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Chemical Industry Report Summary: The competition between coal-based chemical industry and petroleum-based chemical industry At present, the competition between China’s coal-based chemical industry and petroleum-based chemical industry exhibits the following characteristics. 1. The fuel methanol market has been launched and is growing rapidly, but it urgently needs to be regulated. Fuel methanol has a significant price advantage over gasoline. When the concentration of the additive is low, fuel methanol does not require any modifications to the vehicle, making it simple to replace gasoline with it. Over the past two years, driven by high oil prices, fuel methanol has seen rapid development. According to experts’ estimates, fuel methanol consumption was around 500,000 tons in 2003, rising to about 1 million tons in 2004. This rapid growth was driven primarily by market forces, without financial subsidies or mandatory measures similar to those for fuel ethanol, which demonstrates the strong market competitiveness of fuel methanol. However, the fuel methanol market urgently needs to be regulated. On the one hand, since **there have been ongoing disputes among departments and relevant experts regarding issues such as the safety of using fuel methanol and its potential for mechanical corrosion, the relevant **standards have not been established yet, resulting in a lack of regulatory guidelines for the development of fuel methanol. On the other hand, there is a phenomenon of methanol being illegally added to gasoline without the consumers’ knowledge, thereby harming their interests. 2. Dimethyl ether holds potential for development in the field of vehicle fuels, but its immediate target market is primarily limited to domestic gas use. Due to the different target markets for vehicle fuels and domestic gas, dimethyl ether has a different price positioning. Dimethyl ether is used as a vehicle fuel primarily to replace diesel, but under the current refined oil pricing system, it is not economical to use dimethyl ether instead of diesel. Based on a substitution ratio of 1.4 according to the calorific value, for dimethyl ether to replace diesel, its price should be 2,764 yuan per ton. Calculated at this price, even if the cost of the raw material methanol is 1,600 yuan per ton, dimethyl ether production facilities can only operate with minimal profits. Currently, the price of methanol in the central regions of China is around 2,000 yuan per ton, while it is higher in the eastern regions. Moreover, given the current price ratio of diesel to gasoline, there is a structural contradiction between using methanol to replace gasoline and using dimethyl ether to replace diesel. The consumption rate for producing dimethyl ether from methanol is 1.4–1.5 tons per ton. The main methanol fuel currently being promoted in China is M15, which involves adding 15% methanol to gasoline; the substitution ratio of M15 for gasoline is 1.05 ； The substitution ratio of dimethyl ether for diesel is 1.33–1.5. Therefore, producing dimethyl ether from methanol is equivalent to converting 1 ton of gasoline into approximately 0.5 tons of diesel, with the current factory prices for gasoline and diesel being 4,400 yuan per ton and 3,870 yuan per ton respectively. In the near future, dimethyl ether is most likely to replace imported liquefied petroleum gas on a large scale. In the East and South China regions, large quantities of imported liquefied petroleum gas are used, and its price is above 4,000 yuan per ton. The substitution ratio of dimethyl ether for liquefied petroleum gas is approximately 1; that is, when dimethyl ether is used to replace liquefied petroleum gas, its price can reach 4,000 yuan per ton, offering good economic benefits. In China’s major coal-producing regions such as Shanxi, Inner Mongolia, and Ningxia, it is advisable to consider using domestic gas from surrounding areas as the main target market for building methylene dichloride plants of moderate scale in the near future. In the long term, close attention should be paid to the progress regarding **the adjustment of refined oil prices and the introduction of a fuel tax; large-scale dimethyl ether projects should be established once the conditions are ripe. One method of controlling risks is to adopt a two-step approach: first build methanol plants that are already well-established in the market, and then determine the scale and timeline for constructing dimethyl ether plants based on **policy conditions. 3. Coal-to-oil projects require huge investments, and technical and cost issues remain to be addressed. Coal-to-oil projects involve substantial capital expenditures, often in the range of hundreds of billions of yuan. There are no industrial precedents for direct coal liquefaction, and only SASOL in South Africa has achieved industrialization for indirect coal liquefaction, with high costs associated with technology transfer. Coal prices in our country are much higher than those in South Africa; especially over the past two years, the increase in coal prices has been comparable to that of oil prices, resulting in unsatisfactory economic returns for coal-to-oil projects. Therefore, the development of coal-to-oil should be approached with caution. 4. Gasification has an advantage in competition with natural gas-based chemical industries. Industrial and domestic gas users can tolerate higher prices for natural gas, whereas those in natural gas-based chemical industries can only afford lower prices; as a result, gas suppliers are reluctant to supply gas to such companies. In the future, natural gas will primarily be used as a clean fuel rather than a raw material for chemical industries. Coal will continue to be the primary raw material for the production of synthetic ammonia, methanol, and other C1 chemical products in our country. However, in natural gas-producing areas, in order to achieve harmonious development with the local economy, natural gas producers may supply a certain amount of cheap natural gas to local enterprises, creating localized investment opportunities for the development of natural gas chemicals. 5. The choice between the ethylene-acetylene route and other alternatives should be determined based on local conditions, as both will coexist in the long term. The competition between these routes mainly concerns a few products such as PVC and vinyl acetate. Furthermore, the competition between the acetylene-n-butane route and the other route for producing 1,4-butanediol, as well as the competition between the acetylene-butadiene route and other routes for producing neoprene, are similar to the competition involving the ethylene-acetylene route; they represent a competition between coal-based chemical manufacturing and petroleum-based chemical manufacturing, with PVC being the most notable product in this context. Currently, the production of the aforementioned products in China relies primarily on the acetylene route. This is partly due to a shortage of petrochemical raw materials such as ethylene domestically ； On the other hand, the rise in coal prices in our country lags behind that of oil prices; therefore, during periods of rapid increases in oil prices, the cost of PVC produced by the calcium carbide method remains low. However, with the surge in calcium carbide-based PVC production in the domestic market, the situation is changing. Firstly, due to the rapid increase in PVC production capacity, PVC prices have fallen; compared with the prices of PE and PP, PVC prices are significantly lower ； Secondly, as a basic energy source, coal is subject to a price relationship with oil; although increases in coal prices lag behind those in oil prices, the magnitude of these increases is still significant, resulting in a substantial rise in the costs of PVC produced by the calcium carbide method. Currently, over one-third of the PVC industry is operating at a loss. The competitive advantage of calcium carbide-based PVC over ethylene-based PVC lies in its lower cost, and the basis for this low cost is the affordable coal and electricity prices in China’s western regions. At present, coal prices have risen sharply, and the advantage of lower electricity prices will also be significantly reduced due to the construction of projects for transmitting electricity from the west to the east. The lower electricity prices in the western region are mainly due to an oversupply of electricity there and insufficient capacity for transmitting electricity to other areas. However, as the capacity of the power transmission routes from the west to the east is increased, electricity prices in the western regions are likely to rise, which will weaken the competitiveness of a range of energy-intensive industries, including calcium carbide and caustic soda. According to the entry requirements for the calcium carbide industry, the power consumption of calcium carbide furnaces in new calcium carbide production projects is 3,250 kWh per ton of calcium carbide. If the power required for the accompanying electrode materials, as well as electricity for driving, is taken into account, the power consumption per ton of calcium carbide exceeds 4,000 kilowatt-hours. If electricity prices rise by 0.1 yuan per kilowatt-hour in the future, the cost of calcium carbide will increase by 400 yuan per ton. At present, the ex-factory price of calcium carbide in the western region is around 2,100–2,200 yuan per ton, and an increase in electricity prices will have a significant impact on the cost of PVC produced by the calcium carbide method. The industrial layout of PVC produced by the calcium carbide method will be further adjusted in the future. First, continue to concentrate efforts in western regions with advantages in coal resources ； Second, it is to increase the level of integration along the supply chain; those companies that achieve integration across the coal, electricity, calcium carbide, and PVC sectors will possess the greatest competitive advantages and resilience in the face of risks. In the future, there will be no definitive answer to the debate over the ethylene-acetylene route; decisions must be made based on the location of each company, its available resources, as well as the specific circumstances at that time and in that particular facility. The two process routes will coexist for a long time, complementing each other. 6. The maturity of MTO and MTP technologies will usher in an era in which coal-based chemical industry competes on an equal footing with the petrochemical industry. By utilizing methanol-to-olefins (MTO) and methanol-to-propylene (MTP) technologies, the coal-based chemical industry can move from carbon-based chemicals to ethylene, which is a core component of the petrochemical industry. To date, no industrial production facilities for MTO or MTP have been built. A European chemical company is constructing an industrial production facility in Nigeria using the MTO technology of UOP/Hydro, with commissioning expected in 2007. According to preliminary estimates by experts, when the total cost of coal-based methanol production is kept below 1,200 yuan per ton, the cost of MTO ethylene is roughly on par with the cost of petrochemical ethylene when oil prices are at 45 dollars per barrel. If MTO and MTP technologies can be successfully industrialized in the future, it will usher in an era in which coal chemical industry competes on an equal footing with the petrochemical industry.