 2013, Shenhua passed the environmental impact assessment conducted by the ministry in February of the same year. After that, according to media reports, Shenhua discharged wastewater into a new water source through tailrace projects, which eventually ended up flowing into the Yellow River. Financial news reporters have not yet found any updates. Regarding the high pollution issue associated with coal-based olefin projects, Cai Can said that on one hand, companies are trying to improve their technologies, with firms such as Sinopec and Shenhua conducting experiments to reduce pollution ； On the other hand, **strict inspections are also being carried out on pollution issues. To reduce carbon dioxide emissions, imposing a carbon tax might be one approach, but Viswanathan is not optimistic about this. Imposing a carbon emission tax and supporting the development of the coal chemical industry are, to a large extent, contradictory to each other. The environmental impact assessment report for the second-phase project indicates that the investment in environmental protection measures for this project is estimated to be 2.1 billion yuan, which mainly includes the treatment of process exhaust gases, flare systems, the construction of new sewage treatment facilities, and measures to prevent groundwater contamination. In its annual report, Shenhua stated that in 2016, the company spent approximately 27 million yuan on environmental protection efforts at the Baotou Coal Chemical Industry Company (i.e., the Phase I project), primarily for the renovation of desulfurization and water-saving facilities.