Deloitte: The cost-benefit break-even point for coal-based olefins is $80 per barrel of oil

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This post was last edited by jordan569 on 2013-1-6 at 19:56. On December 3, Deloitte released its quarterly chemical industry report for the fourth quarter of 2012, titled “China’s Coal-to-Olefins Industry Report.” According to this report, by the end of the 12th Five-Year Plan period, China’s annual olefins production capacity is expected to reach at least 56 million tons (including output from petroleum-based methods). However, the uncertainties surrounding new methanol-to-olefins projects could lead to further expansion of production capacity. Taking into account both the increase in new production capacity and the slowdown in demand growth, overcapacity may arise in the olefin industry in the coming years, and this overcapacity could even accelerate after 2015. Tuo Bingjie, manager of Deloitte’s chemicals industry practice, added that Deloitte’s forecasts are based on actual research, including statistics on capacity that has been put into operation and is highly certain to be utilized; in fact, they represent realistic and conservative estimates. Since the 11th Five-Year Plan, the coal-to-olefins industry has been identified in China as one of the priority areas for the development of advanced coal chemical technologies. The development strategy of \"diversifying raw materials\" further promoted the growth of this industry. All parties are actively exploring production routes for coal-to-olefins (CTO) and methanol-to-olefins (MTO), in order to provide a valuable supplement to the oil-based olefins production methods. 2011 marked the beginning of the commercialization of coal-to-olefins in China, with four production facilities coming online successively: Shenhua Baotou, Shenhua Ningmei, Datang Dolun, and Sinopec Zhongyuan. According to the Plan for Demonstration Projects of Advanced Coal Processing, during the period 2012–2015, 15 demonstration projects for the upgrading of coal chemical industries will be given priority, of which at least 5 will be coal-to-olefins projects. The main investors will include companies such as Sinopec and Shenhua Group. Sinopec has launched 4 coal-to-olefins projects in Inner Mongolia, Anhui, Henan, and Guizhou, making substantial progress; the total olefin production capacity has reached 3.1 million tons. According to a Deloitte report analysis, the estimated average gross profit margin during the period from April 2011 to April 2012 was around 35%. Compared to the traditional petroleum (naphtha) route, the coal-to-olefins route offers certain cost advantages. However, Yann Cohen, leader of Deloitte’s chemicals industry practice in China, told our reporter that the profitability of coal-to-olefins projects is greatly affected by fluctuations in oil and coal prices. According to the sensitivity analysis of Deloitte’s financial model, when oil prices drop to $80 per barrel, coal-based olefin projects may incur total losses. At the same time, the market is optimistic about coal chemical projects due to China’s abundant coal resources and low raw material costs. In response, Guanyang told our reporter that we expect companies with coal resources to have costs that are only 5-10% lower than those of other companies; this is mainly because coal and olefin products are accounted for separately, and a comprehensive calculation does not reflect the actual situation. **The NDRC’s strict control over the approval process for coal-based olefin projects is strong evidence of this series of regulatory measures. Overall, the National Development and Reform Commission currently oversees key aspects such as the location selection for new projects, construction speed, and technology choices, in an effort to prevent energy consumption and environmental damage that may result from the indiscriminate development of small-scale projects. However, for methanol-to-olefins projects, **no specific regulatory measures have been introduced yet, and further observation will be necessary in the future. Guanyang stated that the coal-based olefins industry still faces a range of challenges and risks that need to be overcome, such as the stability of coal prices and quality, the availability and cost of water resources, the reliability and maturity of MTO technology, as well as strong sales capabilities and a high level of integration in the downstream sector. At the same time, the carbon tax is a major source of uncertainty for coal-based olefin projects. According to estimates in some academic journals, compared to the oil-based route, coal-to-olefins production would incur an additional carbon tax of up to RMB 2,000 per ton of olefins, which would offset the cost advantages of the coal-to-olefins approach. . Note, ) # , . 。