Can coal chemical industry fill the gap left by natural gas?

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Can coal chemical industry fill the gap left by natural gas? Author/Source: Yeeou.com Date: 10-14-2022 Clicks: 18 Perhaps, with rising prices of oil and gas, the European chemical industry could create more opportunities for China’s chemical industry, especially its coal chemical sector. Yet, China’s coal chemical industry remains a field that receives relatively little attention and develops in a quiet manner. Since the Nord Stream 1 and Nord Stream 2 gas pipelines were blown up by unknown actors on September 26, Europe’s energy crisis has become unstoppable. Although U.S. LNG supplies have helped to fill the gap left by Gazprom, French President Emmanuel Macron complained that the U.S. is selling natural gas to Europe at a price more than four times higher than usual. “This isn’t what true friendship is about,” he said. The “ship of friendship” may not have sunk yet, but the banner of environmental protection that Europe once held high is now teetering. Christopher Botshoff, head of the Danish Energy Agency, said that the carbon emissions resulting from the natural gas that leaked just a few days ago in this incident are equivalent to 32% of Denmark’s annual emissions, as methane has a much greater impact on the climate than carbon dioxide. But at this point, environmental protection is no longer an urgent matter. Will Europeans freeze in the winter? Many domestic self-media outlets have taken notice of the rising volume of electric blankets imported from China into Europe. Data from the China Household Electrical Appliance Association shows that from January to July this year, the total export value of electric blankets reached $33.4 million, a year-on-year increase of 97%. Despite the rapid growth rate, the export volume for electric blankets is still low; this faster growth may indicate that European consumers have realized the necessity of electric heating, but it doesn’t mean that Europeans will have to suffer from cold. In Europe, given the existing natural gas reserves, domestic heating can be ensured during winter. The so-called rush by Europeans to buy Chinese electric blankets actually exaggerates Europe’s heating crisis, while ignoring Europe’s industrial crisis. It should be understood that if natural gas prices quadruple, industrial enterprises in Europe that rely on natural gas as an energy source or raw material for chemical production will not be able to cope with such increases. Natural gas is to Europe what coal is to China. According to data from the IEA and Bloomberg, over 40% of the raw materials used in Europe’s chemical industry come from natural gas, and one-third of the energy used in production processes also relies on natural gas. In a survey conducted in July by the German Chamber of Industry and Commerce (DIHK) among 3,500 German industrial companies, it was found that about 16% of them believed it was necessary for them to reduce production or abandon certain business activities. Nearly two-thirds (63%) of the companies considered high natural gas prices to be a serious threat to Germany’s competitiveness. Peter Adrian, president of DIHK, also said: “Many companies have no choice but to shut down their production lines or move production elsewhere.” ”Even before the Nord Stream pipeline explosion occurred, the company was already anticipating such a large reduction in production. So, what about now? 01 Industrial Shift and the Revival of Coal: Europe is the world’s second-largest chemical industry hub (after China), and its technical capabilities in both petrochemical and natural gas chemistry are at the global *leading level. But now, European companies are not only reducing production; the shift of industrial chains is accelerating as well. Take BASF’s Zhanjiang integrated complex as an example, whose first unit came online in September. Acting as a comprehensive chemical production facility, it is BASF’s largest overseas investment to date, with a total investment amount of 10 billion euros. The first plant will increase the annual production of modified engineering plastics for the Chinese market by 60,000 tons, thereby raising the total production capacity of this product in the Asia-Pacific region to 420,000 tons starting from 2023 ； Another set of equipment for producing thermoplastic polyurethane (TPU) will also come online in 2023. BASF is not an isolated case. According to *Caijing*, as natural gas prices rise, more European energy and chemical companies are joining forces to invest in China: The third phase of the CNOOC-Shell Huizhou ethylene project was “virtually signed” in mid-September, both in China and the UK” ； TotalEnergies China and the Hainan International Economic Development Bureau signed a memorandum of cooperation to jointly promote the development of clean energy businesses and technologies ； German chemical company Covestro also recently announced new investment projects in China. While new production lines are being moved to countries such as China and the United States, the existing production lines in Europe face the possibility of being shut down. Back on June 29, The Wall Street Journal reported that BASF might shut down its chemical production site in Ludwigshafen, Germany, due to tight natural gas supplies. The Ludwigshafen chemical production site is BASF’s largest chemical facility in the world, employing nearly 40,000 people, which accounts for about one-third of BASF’s total workforce. Originally, according to the plan, once the Zhanjiang integrated production facility is fully completed by 2030, it will become BASF’s third-largest integrated production site worldwide, second only to the sites in Ludwigshafen, Germany, and Antwerp, Belgium. However, if the Ludwigshafen facility is shut down, and the Antwerp facility is constrained by shortages of natural gas and other resources, the Zhanjiang facility is likely to become BASF’s global *facility ahead of schedule once it is completed in 2030. In fact, major EU countries like Germany **are well aware of the dangers associated with cutting off natural gas supplies. Apart from natural gas, coal—which previously received little attention—has once again become favored as an important energy source and chemical raw material.** In June, the German Federal Ministry for Economic Affairs and Climate Action stated: “To reduce natural gas consumption, it is necessary to decrease the use of natural gas for power generation and instead make greater use of coal-fired power plants.” ” Following Germany, more European ** are also restarting projects that were originally planned to be phased out, such as coal-fired power generation. On June 16, Greece **postponed its plans to decommission its coal-fired power plants until 2028, and increased its planned coal mining volume for this year and next year; on June 20, Austrian Chancellor Karl Nehammer announced that his country would reactivate and modernize its power plant in the Mühlbach area “so that it can once again generate electricity using coal in case of emergencies”; on June 27, France’s Ministry for the Energy Transition issued a statement saying that it is currently “considering” reopening this March the coal-fired power plant in Saint-Avold, eastern France, this winter.** As early as mid-February, energy consultancy Rystad predicted that the outbreak of the Russia-Ukraine conflict would lead to an 11% increase in Europe’s coal demand. However, after the numerous **restarts of coal-fired power generation**, the demand for coal will only increase further. 02 There is no “LNG” problem in coal transportation. Although some argue that Europe’s existing coal industry was largely developed with a view to utilizing high-quality Russian coal, switching to coal of different qualities from other origins might pose compatibility issues. However, these problems can also be partially resolved by upgrading coal-fired power plants and establishing quality standards for imported coal. Especially in terms of transportation, coal is easier to transport than natural gas. Natural gas transportation in Europe relies either on pipelines (with Nord Stream 1 and 2, currently the most important ones, having been destroyed) or on LNG carriers. The repair and construction of the former require enormous costs, and cannot be accomplished in a short time ； The construction of the latter represents the highest level of technology in the global shipbuilding industry; only a few countries such as China and South Korea are capable of building them, and for some key components, there is only * one company in the world that can supply them. Due to the advanced technology involved, LNG carriers are typically leased for long periods, and in the short term, it will be difficult for Europe to mobilize enough such carriers to transport natural gas. According to the ship brokerage firm Poten&Partners, in 2021 there were over 700 LNG carriers in operation worldwide, all of which were mostly in the hands of private shipping companies and natural gas traders. The high demand for liquefied natural gas in countries such as China, Japan, and South Korea has made LNG carriers even more scarce. According to Clarkson Research, as the supply of shipping capacity continues to decline, spot rates for LNG carriers have risen sharply recently; the average spot rate for 174,000 cubic meter 2-stroke vessels increased by 36% on a year-on-year basis, reaching $297,500 per day. Even with such high rents, current shipowners still refuse to sublet their shipping capacity. Because some still predict that this winter, the daily charter rate for LNG carriers could reach up to $500,000 per day. However, renting is not as good as buying. Driven by strong demand, in the first half of 2022 alone, orders for LNG carriers exceeded 100, with a total value of $22.4 billion. As the only two countries in the world capable of building LNG carriers—China and South Korea—both will also reap substantial growth in their shipbuilding industries amid this surge in demand. The problem is that even if they didn’t care about the rent, Europe simply couldn’t charter a sufficient number of LNG carriers. In contrast, the construction of coal-carrying ships is less complicated, and their carrying capacity can be adjusted more easily. Although coal is not low-carbon, according to estimates by the International Atomic Energy Agency (IAEA), the carbon emission factor for coal or lignite when producing 1 kWh of electricity is twice that of natural gas, and 1.7 times that of fuel oil. But as long as coal remains cheap enough in comparison, even image-conscious Europe will have to increase its coal imports. The latest issue of the Coal Markets Report released by the U.S. Energy Information Administration shows that after remaining unchanged for a week in the week ending September 23, U.S. coal prices saw another significant increase in the week ending September 30, breaking through the $200 per ton mark for the first time. Driven by the damage to the Nord Stream pipeline, prices of thermal coal in Europe have recently risen to over $305 per ton. Even after the price increase, coal is still much cheaper than natural gas. According to data compiled by Bloomberg, LNG flows to northwestern Europe are at their highest seasonal level since 2016. Meanwhile, the weather agency Maxar stated in a report that temperatures across most of the European continent are expected to be higher than previously predicted over the next two weeks. Rapidly rising LNG import figures and warmer-than-expected weather also briefly alleviated panic in the European energy market. On October 10, the price of the near-term natural gas contract on Europe’s natural gas price benchmark, the Dutch TTF, dropped by 7.8%, to 144 euros per megawatt-hour. Since 1 megawatt-hour is roughly equivalent to the heat value of 100 cubic meters of natural gas, it can be estimated that natural gas prices in Europe have dropped to around 1.44 euros per cubic meter (which is approximately 9.99 yuan per cubic meter), while the tiered pricing for natural gas use by residents in Beijing is only 2.61 yuan per cubic meter. European natural gas prices are still more than three times those in Beijing, and this is already a relatively low level since the Nord Stream incident. In 2021, the EU imported 155 billion cubic meters of natural gas from Russia, accounting for 45% of its total imports. Data from the European Gas Pipeline Alliance show that as of the week ending October 4, Russia’s gas deliveries to Europe were about 82% lower than the same period in previous years. After losing Russian supplies, nearly half of the gap could not be filled. Europe holds an important position in the global supply chain of chemical products such as antioxidants, ethylene, acetic acid, MDI, TDI, and vitamins; these chemicals either require natural gas as an energy source or as a raw material. The shortage of natural gas will also disrupt the global supply of chemical products and affect Europe’s industrial standing worldwide. Too many people focus on the *share of Russian gas in EU imports, but in fact, the small Nordic country of Norway also exports a large amount of gas to the EU. According to Tianfeng Securities, in 2020, the 27 EU countries imported 155 billion cubic meters, 746 billion cubic meters, and 290 billion cubic meters of natural gas from Russia, Norway, and Algeria respectively, accounting for 39%/19%/7% of their total imports – a combined share of 65%. With Gazprom banned, U.S. LNG may not be a sufficient solution in the short term; Norway is more likely to be the main beneficiary. According to The Washington Post, oil alone generated $109 billion in export revenue for Norway, an increase of $82 billion compared to 2021. Just the day after the Nord Stream pipelines were bombed (September 27), the inauguration ceremony for the Baltic Gas Pipeline project was held in northwestern Poland. This project connects Norway’s gas fields to Poland via Denmark; it’s a case of only the new pipelines being celebrated, while the old ones go unnoticed. Frode Leversund, CEO of Gassco, Norway’s main pipeline operator, said: “For decades, I’ve seen both low and high prices.” ”This statement actually implies that since the EU is willing to accept low prices, it should also be prepared to bear high prices—whether it’s the public, politicians, or **, everyone must pay the price for their decisions. 03 Has the spring for China’s coal chemical industry arrived? The sources of raw materials in the chemical industry mainly include five categories: crude oil, natural gas, coal, crude salt, and ores. Among these, the first three fossil fuels are the three primary raw materials for the chemical industry. As the world’s* leading chemical industry hub, China differs from Europe in that it not only has large-scale petrochemical and natural gas chemical industries but also the world’s* largest coal chemical industry. While Europe pays the price, can Chinese chemical enterprises, particularly the coal chemical industry, see a turnaround? Coal chemical industry is divided into traditional coal chemical industry and modern coal chemical industry based on industrial maturity and development history. Traditional coal chemical industry refers to products related to coal coking, including coal-based synthetic ammonia (for fertilizers and building materials), coal-based coke (for iron smelting and non-ferrous metals), and coal-based calcium carbide (for PVC plastic products). Modern coal chemical industry integrates energy development and chemical technologies to achieve the integration of coal and the chemical industry. It primarily produces syngas, coal tar, as well as basic chemical raw materials or intermediate chemical products such as benzene, toluene, ethylene, olefins, alcohols, acids, and ethers through coal gasification, direct liquefaction, and indirect liquefaction. Petroleum and natural gas chemistry is primarily focused on producing important basic organic chemical raw materials such as \"triene triphenyls\" – benzene, toluene, xylene, ethylene, propylene, and butadiene. From these, intermediate organic chemical products such as alcohols, aldehydes, ketones, acids, esters, nitriles, ethers, and phenols are synthesized. Further processing allows for the production of high-molecular substances or fine chemical products such as synthetic fibers, synthetic resins, synthetic rubbers, pharmaceuticals, pesticides, coatings, fuels, and organic additives. These downstream industrial chains are interconnected with the development of related industries in coal chemical engineering; they can even substitute for each other. China's resource distribution is characterized by an abundance of coal, but a shortage of oil and gas. Constrained by oil and gas resources, China has a relatively high dependence on imports for petrochemical products; the reliance on foreign sources for crude oil, ethylene, aromatics, and ethylene glycol all exceeds 50%. However, in the coal chemical industry, China has *advantages*. One of the approaches to replacing petrochemicals through modern coal chemical industry is also a solution to address China’s energy landscape characterized by abundant coal, limited oil, and scarce gas. The coal chemical industry and the petrochemical industry exhibit a high degree of overlap and potential for mutual substitution. Taking olefins, an important chemical raw material, as an example, its production processes can mainly be divided into crude oil-based routes and coal-based routes. As the effects of the policies aimed at ensuring supply and stabilizing prices have become apparent since last year, coal prices have remained at a reasonable level. In the first quarter of this year, the average cost of coal-based olefins was 7,596 yuan per ton, which is significantly lower than the cost of oil-based olefins (9,600 yuan per ton). Moreover, the proportion of raw materials in the production cost varies between the two manufacturing processes. In the production of olefins from crude oil, the cost of raw materials (naphtha) accounts for 75%; in contrast, the cost of coal as a raw material in coal-to-olefins processes makes up only 22%. Even if coal prices rise, their impact on the overall cost of coal-based olefin production remains relatively minor. On the other hand, increases in oil prices will have a direct effect on the cost of producing olefins from crude oil. A research report by Western Securities states that as oil and gas prices continue to rise, domestic measures are in place to curb speculation in coal prices, giving coal chemical industries a clear cost advantage. Furthermore, the resource endowments differ between the eastern and western regions of the country. The total cost of coal produced in Xinjiang is close to 100 yuan per ton, while the cost of imported coal is less than 400 yuan per ton. In contrast, the current spot price of imported coal in the eastern regions exceeds 1000 yuan per ton, resulting in significant differences in costs for coal chemical enterprises in these two regions. In fact, current domestic coal chemical enterprises are mainly located in the western region, which is also related to the advantages of coal resources there. As the price gap between oil and coal widens, the profitability of petrochemical companies will decline, while the coal chemical industry in the western region is still in a period of growth. For example, the demonstration project for the selective utilization of coal to produce new chemical materials at Yulin Chemical Company of Shaanxi Coal Group, whose first phase was completed and put into operation in September, is the largest coal chemical project under construction in the world. The total investment planned for this project is around 125 billion yuan, with an annual capacity to process approximately 24 million tons of coal. However, on a global scale, petrochemicals based on crude oil and associated petroleum gases from oil and gas fields remain the mainstream. Apart from SASOL’s coal-to-oil project in South Africa and Great Plains’ coal-to-gas project in the United States, most of the large-scale industrial projects in modern coal chemical industry are located in China. It can be said that projects in modern coal chemical industry—such as coal-to-oil, coal-to-gas, coal-to-olefins, and coal-to-ethylene glycol—have seen large-scale commercial development only in China. According to AAIC’s analysis, looking at the entire coal chemical industry chain—from companies specializing in coal chemical technologies, engineering construction, and equipment manufacturing to those producing coal chemical catalysts such as Qixiang Tengda—China undoubtedly ranks among the world’s leaders in terms of product scale, technological innovation, and commercial applications. However, the leader in the petrochemical industry is Sinopec, but who is the leader in the coal chemical industry? I’m afraid very few people can say it. Among the two key enterprises in the coal chemical industry, China Coal Energy and China Shenhua, the revenue generated from coal chemicals in 2021 was 21.67 billion yuan and 5.85 billion yuan respectively. However, the proportion of coal chemical revenue in their total revenue remained relatively low, both staying below 10%. Compared to the petrochemical industry, the overall share of the coal chemical industry remains relatively small. For instance, the supply of olefins and ethylene glycol still primarily relies on non-coal-based production methods; coal-based ethylene glycol accounts for less than 40% of total output, while coal-based olefins make up just over 20%. Perhaps, amid the rising trend of oil and gas prices, Europe’s chemical industry will bring more opportunities to China’s chemical industry, particularly the coal chemical industry. Nevertheless, China’s coal chemical industry remains a relatively overlooked sector that develops quietly. 04 Concluding remarks: In China’s energy structure, coal accounts for a much larger proportion than oil and natural gas. Using coal as a chemical raw material to replace petroleum and natural gas, while utilizing petroleum and natural gas more as energy sources to replace coal combustion, is also an approach to addressing air environmental pollution and reducing carbon emissions. However, as mentioned earlier, China’s coal chemical industry is concentrated in the western regions. However, a major challenge currently faced in the development of coal chemical industry in the western region is the inverse distribution of water resources and coal resources. Li Shousheng, President of the China Petroleum and Chemical Industry Federation, pointed out that in Shanxi, Shaanxi, Inner Mongolia, and Ningxia—regions along the middle and upper reaches of the Yellow River—coal reserves account for 67% of the country’s total, while water resources make up only 3.85% of the national total. In these regions, water for coal chemical projects primarily comes from the Yellow River. However, with declining inflows from the Yellow River and continuously increasing water demand from these projects, the imbalance between water supply and demand will become even more pronounced in the foreseeable future. However, Jin Guozhong, an expert from the Dalian Institute of Chemical Physics of the Chinese Academy of Sciences, proposed another approach to solve this problem. He pointed out that, given the fact that coal is rich in \"carbon\" and \"oxygen\", modern coal chemical industry is more suitable for producing hydrogen-deficient products such as oxygenated compounds and aromatics. At the same time, it is also possible to make full use of the physical properties of coal; by employing advanced catalytic techniques, the large molecules in coal can be broken down into molecules of different sizes, thereby enabling the efficient production of the desired chemicals. This approach can **reduce carbon emissions and minimize or even eliminate the need for water. Of course, this places higher demands on catalyst research and development. At the same time, although coal resources are distributed in the opposite direction to water resources, they are distributed in the same direction as wind and solar energy resources. The regions in China where coal chemical industries are concentrated, such as Inner Mongolia, Xinjiang, and Ningxia, are also areas rich in new energy sources like wind and solar power. By utilizing the coal chemical hydrogenation method, hydrogen is first produced from electricity that would otherwise be wasted due to insufficient wind or solar power generation; subsequently, hydrogen is added during coal chemical processes such as coal-to-methanol production. This approach not only increases the range of products available from coal chemistry but also reduces carbon emissions. Whether in the context of coal, oil, and natural gas, or in the triad of coal, water, and wind/solar power, coal always plays the role of a stabilizing force. For China, in the process of achieving the \"3060 carbon peak and carbon neutrality\" goal, how to handle coal resources efficiently is also an issue that coal mining and deep-processing enterprises, as well as those in the subsequent industrial chains, must consider.