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Protecting the Healthy Development of the Modern Coal Chemical Industry Author/Source: Sinochem New Network Date: April 8, 2020 Clicks: 5 In the first quarter of this year, the petrochemical industry experienced significant divergence as a result of the spread of the pandemic and the sharp drop in oil prices. The trends for chlor-alkali products, pharmaceutical intermediates, and certain new chemical materials are positive, and the profitability of some fertilizer and refining companies has improved. Meanwhile, the prices of bulk petrochemical products have dropped significantly, while the prices of coal-based chemical products have fallen below their cost of production, resulting in widespread losses for these companies. In particular, modern coal chemical industries, represented by coal-to-oil, coal-to-gas, coal-to-olefins, and coal-to-ethylene glycol, are in a difficult situation facing challenges on both the internal and external fronts. The two key indicators of the modern coal chemical industry are crude oil and coal, but in the first quarter these two indicators moved in opposite directions. On April 1, NYMEX May crude oil futures and Brent June crude oil futures dropped to $20.31 per barrel and $24.74 per barrel respectively, representing a decline of over 60% from the beginning of March. However, coal prices remained strong; on April 1, the Bohai Rim thermal coal price index stood at 546 yuan per ton, showing a decline of only 1.8% compared to the beginning of March. According to experts’ calculations, when domestic coal prices are linked to international crude oil prices, the break-even points for coal-to-oil/gas, coal-to-ethylene glycol, and coal-to-olefins in China are 60 dollars per barrel, 50 dollars per barrel, and 45 dollars per barrel, respectively. However, under the current price system, the prices of coal and coal-based products are severely inverted, causing the entire modern coal chemical industry to fall below its break-even point. Taking the production of ethylene glycol from coal as an example, on April 1st, the futures contract for ethylene glycol for 2005 closed at 2,926 yuan per ton, setting another record low, with a decline of over 40% since the beginning of the year. In order to retain their customers, some manufacturers even offered prices as low as 2,800 yuan per ton, while the current average cost in this industry is around 4,500 yuan per ton. To maintain production, companies have to bear losses of around 2,000 yuan per ton, putting significant pressure on their operations. At present, in China, there are coal-to-ethylene glycol production facilities that have been shut down, including 3 facilities belonging to Henan Coal Industry with a total capacity of 600,000 tons per year, 1 facility owned by Hubei Fertilizer with a capacity of 200,000 tons per year, 1 facility operated by Yangquan Coal Group Pingding with a capacity of 200,000 tons per year, and 1 facility owned by Xinjiang Tianying with a capacity of 150,000 tons per year. In total, this amounts to 1.15 million tons per year of capacity that is currently not in use. It is estimated that another 1.2 million tons per year of production capacity may be shut down in the future. If all the above facilities shut down due to losses, the operating rate of domestic coal-based ethylene glycol plants will drop to around 50%. And the market space created by these production stops could soon be taken over by foreign manufacturers. Over the past few years, with the commissioning of new petrochemical production facilities in the Middle East, large amounts of ethylene glycol have flowed into the country, with imports reaching 9.947 million tons last year. Recently, affected by the decline in international crude oil prices, the CIF price of ethylene glycol produced from imported oil for delivery in April was only 2,780 yuan per ton, which is about 10% lower than the current market price in China. According to a notice from the Tariff Commission of the State Council, ethylene glycol will be eligible for tariff reductions starting from March 2nd. As a result, ethylene glycol imported via overseas oil routes will have a lower cost advantage, which is bound to impact the domestic market. Coal-to-oil and coal-to-gas are strategic reserve technologies in China, while coal-to-olefins and coal-to-ethylene glycol are of great significance for reducing dependence on foreign crude oil and ensuring China’s energy security. At present, coal-to-oil and coal-to-gas projects in China are part of the strategic plans of **-tier energy companies, and these projects can still cover their losses through other products. Other modern coal chemical projects are mostly operated by local state-owned enterprises and private companies; they are of smaller scale and have relatively weaker risk resistance. Even if companies strive to improve their internal operations and reduce costs to increase revenue, this is not enough to cover the huge losses; once they are forced to halt production due to a lack of cash flow, the market they have worked hard to build over many years will disappear. The widespread losses and closures of enterprises not only affect the livelihoods of hundreds of thousands of employees but also result in the waste of substantial investments made earlier on. Therefore, given the current situation, in addition to guiding and supporting modern coal chemical enterprises in carrying out technological upgrades, diversified co-production, and expanding into downstream areas, **policy intervention at a higher level is also necessary. First, closely monitor changes in the prices of bulk commodities and implement necessary policy adjustments. It is recommended that **the relevant authorities, after conducting comprehensive research, implement reasonable quota systems for imported chemical products such as ethylene glycol, and use tariffs to prevent cheap dumping by foreign products, thereby protecting the interests of domestic enterprises and the development of the industry. Second, it is necessary to adopt measures tailored to specific industries and enterprises, and to reward those who perform well and support the stronger ones. Temporary electricity pricing incentives are provided to leading enterprises, key players, and those with the highest energy efficiency in the modern coal chemical industry, to help them overcome difficulties. Third, strengthen guidance through industrial policies and strictly regulate the approval of projects with excess capacity. **Relevant departments should strengthen macro-control and make comprehensive plans for industries that are crucial to the country’s economy and people’s livelihoods as well as to energy security. Provinces should also enhance their analysis and forecasting capabilities, impose strict restrictions on unplanned investment in industries that are already overcapacity, approve projects in industries showing signs of saturation with caution, actively guide the development of technologies and products that are in short supply domestically, and use policies related to energy conservation and environmental protection to accelerate the phasing out of outdated production capacities.