There are three major risks associated with importing methanol for olefin production
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This post was last edited by jordan569 on 19:55, January 6, 2013. It’s an article I found online that is quite useful for reference. In the data related to risk factor number three, the figure of 600,000 tons per year refers to the consumption of methanol. “Although there are no restrictions on projects that use imported methanol for olefin production, investors should not rush into such projects blindly.” Otherwise, projects that seem promising at present may face significant operational and production risks in the future. ”Gu Zongqin, president of the China Petroleum and Chemical Industry Planning Institute, said this in a recent interview with reporters. He said that many enterprises and experts believe that using imported methanol to produce olefins not only results in lower production costs (due to the low price of imported methanol) and reduced investment requirements (as there is no need to build methanol production facilities), but it also helps to reduce domestic energy consumption. Moreover, the carbon dioxide and wastewater generated during the methanol production process can be left in foreign countries, making it a win-win solution. It is therefore advisable to encourage the construction of more projects for producing olefins from imported methanol in coastal areas, so as to make full use of foreign methanol resources to produce olefin products that are in short supply domestically and to reduce domestic oil consumption. But this wonderful idea is clearly a bit wishful thinking. In fact, the prospects for using imported methanol to produce olefins are far less promising than imagined, and the risks are even greater than those associated with using domestic coal to produce olefins through methanol. Risk 1: Possible shortage of supply. Since 2008, affected by the financial crisis, the growth in global demand for methanol has slowed down. Coupled with the rapid expansion of methanol production capacity in China and the commissioning of several large-scale methanol plants in the Middle East, this has led to an overcapacity in global methanol production. Although China also has an excess capacity in methanol production, it remains the region with the fastest-growing demand for methanol globally. Under such circumstances, Middle Eastern methanol producers, eager to find buyers and open up new markets, naturally turn their attention to the Chinese market, selling large quantities of methanol there at lower prices. As a result, domestic imports of methanol have been increasing year after year, at one point accounting for more than one-third of total consumption. But if we use this as a reason to build numerous methanol-to-olefins plants and rely on imported methanol as raw material. Well, once all the facilities are built, if a large amount of methanol is needed, it will be difficult to ensure a supply of raw materials. On the one hand, as the global economy recovers, demand for methanol is bound to increase, and the sales channels for methanol in the Middle East will become smoother and more extensive, which will inevitably lead to a reduction in methanol exports to China. On the other hand, the low price of methanol in the Middle East is due to business strategies aimed at selling it at low prices in order to enter the Chinese market as quickly as possible, as well as to the use of abundant and inexpensive associated gas from oil fields as raw material. However, as world oil resources decline and approach exhaustion, associated gas from oil fields will become a valuable hydrocarbon resource to be used in the production of higher-value products such as olefins and alkanes, rather than for producing methanol, which is a basic chemical raw material with lower added value. Furthermore, as the industrialization technologies for producing olefins and propylene from methanol mature and improve, companies in regions such as the Middle East that possess large-scale methanol production facilities will also adopt these technologies to manufacture olefin and polypropylene products. This has led to a significant reduction in methanol exports, putting many methanol-to-olefins plants that rely on imported methanol as a raw material at risk of running out of feedstock. Not long ago, experts from the Petrochemical Federation and the Petroleum and Chemical Industry Planning Institute held discussions with several large methanol producers in the Middle East, who explicitly stated that they could not guarantee the supply of sufficient methanol to Chinese companies. Risk 2: Difficult transmission of price fluctuations. Although in 2009, the CIF price of imported methanol dropped below 1,500 yuan per ton at one point. However, between July and August 2008, it also rose to 4,600 yuan per ton at one point. If a company does not have its own methanol production facilities and relies on purchased methanol or even entirely on imported methanol as raw material, and if methanol prices experience such severe fluctuations, then, due to their limited bargaining power – which is currently in the hands of the Sinopec and CNPC groups – such companies are unable to pass on the cost increases resulting from changes in raw material prices in a timely manner. As a result, they face significant market risks, and some may even go bankrupt as a consequence. Risk 3: High financial costs. The economic scale for methanol-to-olefins production is 600,000 tons per year or more; assuming that 1 ton of olefins can be produced from 3 tons of methanol, a facility with a capacity of 600,000 tons per year will consume 2,000 tons of methanol per day. Based on a minimum of 7 days’ worth of raw materials for the enterprise, 14,000 tons of methanol is typically required in stock. Taking into account the uncertainties associated with various stages such as loading of imported methanol, departure from port, sea transport, arrival at port, customs clearance, unloading, and transportation, in order to ensure the long-term operation of olefin plants, companies should maintain a methanol inventory of 15 days, which amounts to 30,000 tons. Even at 2,500 yuan per ton, the required funds will amount to 75 million yuan. Based on a normal inventory of 10,000 to 20,000 tons for a 600,000-ton per year olefin plant, the capital required is at least 150 million yuan. Including the funds required for the company’s daily operations, a 600,000 tons per year import methanol-to-olefins plant would require substantial working capital of up to 300 million yuan for its normal operation, which in turn increases the company’s financial costs. With such a large amount of capital tied up, if the products fail to sell or if the cash flow is disrupted for other reasons, the company will face significant (and even fatal) operational risks. Furthermore, as oil resources become increasingly scarce, methanol – as the best current alternative to oil – will see its applications expand further driven by ongoing advancements in related technologies. It may even become, just like oil, an important energy source and strategic resource, attracting significant attention and giving rise to competition over it. By then, importing methanol will be more difficult and costly, which in turn will increase the risks associated with using imported methanol to produce olefins. Therefore, Gu Zongqin warns companies that before launching such projects, it is essential to take a comprehensive approach, considering both domestic and international markets as well as various uncertainties, and to proceed with caution when investing in projects for producing olefins from imported methanol – in particular, to avoid a rush to do so. He said that it is precisely because of the aforementioned risks and uncertainties associated with importing methanol to produce olefins that **when formulating the 12th Five-Year Plan for the ethylene industry, it was recommended to establish only 2–3 projects in coastal areas, with a total capacity of 1.8 million tons per year for producing olefins from imported methanol. However, based on rough estimates, there are currently 6 to 8 import methanol-to-olefins projects under construction or planned, with a combined production capacity of over 3.5 million tons per year, indicating an oversupply in this sector. . Note # ) # # , .
Reply to 1# Liang Peng: It’s hard to understand the three risks mentioned in the article. Firstly, there is the risk associated with the supply of methanol as a raw material: this might be an unfounded concern. Methanol is a commodity in the Middle East, and it operates according to market principles, just like crude oil and natural gas. When China began to import large quantities of crude oil, many experts raised warnings about the risks involved, yet in reality, crude oil imports have continued to proceed normally to this day. Secondly, there is the risk of fluctuations in methanol prices, but this is completely unfounded. All commodities experience price fluctuations, which are caused by changes in supply and demand within the industry as well as by broader economic conditions. It is not appropriate to use extreme price levels to describe industry risks. In fact, China’s methanol industry would have gone bankrupt long ago during periods of extremely low methanol prices, yet the vast majority of companies in this sector are still operating successfully and have not gone bankrupt. Therefore, the price of the raw materials used for producing olefins from imported methanol should be expressed as an annual average price. In recent years, the annual average price in the domestic methanol market has rarely exceeded 3,000 yuan, so the price of imported methanol is likely even lower. Thirdly, regarding the issue of working capital, for a chemical plant with annual sales of 7 billion, 5% working capital should be considered normal; so why is it considered to represent a significant financial risk? Furthermore, for the production of ethylene from naphtha on a similar scale, the investment required is **higher than that for producing ethylene from methanol, and the working capital needed is several times that for producing olefins from methanol. So why is there no risk involved in this approach? How should his financial risks be understood? In fact, the risk associated with producing olefins from methanol may not lie in this aspect at all; the real risk is its market competitiveness. When international crude oil prices are below $80 per barrel, importing methanol to produce olefins may become unfeasible.
Reply to 2# kinge2000: For companies that produce olefins from methanol, since the pricing power for olefin products lies with the petrochemical companies, as long as oil prices remain above $80 per barrel, producing olefins from methanol will not result in losses. This is the situation currently and for the next few years; as long as there is an oversupply in the domestic olefin market, this will likely continue. The risks mentioned in this text refer mainly to projects that rely on external methanol supplies for olefin production – this is a prerequisite, and it’s impossible to discuss increasing or decreasing these risks without taking this into account. First of all, if methanol is produced from coal before being used to make olefins, then such projects need not be considered at all. The situation described under Risk 1 is indeed true: currently, the import volume of methanol from the Middle East is still far lower than China’s domestic production capacity. There are statistics available on this topic, and I’ve calculated that China’s domestic methanol production capacity is around 50 million tons. It’s possible to use cheap methanol from abroad to produce olefins, but the problem is that if everyone rushes to do this, and there isn’t an oversupply of methanol, then its price will surely be high. Moreover, with the advancement of MTO technology, it’s very likely that the Middle East will start using methanol to produce olefins itself. As for Risk 2, although price fluctuations might seem extreme, they have been quite significant this year. With rising costs for coal (or natural gas), logistics, and labor, it’s unlikely that the cost of methanol will decrease, while its market price remains mostly at or near the cost level. So why haven’t many methanol companies gone bankrupt? The reason is that China’s methanol companies operate within a framework that isn’t purely market-driven. Although this isn’t as obvious as in the case of the three major petrochemical companies, there are still similarities. Many of today’s methanol companies are state-owned, and they are either owned by large conglomerates or have their backs supported by such groups. Methanol is just an intermediate product; as long as there is demand downstream, production must continue. This leads to situations where companies continue to produce despite incurring losses. Even private companies must continue production as long as they have access to coal resources upstream or profitable products downstream. Regarding Risk 3, the author is actually based on a production capacity of 200,000 tons per year for olefins. But according to current requirements, it should be at least 600,000 tons per year. Just storing methanol would require nearly 500 million yuan. And please keep in mind that the planning, construction, production, and storage of a company’s operations are all handled by different departments. If just storing methanol requires 500 million yuan, I doubt that any company would have the courage to undertake such a project.
Hehe, I just realized that the two of you might work at the same place; maybe you even know each other. Such discussions are great; I hope they continue, and I’ll give extra points.
Hehe, it’s possible. The company has thousands of employees, and the group has tens of thousands; I know less than a thousand of them, and I’m familiar with less than a hundred.
Everyone will express their opinions from their own perspective of interest; as for whether it’s risky or not, we’ll have to see. Next summer, the first set of imported methanol-to-olefins plants will come online. Practice is the sole criterion for testing truth.
LSD is supported; the economic viability of methanol-to-olefins at present still depends on the profitability of Ningbo Heyuan.
In my opinion, since China is a major consumer of methanol, it is necessary for **key players to step in; large enterprise groups and industry associations must unite in order to gain control over the pricing of methanol raw materials. Otherwise, our chemical companies will suffer the same hardships as those in China’s steel industry.
Reply to 6# tfz: I have a gentle question – which is the first domestic project for producing olefins from imported methanol that you are referring to? Please forgive me for not having very thorough knowledge of market information...
He Yuan Chemical Co., Ltd. in Ningbo, Zhejiang: 1.8 million tons of methanol to produce 600,000 tons of olefins project
This post was last edited by kinge2000 on 2012-1-6 09:38. Reply to 3# Liang Peng: I believe that any investment involves risks, but we shouldn’t exaggerate them. The so-called three major risks mentioned in the text are not actually big problems. The commodity market follows its own rules. Our country imports millions of tons of ethylene, propylene, and ethylene glycol each year, and each of these materials is subject to market risks; yet the market still functions as it does, with those offering the best overall price usually coming to dominate. As for the methanol statistics you saw, they might well be the ones I sent Furthermore, regarding the financial cost of capital, perhaps this expert does not understand how businesses operate. For a company that invests over 5 billion and generates nearly 7 billion in output, 500–600 million in working capital should not be much; with capital being rotated 12–14 times per year, its financial cost should not be high, right? But I don’t think there are no risks associated with importing methanol to produce olefins; it’s just that these risks are not mentioned in the text.