Can coal-based olefins not satisfy immediate needs?

Thread Content

This post was last edited by yinkuilin6868 on 2015-11-23 at 18:57. Coal-based olefins have become a hot topic in the chemical industry in recent years; this technology, which has only been developed over the past few years, not only helps to address the shortage of olefins in China but also changes the structure of downstream demand for methanol. However, despite such strong underlying demand, methanol prices remain \"with no bottom, only lower.\" The author tries to explain the reasons behind it. Reasons for the development of coal-based olefins: After the reform and opening up, China’s economy experienced rapid growth. As the economy develops further, the domestic demand for energy is increasing. By 2014, domestic crude oil consumption amounted to 520.26 million tons, an increase of 429.01 million tons compared to 1978, representing a growth rate of 470.15%, with an average annual growth rate of 5.06% ； Natural gas consumption reached 185.49 billion cubic meters, an increase of 171.31 billion cubic meters compared to 1978. This represents a rise of 1207.62%, with an average annual growth rate of 7.69%. Resource demands have increased significantly, and China’s resource characteristics of “abundant coal but scarce oil and gas” are becoming increasingly evident. Data from the white paper \"China’s Energy Situation and Policies\" show that in 2006, China’s coal reserves amounted to 1,034.5 billion tons, with the remaining proven exploitable reserves accounting for about 13% of the world’s total, placing China in third place globally. However, the reserves of crude oil and natural gas are relatively low compared to the country’s third-largest land area. At the same time, due to our large population, the per capita availability of energy resources in our country remains at a relatively low level. Among them, the per capita coal resource amount is equivalent to 50% of the global average ； The per capita resources of oil and natural gas are only 1/15 of the global average. In this situation, the domestic energy supply is no longer sufficient to meet domestic demand, and the market needs large amounts of imports to cover the shortfall in domestic supply. Before 1995, domestic crude oil exports exceeded imports. Since 1996, the dependence on energy imports has continued to rise. As of September 2015, the dependence on crude oil imports reached 60%, while the dependence on natural gas imports reached 31.5%. Due to its low energy self-sufficiency rate, the country needs to import large quantities of crude oil and natural gas. However, after 2000, excessive money supply, rising demand (with a significant increase in demand in developing countries such as China), and instability in the Middle East led to continuously rising international energy prices. To this end, our country has to spend a large amount of foreign exchange on purchasing crude oil and natural gas, which not only drives up the prices of basic raw materials but also hinders economic development. Furthermore, since most of China’s imported energy comes from the Middle East, instability in this region has prevented China from securing a stable source of energy supply. China urgently needs to address the issues of excessively high energy prices and unstable supply. To address the above issues, many measures have been taken domestically. Among these, utilizing its abundant coal resources to replace part of the oil chemical industry with coal chemical industry has become one of the measures to alleviate high oil and gas prices. Those with a basic understanding of chemical production know that PVC is primarily produced in China using the calcium carbide method, rather than the ethylene method that is widely used internationally. The process used for methanol production in China is mainly coal-based methanol production, rather than the gas-based methanol production that is common internationally. Compared to the calcium carbide method, the ethylene route offers advantages in terms of larger scale and better quality; moreover, gas-based methanol production has cost advantages abroad as well compared to coal-based methanol production. The reason why China chooses the calcium carbide method for PVC production and coal-based methanol production is simple: coal is inexpensive in China, and using coal to produce olefins is less costly compared to using crude oil, offering a greater price advantage. By the same logic, traditional oil-based olefins are produced through the cracking of naphtha (a downstream product of crude oil), and the cost of raw materials is very high (the ratio of the raw material costs for producing ethylene in the oil chemical industry to those in the coal chemical industry is 6:1). Given economic benefits, the rise of coal-based olefins is an inevitable trend. Coal-based olefins are primarily used to produce ethylene and propylene (with propylene accounting for a larger proportion), mainly because ethylene and propylene are the most fundamental chemical raw materials, serving as direct or indirect upstream components for many chemical products. Those who pay close attention will notice that the country’s dependence on imports of ethylene and propylene is not high. As of September 2015, the dependence on ethylene imports was only 7.6%, and even the highest value recorded to date did not exceed 10%. If that’s the case, why does the country still need to develop coal-based olefins? In fact, although our country has a high degree of self-sufficiency in ethylene and propylene, it still needs to import large quantities of derivatives of these substances, such as LLDPE. The hidden demand for ethylene and propylene in the domestic market is very high. Meeting the market demand for ethylene and propylene, these two basic raw materials, is also an important reason for the vigorous development of coal-to-olefins production in China. Current development status of coal-to-olefins in China. There are many processes for coal-to-olefins; the two main ones are MTO and MTP. The products of the MTO process are mainly ethylene and propylene. Currently, the leading technologies in this field are the MTO technology developed jointly by the American company UOP and the Norwegian company HYDRO, as well as the DMTO technology developed by the Dalian Institute of Chemical Physics under the Chinese Academy of Sciences. The main product of the MTP process is propylene; currently, Germany’s Lurgi company is a leader in this technological field. In the production of coal-based olefins in China, both the MTO and MTP processes are utilized; among them, the MTO process is used more frequently. After years of development, China’s coal-to-olefins industry has reached a considerable scale, with production capacity continuing to grow. By the end of 2010, the operational coal-to-olefins production capacity was merely 1.1 million tons per year. After nearly five years of development, as of October 2015, the total production capacity for coal-based olefins reached 10.25 million tons per year, an increase of almost 10 times. The production capacity for coal-to-olefins is mainly concentrated in Shandong, Shaanxi, Ningxia, and other regions. Among them, the 600,000-ton/year MTO plant of Shenhua Baotou, the 1 million-ton/year MTO plant of Shenhua Ningxia, the 1.3 million-ton/year MTO plant of Pucheng Clean Energy Shaanxi, the 600,000-ton/year MTO plant of Shaanxi Yanchang China National Coal, and the 600,000-ton/year MTO plant of China National Coal Shaanxi are the most representative. Looking ahead, a large number of coal-based olefin production capacities will still be brought online in China. It is expected that the 600,000 tons per year DMTO plant of China Coal Mengda and the 600,000 tons per year DMTO plant of Shenhua Yulin will come online in November 2015 ； In December 2015, Jiangsu Shenghong’s 1.2 million tons/year MTO plant will be put into operation ； In 2016, Changzhou Fude’s 330,000 tons per year DMTO plant, Betel’s 300,000 tons per year MTO plant, Salt Lake Group’s 1 million tons per year DMTO plant, Zhongtian Hechuang’s 1.37 million tons per year DMTO plant, and Jiu Tai Energy’s 600,000 tons per year MTO plant were set to come online. By the end of 2016, China’s coal-to-olefins production capacity will reach 16.95 million tons per year. With the rise of coal-based olefins, the downstream consumption structure of methanol is also changing. Before 2010, coal-based olefins such as MTO and MTP were not produced on an industrial scale, and the downstream uses of methanol were mainly dominated by traditional applications like formaldehyde and dimethyl ether. However, after 2010, as more coal-based olefin plants came online, the share of consumption for MTO and MTP continued to rise, increasing from less than 2% in 2010 to over 20% by 2014. The market expects that by 2017, the share of coal-to-olefins in downstream methanol consumption will rise to 40%. By then, coal-based olefins will replace formaldehyde as the largest segment in methanol’s downstream applications. It is worth mentioning that, apart from coal-to-olefins, methanol fuels represented by methanol gasoline are also developing at a relatively rapid pace due to their price advantages. They are expected to become the second-largest application area for methanol, following coal-to-olefins. Based on the above analysis of the current state of the coal-to-olefins and methanol fuel industries, it can be seen that downstream methanol consumption is in a phase of transition from old to new applications. The consumption of newly emerging coal-to-olefins and methanol fuels is gradually replacing the roles formerly played by formaldehyde and dimethyl ether. Moreover, given the current situation, coal-to-olefins and methanol fuel represent two key areas of focus: coal chemical industry as an alternative to the oil chemical industry, and new energy sources. In the foreseeable future, an expansion of production capacity in these two sectors is inevitable, which means that downstream consumption of methanol will not decline due to a slowdown in economic growth, as is the case with other chemical products. Based on this assessment, the author believes that in the future, methanol prices will show a stronger performance compared to other chemical products, and may even follow a completely different trajectory. In portfolio strategies, methanol can also be used as a long-position hedge. At present, the impact of coal-based olefins is limited. Given the huge potential demand for methanol, why was the performance of methanol futures so poor in the second half of 2015? This Wednesday, the 1605 contract for methanol futures even hit the lower price limit. Next, the author will analyze this issue. Product prices are determined by many factors. The overall macroeconomic environment, as well as fiscal and monetary policies, determine the general trend of commodities ； The upstream raw material market determines the cost of goods ； The operations and inventory levels of midstream enterprises determine market supply ； Demand is determined by the performance of consumption at the downstream and end-user levels. Firstly, the external macro environment is not conducive to an increase in commodity prices. Following the subprime mortgage crisis, due to the slowdown in the domestic economy, **4 trillion yuan was allocated for infrastructure investment, and interest rates on deposits and loans were significantly reduced. The sharp decline in financing costs prompted companies to expand production on a large scale. Although this helped to offset the impact of the subprime mortgage crisis on the economy, excessive investment led to overcapacity, which essentially depleted the country’s future economic potential and shortened the duration of China’s traditional economy, which was dominated by raw material production and low-value-added processing industries. As a result, China faced the need for transformation at an earlier stage. With the advent of the economic transition period, capital- and technology-intensive emerging industries have gradually replaced traditional resource- and labor-intensive industries. For traditional industries, the main tasks are to eliminate outdated production capacity and reduce inventory levels. Under such circumstances, the slowdown in economic growth is the price to pay during a period of economic transformation, and as a result of this slowdown, commodities, particularly industrial products with strong financial attributes, tend to enter a downward cycle. In addition, commodities are often priced in dollars, and there is a negative correlation between the dollar and commodities. Given that the United States is poised to enter a interest rate hiking cycle, commodities are under pressure to varying degrees. Secondly, the global repricing of energy has led to a collapse in methanol production costs. The main production methods of methanol are coal-to-methanol, gas-to-methanol, and coke oven gas-to-methanol. The proportion of methanol produced from coke oven gas is relatively small; thus, its impact on methanol prices is limited. There is a relative shortage of natural gas in the country. It has been explicitly stipulated that no new approvals will be granted for projects involving the production of methanol from natural gas. This means that the production capacity for methanol derived from natural gas will remain stable—it will only decrease, not increase. Coal-to-methanol is the main sector for methanol production. However, due to overall oversupply and weak demand, the price of raw coal has dropped by half compared to its peak in 2010, with no sign of a stop to this decline, resulting in a sharp fall in the cost of coal-based methanol. In addition, the National Development and Reform Commission issued a notice recently stating that, starting from November 20, 2015, the prices at the gate stations for natural gas used by non-residential users would be reduced; the maximum price at such gate stations for non-residential use was lowered by 0.7 yuan per cubic meter, which also led to a significant decrease in the cost of producing methanol from natural gas. Furthermore, the production of methanol abroad primarily relies on the natural gas-based process, and with the rise of the shale oil and shale gas revolution, energy supply in North America has increased significantly. OPEC, which used to act as the \"central bank\" for crude oil, has seen its market share eroded; yet it did not reduce production as it used to do, which led to a sharp drop in international energy prices. The price of methanol produced from natural gas also dropped significantly worldwide. In the Middle East, particularly in Saudi Arabia, large quantities of inexpensive methanol flowed into local markets, thus affecting the domestic methanol market. Once again, the domestic methanol supply is currently relatively ample; given the profits available in this industry and the optimistic prospects for future demand, the methanol sector is far from reaching a stage where capacity reduction is necessary. In terms of operating rates, domestic methanol producers operate at around 50%–60%, and there have been no widespread shutdowns for maintenance recently; as a result, the supply of methanol is relatively sufficient. In terms of inventory, as of November 12, the stock of methanol at domestic ports was 481,000 tons, which represented a decrease of 553,000 tons compared to the historical high level at the end of 2014, resulting in a decline rate of 53.48%. Among them, the inventory at ports in East China was 309,000 tons, which is 307,000 tons less than the historical high recorded at the end of 2014, representing a decline of 49.84% ； The inventory at ports in South China stood at 71,000 tons, a decrease of 124,000 tons or 63.59% from the historical high recorded at the end of 2014 ； The inventory at the Ningbo Port (suspended trading on August 16; buy recommendation) stands at 101,000 tons, a decrease of 122,000 tons, or 54.71%, compared to the historical high recorded at the end of 2014. Currently, port inventory of methanol has been reduced by half compared to its historical highs and is now at a low level; the process of reducing inventory of methanol in the domestic market has essentially been completed. However, it should be noted that methanol is somewhat corrosive, and it is flammable and explosive. It is difficult to store and transport, and long-term storage poses a risk of tank buildup. Compared to other industrial products, methanol’s ability to buffer supply-demand imbalances is relatively limited. Furthermore, methanol is produced in different locations from where it is sold, and a long-distance transportation process is required from production to sales. As a major production area, the Northwest region often faces transportation difficulties in winter due to weather conditions, which drives up methanol prices during that season. However, this year is an El Niño year, with temperatures higher than in previous years. Even at the end of November, temperatures in many areas in the north remain above zero degrees Celsius, which means that the problem of structural supply shortages caused by poor transportation conditions during winters in previous years is unlikely to occur this time. An ample market supply is also a significant factor suppressing methanol prices. Finally, traditional downstream consumption still accounts for more than half of the total methanol consumption. Although emerging uses of methanol, such as those in coal-to-olefins and methanol fuels, offer promising prospects for its future consumption, in the present day traditional downstream applications account for over 60% of total methanol consumption, with formaldehyde and dimethyl ether being the main products in these traditional sectors. The main use of formaldehyde is as an adhesive in construction, and its end-use is closely linked to the real estate industry. Currently, the real estate industry is weak, so demand for formaldehyde is naturally low; the utilization rate of formaldehyde production has dropped to \"freezing levels\". The main use of dimethyl ether is as a clean fuel, but its promotion in China has not been effective; it is primarily used as a fuel for domestic purposes, accounting for 94%, while its use as a fuel for vehicles, which holds great potential, accounts for only 2%. In contrast, there is a severe surplus of dimethyl ether, amounting to 12.158 million tons, and additional production capacity of up to tens of millions of tons is set to come online in the future. Due to the sharp drop in crude oil prices, the previously \"unaffordable\" costs of olefins derived from oil have also decreased significantly. At the current crude oil price of $40 per barrel, coal-based olefins not only lack a price advantage but also have higher costs compared to oil-based olefins. As a result, demand for coal-based olefins is being driven down by oil-based olefins; some companies that produce coal-based olefins have reduced their production, while those plants that have not yet started operating are delaying their commissioning. Furthermore, although coal-based olefins are suitable for China’s resource conditions, the quality of the olefins produced is inferior to that of oil-based olefins due to process issues. In the high-end market, coal-derived olefins still cannot replace olefins produced through traditional naphtha cracking. The author believes that until coal-based olefins and methanol fuels fully replace traditional consumption areas and crude oil prices rise significantly, they will not be able to reverse the weak demand for methanol in downstream applications. The author can describe their view on the methanol market in one sentence: \"The future is bright, but reality is harsh.\" Due to the rise of coal-based olefins and methanol fuels, methanol consumption is set to continue increasing in the future, which means that despite weak demand for other chemical products, downstream consumption of methanol will grow. However, due to the macroeconomic environment and cost declines, the time is not yet right for methanol prices to rise. Methanol can only regain its vitality when energy prices rise, the issue of falling costs is resolved, and coal-based olefins regain their price advantage.