Summary of Research on the Four Major Coal-to-Olefins Projects in the Northwest

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Summary of the Investigation into the Four Major Coal-to-Olefins Projects in the Northwest Author/Source: Huahua Network Date: 2017-09-22 Clicks: 70 From September 4 to September 8, 2017, an investigation was conducted on several coal chemical enterprises in the Northwest, organized by the Dalian Commodity Exchange and the China Petrochemical Federation. These enterprises included Shenhua Yulin Energy Chemical Co., Ltd., China National Coal Group Shaanxi Yulin Energy Chemical Co., Ltd., Inner Mongolia China National Coal Group Mengda New Energy Chemical Co., Ltd., and Shenhua Baotou Coal Chemical Co., Ltd. I. Key points summary: 1. At present, the operating rates of coal-to-olefins plants in the northwest are relatively high, and their profits are good as well. Among them, those that purchase coal to produce olefins enjoy even better profits, around 1,500–2,000 yuan per ton, while those that use methanol for this purpose have lower profits, around 500 yuan per ton. 2. Currently, the inventory of coal-based polyolefins is relatively low; companies are seeing good sales performance, and there is also a high level of enthusiasm for production. The major overhauls at these companies have basically been completed, and there are no plans for major repairs in the short term; it is expected that production levels will remain high going forward. The future prices of polyolefins are viewed positively. 3. In terms of methanol, currently, given that the development of coal-to-olefins projects in the Northwest region is progressing well and profitability remains acceptable, there is a high demand for methanol in the surrounding areas. Apart from gas-based methanol producers that have shut down due to cost issues, coal-based methanol producers in the vicinity are likely to be enjoying good profits. Barring any special circumstances, these companies should be willing to maintain active production. In this region of the northwest where methanol prices are relatively low, methanol prices have been rising for several consecutive days; therefore, we remain optimistic about future methanol prices. II. Research findings
(1) Shenhua Yulin Energy and Chemical Co., Ltd.
1. Company overview
The trial operation commenced in December 2015. The project mainly includes a methanol-to-olefins plant, an olefin separation unit, a polyethylene plant, and a polypropylene plant. The production capacity is 300,000 tons per year of polyethylene and 300,000 tons per year of polypropylene. There are further CTC projects planned, including the 13 million tons per year Dabaochang coal mine along with the corresponding coal washing railway, a 4 million tons per year methanol production facility, and downstream facilities for producing olefins from methanol in a capacity of 1.51 million tons per year. The first phase of CTC is a 2 million-ton coal-to-methanol project, with the additional production of 400,000 tons per year of ethylene glycol. 2. Regarding raw materials, the manufacturer currently purchases methanol from external sources, acquiring it from methanol plants within a 300-kilometer radius for use in production. The designed production capacity of these local methanol plants is around 6-7 million tons per year, which is sufficient to meet the production needs, eliminating the need to import methanol. The methanol plants with which long-term cooperation exists in the surrounding area currently include Shenmu with a production capacity of 600,000 tons, Yankuang with 600,000 tons, and Kaiyue with 600,000 tons, which are sufficient to meet production needs. The pricing model for methanol procurement involves using the lowest regional prices. The lowest regional prices reported by three websites—Jinlianchuang, Zhongyu, and Zhuochuang—are averaged to determine the daily procurement price. Enterprises enter into long-term contracts with local methanol producers on an annual basis; settlements are made monthly. The monthly payment amount is calculated by multiplying the daily settlement price by the corresponding quantity of methanol purchased. The enterprise has 4 methanol storage tanks of its own, with a total capacity of 120,000 cubic meters, allowing it to store 96,000 tons of methanol; currently, around 50,000 tons of methanol are stored there. 3. Regarding inventory, the company’s storage capacity for polyolefins is approximately 10,000 tons each for polyethylene and polypropylene; currently, the inventory levels for each are 6,000 tons. There are also 28 warehouses in other locations; the total inventory level cannot be estimated. However, the production cycle for polyolefins is short, around 5-10 days, so inventory replenishment takes place quickly as well. 4. In terms of sales, the factory’s products are sold through the sales company affiliated with the group’s head office. The products produced by the group’s subsidiaries in Xinjiang, Baotou, and Yulin are all sold through the sales company located in Baotou. The factory is responsible for production, packaging, and loading; once the products are delivered to the sales company, it is this company that handles distribution. The sales model of the group company was such that, until June 2017, sales were primarily carried out through electronic platforms; the base price was determined based on the transaction prices from a few days prior, and then the items were listed on the platform for bidding, with the highest bidder winning. Under the online sales model, a 10% deposit must be paid first; upon completion of the transaction, the full amount has to be paid before goods can be picked up from the corresponding warehouse – payment is required before delivery. Since June this year, Sinopec and PetroChina have adopted a key-client channel, namely offline sales. They rate their major distributors and, based on online transaction prices, offer different rebates to respective clients for direct offline sales. The approach of developing offline sales involves, when prices decline, many customers choosing to place their orders with CNPC and Sinopec first; therefore, reaching agreements through offline sales helps to maintain market share during such price drops. Currently, the two sales methods employed by the Group’s sales company each account for 50%. Specialized materials such as high-pressure types are mainly sold offline, while general-purpose materials are mainly sold online. 5. In terms of environmental protection, it has little impact on enterprises. 6. In terms of the advantages of coal chemical processing, the quality of polyolefins produced through coal chemical methods is not much different from that of polyolefins produced from traditional oil-based processes; in fact, it can even be better. Rumors in the market suggest that some coal chemical products turn yellow due to insufficient addition of antioxidants, but this has nothing to do with their quality. The difference between coal-based chemical products and traditional oil-based products lies mainly in market acceptance; currently, coal-based chemical products are 400-500 yuan per ton cheaper than oil-based products, and this price gap is set to continue narrowing, or even reverse in the future. 7. In terms of costs, the ratio of raw materials to products in the factory is 3.2 tons of methanol per ton of polyolefin produced, with polyethylene and polypropylene accounting for half each; therefore, the purchase price of methanol has a significant impact on the cost of the products, with raw material costs making up 60–70% of the total cost of the products. Recently, the methanol production facilities in the Northwest region have been operating unreliably, leading to a rise in regional methanol prices. Currently, the price stands at 2,430. This price increase has significantly eroded companies’ profits; they jokingly say that all the profits are going to the methanol plants, and that they’re essentially working for those plants. 8. Regarding knowledge of futures, the company does not currently engage in futures trading, as the group does not participate in such activities on a unified basis. Therefore, for the company, the way to mitigate the risks associated with price fluctuations in the upstream supply chain is through the CTC project that it is currently carrying out – that is, building its own equipment for producing methanol from coal. Since the CTC project relies on coal mines, the cost of coal extraction is very low, at around 120 yuan per ton. The cost of the produced methanol is between 1,000–1,200 yuan per ton when it’s low, and 1,300–1,400 yuan per ton when it’s high, which is lower compared to the current purchase cost of over 2,000 yuan per ton. Additionally, the CTC project also produces ethylene glycol, and the profits from this are quite substantial. Additionally, companies are currently actively developing specialty materials. Although the cost of these materials is similar to or slightly higher than that of general-purpose materials, their selling price can be significantly higher. This serves as an effective way for companies to increase their profits. However, given that the market size for specialty materials is relatively small, they can only serve as a supplementary option. Although corporate profits are affected by methanol prices, the company still achieved a profit of over 100 million last year. Mainly, last year the average price of methanol was lower than that of the year before, but the average price of polyolefin products was higher than in the year before, and it is even higher this year; thus there is still a certain profit margin available. 9. In terms of logistics, the total cost of a product does not include logistics costs; the factory is responsible for loading the products onto vehicles, and once they arrive at the sales company, it is the sales company that handles the distribution. Most of the products are sent to various warehouses located in different locations, allowing customers to pick them up from the nearest one. In a small proportion of cases, the products are delivered directly to the customer’s home, but this accounts for only a very small percentage. Currently, for transportation, 30% is by road and 70% by rail, as road transport is more expensive while rail transport is cheaper. Regarding shipping costs, it’s about 400 for road transport and 380 for rail transport to Changzhou. 10. In terms of maintenance, the factory carries out regular minor repairs; generally, high-voltage equipment is shut down for 1–2 days per month for such repairs, while PP equipment requires minor repairs every 2 months. There was one repair that lasted over 10 days in the first half of this year, and major repairs are carried out once every two years. 11. Regarding the commissioning of new facilities, the CTC project is expected to come online by the end of 2020. (II) China Coal Shaanxi Yulin Energy Chemical Co., Ltd. 1. Company Overview: Established in 2010, the company has a coal-to-olefins production capacity of 600,000 tons per year, as well as coal mine projects with a capacity of 15 million tons (not yet built), and another coal mine project in Yan’an with a capacity of 5 million tons. 2. Raw materials: The plant is equipped with facilities for coal-to-methanol production, methanol-to-olefins conversion, olefin separation, and the production of polyethylene and polypropylene. Therefore, it needs to purchase coal. Since the Dahai Coal Mine has not yet commenced operations, and the Yan’an coal mines are quite far away, the plant sources its coal from nearby coal mines. Based on market prices, negotiations are held with the enterprise; settlements are made twice a month, and coal with a calorific value of over 5500 kcal is primarily purchased for production. In terms of consumption, 1 ton of polyolefin products requires 7.5 tons of coal (including both raw coal and fuel coal; the raw coal has an energy content of 5,800 kcal, while the fuel coal has an energy content of around 5,000 kcal and is used primarily for generating power, with a ratio of roughly 3 to 1 between the two). The cost of coal accounts for 40% of the total cost. The enterprise has 6 methanol storage tanks of its own, with a capacity of 120,000 cubic meters, allowing it to store 84,000 tons of methanol. 3. In terms of sales, they are handled uniformly by the group company, with online sales through platforms being the primary method, and no offline sales taking place. The selling price is based on the quotes provided by CNPC and Sinopec. China Coal’s product quality is high, and its price is 40–50 yuan per ton higher than that of similar coal chemical products on the market, mainly due to the high level of recognition it enjoys in the market. 4. Advantages of coal chemical industry: Regarding the future market share of coal chemical products, companies believe that this share has increased from a few percent in the past to 20% at present. Based on the production plans, it is intended to reach 50% around 2020; although this target may not be achieved, an upward trend over the years is evident. Compared to traditional oil-based products in the coal chemical industry, the cost advantage is influenced by both coal prices and oil prices. However, coal-based products require large initial investments, but their operating costs are relatively low later on. 5. In terms of environmental protection, it has little impact on enterprises. 6. In terms of maintenance, companies have maintenance plans in place; the first major overhaul in over two years since operation was carried out in April and May this year, as the equipment usually operates under overload conditions. Generally, major overhauls are carried out according to a plan and the actual operating conditions of the machine, while minor overhauls are scheduled when prices are low; major overhauls are usually done every 3 years. Companies generally do not adjust their production levels in response to price changes. Since the company has two sets of equipment for producing methanol from coal and olefins from methanol, it generally does not stop operating one of these sets unless there are extreme price conditions. However, situations such as a short-term shortage of methanol or the need to procure it from external sources due to maintenance, or the temporary sale of olefins when production is halted, are all short-term phenomena. 7. In terms of costs, it takes 3.13 tons of methanol to produce 1 ton of polyolefin products, with variable costs of around 5,000. 8. Regarding inventory, the company has a storage capacity of 30,000 tons; currently, the inventory level is around 15,000 tons, of which 8,000 tons consist of products that have already been sold. Sales are currently performing well. According to the company, inventory levels are somewhat seasonal. On average, they stand at 30,000 tons. During the Spring Festival period, inventory levels rise to 40,000–50,000 tons. In contrast, during the peak seasons for agricultural films—April–May and October—inventory levels drop to 10,000–20,000 tons. The company also has 14-15 off-site warehouses, which are rented. 9. Currently, the enterprises use general-purpose materials, with no specialized materials. 10. In terms of logistics, it is affected by weather conditions; for example, before the Spring Festival, poor weather makes roads difficult to use and vehicles hard to find. However, arrangements are made in advance to avoid inventory buildup. 11. In terms of profits, the company made a profit of 2.2 billion last year. This is mainly because the company purchases coal to produce methanol, which is then used to manufacture polyolefins; this significantly reduces production costs. A large portion of the profits comes from the coal-to-methanol process, resulting in higher profits compared to Shenhua Yulin. (III) China Coal Mengda New Energy Co., Ltd. 1. Company Overview: Testing began in April 2016, and the plant went into official operation on August 1 of this year. It is a facility capable of producing 600,000 tons of olefins per year, with an annual consumption of 1.8 million tons of methanol; methanol is purchased from external suppliers for use in the production of polyolefins. 2. Maintenance and restart: The average load last year was 106%, the maximum load was 115%, and the current load is 112%. The design load of the equipment is 70-110%. Generally, they operate at full capacity or even beyond it; reducing the load is only considered when there are problems with the equipment or when inventory levels are too high. However, the load is not reduced due to unfavorable market prices. The factory underwent a major maintenance campaign that lasted 33 days in June, with the next one expected in 3 years. There are virtually no minor repairs. 3. In terms of raw materials, when China Coal Mengda chose its location, it took into account the fact that Inner Mongolia Boyuan was located nearby. Inner Mongolia Boyuan has a methanol production capacity of 1.3 million tons, and together with Yuanxing’s 600,000 tons, this capacity is sufficient to meet Mengda’s needs. However, due to high natural gas costs, Boyuan has been shut down; currently only one production line is operating at a capacity of 400,000 tons per year. China Coal Yuanxing Energy has a production capacity of 600,000 tons; it is located 200 kilometers away from Mengda, and all of its output is purchased by Mengda. Currently, apart from Yuanxing Energy, Mengda also purchases methanol from plants within a 400-kilometer radius. There is ample methanol production capacity in the vicinity, ensuring stable supply. The purchase price is set according to market rates, with reference also being made to the prices listed on websites such as Jinchuang and Zhuochuang. As a major customer, a slight discount is also provided. The method for purchasing methanol is that China National Coal Group enters into large-scale framework agreements with nearby methanol plants, after which Mengda negotiates directly with them regarding prices and settlement, with settlements taken place on a weekly basis via advance payments. It is available in approximately that length, and there is a small amount in stock, but very little indeed, as the smaller methanol plants in the vicinity sell to Monda at lower prices, and they are also unwilling to sell to Monda in small quantities. Monda generally prefers to cooperate with large manufacturers capable of producing 300,000 to 600,000 tons, in order to ensure a stable supply of materials and consistent production. Whether the methanol purchased is of gas-based or coal-based origin, it makes no difference; as long as it is high-purity methanol that meets the manufacturer’s quality standards, it can be mixed together. The energy consumption for methanol is 3.05 tons of methanol to produce one ton of polyolefins. Raw materials account for 65-70% of the total cost, while equipment depreciation is calculated at 40 million per month over a period of 15 years; depreciation costs make up 7-8% of the total cost. The current profit is around 500. The methanol storage tank at the factory has a capacity of 70,000 tons. The monthly consumption is 150,000 tons, and the regular inventory level is maintained at around 80%, or approximately 50,000 tons. Yuanxing has pipelines that deliver methanol directly to the plant; therefore, there is no need to stockpile it. Even when methanol prices are low, the storage capacity remains limited. 4. Inventory-wise, currently the company’s storage capacity for PP, PE, and E is 10,000 tons each, with current inventories standing at 5,000 tons per product. This represents a decrease compared to the first and second quarters. Inventory levels typically peak during the Spring Festival, after which they decline. 5. In terms of sales, they are handled uniformly by China Coal Sales Company in Beijing; the factory is responsible only for production and loading, while the sales company is in charge of distribution. The warehouse in another location is the same as that of China Coal Yulin, and the products there are identical; both are sold by the Beijing-based sales company. Settlements with the sales company are also made at market prices. 6. In terms of costs, the company currently produces 300,000 tons of each of PP and PE; the amount of PE produced is slightly less, as PE is a copolymer made from the copolymerization of ethylene and butylene, while PP is a homopolymer, which means the production volume of PE is about 10% lower. In terms of cost, the production costs of PP and PE are roughly similar; however, PE is more expensive. Yet this does not lead to any changes in the ratio between the two, as there is already very little room for adjustment. Moreover, adjusting the equipment can reduce production speed, which is not cost-effective; therefore, PE’s proportion is generally not increased, even though it would result in higher profits. Currently, by-product C4 is also produced, mainly butylene, which is used for copolymerization; the annual production amount is around 100,000 tons, which is sufficient for copolymerization needs. If more is required, a small amount is purchased from outside. 7. Enterprises will appropriately adjust the bidding grades of plastics based on market sales conditions; however, they do not make adjustments according to changes in raw material prices. This is because the raw material used is always methanol, which differs from the petroleum-based supply chain. 8. Regarding transportation, the factory purchases methanol at the ex-plant price, and then bids for a transportation company to handle the delivery; it is a long-term contract with monthly payment for freight costs, which are approximately 80 yuan per ton, or 0.4 yuan per ton-kilometer. The product is sold at the factory price, with the factory only responsible for loading it onto the vehicle. 9. Environmental protection: Regarding ultra-low emissions in the central and western regions, it is required that these areas achieve such standards by 2020. Currently, Mengda meets the ** emission standards; however, it still falls slightly short of the ultra-low emission standards. For now, there is no impact on environmental protection, but the future remains uncertain. 10. Advantages of coal chemical industry: Regarding the advantages of the coal chemical industry over the oil chemical industry, manufacturers believe that from a resource perspective, China has abundant coal resources but limited oil reserves; therefore, developing the coal chemical industry aligns with China’s resource endowment. From an environmental perspective, **control over thermal coal is being imposed, and coal is moving towards the chemical industry – this will also be a major trend in the future. Regarding the price difference between PP and PE, manufacturers believe that due to the large-scale production of PDH, propylene prices will be lower in the future, and the impact of raw material costs prevents PP prices from rising. (IV) Shenhua Baotou Coal Chemical Co., Ltd. 1. Company Overview: The project was approved in 2004; the company was established in 2005. Trial operations began in August 2010, and the company entered full commercial operation in 2011. The company has a capacity of 1.8 million tons of coal-to-methanol and 600,000 tons of methanol-to-olefins. 2. Regarding raw materials, the company purchases coal from Shendong Coal Group, which is part of Shenhua Group. The distance is 150 kilometers; Shendong has a production capacity of 200 million tons, ensuring a stable supply. The factory has its own dedicated railway line, with 2 trains carrying raw coal arriving daily, and 1 train carrying thermal coal arriving every two days. fifteen years ago, the purchase price was fixed; it was around 300 or so. Starting from 2015, the Bohai Sea Index plus freight costs (the freight from Huanghua Port to Baotou) were used for settlement, with prices adjusted on a monthly basis. Currently, the purchase price for thermal coal is around 380, while that for raw coal is 450. In terms of energy consumption, 1 ton of polyolefin requires 5.5 tons of raw coal, and when thermal coal is taken into account, a total of 7.5 tons of coal are consumed. 1.6 tons of raw coal are required to produce one ton of methanol, and 3.05 tons of methanol are needed to produce one ton of polyolefins. For thermal coal, 4500 kcal coal is used, while for raw coal, 5500 kcal coal is utilized. The factory produces 95% crude methanol; it contains a small amount of impurities such as ethanol and propanol, which do not affect production and can be used directly in the production of polyolefins. 3. Regarding load, the current load is at full capacity; it has been between 100-110% since the second half of last year, and it was 105% from January to August this year. From January to August this year, 1.4 million tons of methanol and 450,000 tons of polyolefins were produced, generating revenue of 4 billion yuan and a profit of 400 million yuan. In terms of maintenance, since the company began operations, it carried out major maintenance campaigns lasting 30–40 days in the years 11/12/13/14. During those years, the annual production volume was around 500,000–550,000 tons, the operational rate was approximately 85%, and the annual profit amounted to 800–1,000 million. By 2015, a one-and-a-half-year maintenance cycle was implemented for the first time; since April 2016, no major repairs have been carried out. A 15-day minor repair is scheduled to take place next week, mainly due to the fact that winter is approaching in Inner Mongolia. Another major overhaul is planned for next April, so this means a major overhaul every two years; the goal is to achieve one such overhaul every 2-3 years in the future. During maintenance, the entire plant comes to a stop; the impact on production is roughly 1,700 tons per day multiplied by the number of days of maintenance. For example, the minor maintenance scheduled for next week is expected to result in a production loss of approximately 17,00 * 15, which is about 25,000 tons. The level of startup load has nothing to do with product prices; it is primarily determined by the operating condition of the equipment. Major repairs are usually planned half a year in advance, while minor repairs are more random. During maintenance, the procurement of corresponding raw materials will also be halted. A decrease in load is often due to some degree of catalyst deactivation; generally, the catalyst needs to be replaced every 2–3 years. 4. In terms of inventory, the factory has 3–5 days’ worth of raw material stock, while the product inventory is very low. The factory has a storage capacity of 15,000 tons, but currently only 5,000 tons are stored there. This is mainly because the factory has its own dedicated railway line for transporting products; railway transportation is inexpensive and not affected by weather conditions. As a result, the factory ships out its goods as soon as they are available, and there is no seasonal variation in its own inventory, which is different from factories that rely on road transportation. 5. In terms of sales, they are handled uniformly by Shenhua Baotou Sales Company, the same as in the case of Shenhua Yulin. 6. In terms of profits, the current profit margin for coal-based olefins is around 2,000 yuan per ton. Compared to traditional oil-based polyolefins, coal-based olefins can break even at oil prices of around $40 per ton; in other words, the cost advantage is not significant, as market prices are still determined by oil-based polyolefins. The company’s by-products include tetra-carbon and penta-carbon propanes, MTBE, etc., with production volumes of only a few tens of thousands of tons each; thus, the profits generated by these by-products are limited. The company’s main profits come from its core products. 7. When switching between different production grades, many factors need to be taken into consideration, including the inventory of butylene available, the sales performance of each grade in the market, as well as the additional costs associated with such a switch. Shenhua Baotou, together with its sales companies, determines the annual plan for grade switching based on these factors; it only takes 1 day to make a grade change. 8. In terms of environmental protection, supervision is quite strict; the environmental protection team comes by 4 days a week. However, since all production activities at Shenhua Baotou comply with regulations, this has no impact on actual production for now. As ultra-low emissions are to be achieved in the western regions by 2020, boilers are currently also being upgraded. 9. For the second-phase project, the polyolefin production capacity is 700,000–750,000 tons, of which approximately 400,000 tons are PP and 350,000 tons are PE. The project is currently undergoing environmental impact assessment, with production starting as early as next year, and output becoming possible by 2021 at the earliest.