Is it becoming harder to make money from coal-based olefins? Is an investment turning point approaching?

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Is it becoming harder to make money from coal-based olefins? Is an investment turning point approaching? Author/Source: Date: 2017-09-21 Clicks: 24 Since the beginning of this year, there have been an overwhelming number of reports regarding the launch of coal-based olefin projects, leaving it hard to keep up with them all. So, what is the current status of coal-based olefins, and are their profitability levels as claimed by outsiders? What will be the trend of development in the future? Hotspots in investment for coal-based chemical industries: In just over the past month, reporters from China Chemical Industry News have learned of dozens of updates related to coal-to-olefins projects. The construction of the methanol-to-olefins plant in Jilin Cornell is progressing smoothly; the coal-to-olefins project in Anhui Zhongan United is also advancing well. Pucheng Clean Energy held a seminar to discuss the product plans for an upgraded demonstration project in this area. There are new developments regarding the 600,000-ton methanol-to-olefins plant under construction in Inner Mongolia Jiutai. The 1 million tons per year methanol-to-olefins project in Taizhou operated by Huisheng is moving forward. Shaanxi Yanchang Zhongmei signed contracts for long-term equipment supply for its coal-to-olefins project. The overall design review for Feihong Chemical’s 1 million tons methanol project has been completed. Data from the China Petroleum and Chemical Industry Federation and the China Nitrogen Fertilizer Industry Association show that in 2017, China’s planned coal-to-olefins production capacity was expected to reach 4.01 million tons, requiring 12.03 million tons of methanol. However, the country’s own methanol production capacity was only 7.4 million tons, meaning there was a need for an additional 4.63 million tons of methanol to be purchased. This year, China’s planned methanol production capacity is 3.2 million tons per year; thus, the additional demand for methanol for coal-to-olefins production alone is 1.43 million tons more than the additional methanol production capacity available. 　 According to research by journalists, as of August 2017, there were 27 coal/methanol-based olefin production facilities in China in operation, with a total olefin production capacity of 14.15 million tons and a polyolefin production capacity of 11.06 million tons, of which 4.19 million tons were PE and 6.87 million tons were PP. The majority of the downstream processing facilities are dedicated to polyolefins. In our country, there are 7 enterprises engaged in the production of coal-based olefins, with a total olefin production capacity of 3.6 million tons and a polyolefin production capacity of 3.56 million tons. Of this, the PE production capacity is 1.65 million tons, while the PP production capacity is 1.94 million tons. China plans to build 47 methanol-to-olefins plants, resulting in an olefins production capacity of at least 24.56 million tons. As the details of the polyolefin projects associated with some enterprises are unclear, based on the available information, the amounts are at least 5.85 million tons for PE and 4.98 million tons for PP. In summary, there are as many as 81 coal-to-olefins projects in China that have been built, are under construction, or are planned to be built, with a total production capacity of 42.31 million tons. It is becoming increasingly difficult to make money year by year. Making profits from coal-based olefins is getting harder and harder, as reported by reporters from China Chemical Industry News – and this is an undeniable fact. Since in the past, olefins were produced through petroleum-based methods, with one industry dominating the market, prices were largely controlled by the \"Big Three oil companies,\" giving rise to a certain degree of monopoly. As a result, prices remained relatively high and stable, allowing companies to earn substantial profits. The reporter specifically examined the Shenhua Baotou Coal-to-Olefins project, which is the most representative in China’s olefins industry. Between 2012 and 2016, its profitability declined year by year as crude oil prices fell, but it still managed to generate some profit throughout that period. For example, the gross sales margins in 2012, 2013, 2014, 2015, and 2016 were 1.8 billion yuan, 2.13 billion yuan, 2.06 billion yuan, 1.35 billion yuan, and 1.029 billion yuan respectively. However, in comparison, gross profit shows a downward trend year by year. The reporter learned that China’s early coal-to-olefins plants, which came online in the early stages, also benefited from a favorable market situation and reaped huge profits; the Shentou Baotou coal-to-olefins project is one of them. However, in recent years, as the production of olefins from coal has progressed at an accelerating pace and the resulting capacity has grown significantly, it now accounts for around 27% of the market share, exerting considerable pressure on prices. Meanwhile, since the second half of 2014, international oil prices have dropped significantly from over $100 per barrel to a range of around $40-$55 per barrel. The decline in oil prices directly pressures polyolefin prices, resulting in a significant drop in the profitability of coal-based olefin projects. Along with the continuous decline in international crude oil prices, the olefin market has also dropped all the way to its current level, having fallen by nearly half compared to its peak prices. According to public information available on three influential domestic companies that produce olefins from coal, in 2016, Pucheng Clean Energy, Shenhua Baotou, and Yanchang China National Coal Group Yulin Energy Chemical all achieved certain levels of profitability. Pucheng Clean Energy Chemical Co., Ltd. achieved a gross profit of 353 million yuan ； Shenhua Baotou Coal Chemical Co., Ltd. achieved a gross profit of 1.029 billion yuan ； The extension of China Coal Yulin Energy Chemicals resulted in a gross profit of 845 million yuan. From January to June 2017, all three companies continued their strong performance seen in 2016. Although the disclosed data is incomplete, there was still some profit generated; for example, the gross profit of Yulin Energy Chemicals under China Coal increased by 560 million yuan. Judging from the operational performance and gross sales margins of these companies, although they still generate some profit, it is no longer possible to see the high levels of net profits in the hundreds of millions of yuan that were common in previous years. When it’s time to brake, industry experts argue that, based on three factors, China’s coal-based olefin production cannot continue at this rapid pace; otherwise, the consequences could be severe. First, the market is becoming saturated, leading to excess capacity. Market analysts believe that China’s consumption of polyolefins in 2016 was 45 million tons, while the country’s production capacity for polyolefins reached nearly 40 million tons. Supply and demand are generally in balance, with an oversupply of low-end polyolefin products existing. Due to the relatively low prices of imported olefins, further intensification of competition in the international market will result in unsatisfactory olefin prices. According to cost models developed by professional institutions for coal-based olefins, at current olefin prices of around 8,000 yuan per ton, factors such as a sharp rise in coal prices have caused the production costs of coal-based olefins to approach this price level. With few companies able to transfer internal coal-related profits to their olefin operations or achieve only modest profits, a considerable number of such companies are essentially unprofitable, and some even suffer heavy losses, facing severe difficulties. Secondly, petroleum-based olefins are set to see further growth. Looking at the share of the olefin market in our country, petroleum-based olefins still account for around 70%. In recent years, as international crude oil prices have remained low, the cost advantage of petroleum-based olefins has increased significantly. Recently, relevant policies were introduced; by 2020, China will have fully adopted ethanol-blended gasoline, and plans to phase out the sale of fuel-powered vehicles are under consideration. As a result, the country’s extensive refining capacity will have to be redirected toward downstream applications, which could lead to a significant increase in the supply of olefins. 　 Third, it will be impacted by more new technologies. The coal-to-olefins projects that are currently in operation in our country all first convert syngas into methanol, and then produce olefins from methanol using MTO or MTP technologies. The disadvantages of this technical approach are its complexity, numerous processing steps, and low conversion efficiency. Relevant organizations are developing a new generation of coal-to-olefins technology, which involves the direct production of olefins from purified gas, thereby eliminating the need for methanol synthesis. “During the 13th Five-Year Plan period, with the rapid development of coal (methanol) to olefins (CTO/MTO) and propane dehydrogenation (PDH) processes, China’s polyolefin production capacity and output will continue to increase, leading to further intensified competition ； As a result, existing coal-based olefin technologies may fall behind and become less competitive. At the same time, due to the insufficient supply of high-end polyolefin products in the domestic market and the heavy reliance on imports, the advancement of polyolefin products toward higher quality levels in order to replace imports will be a key focus for the upgrading of China’s polyolefin industry.