Coal chemical industry: Should these unfinished projects be halted or not? It seems that foreign companies are more calm about this.

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Coal chemical industry: Should these unfinished projects be halted or not? Source: **Coal Chemical Industry Network | Date: 2016-01-28 For coal chemical companies and the entire industry as a whole, the situation is quite complicated at present. On the one hand, the underwhelming performance of many projects in 2015 has led many investors to question and worry about the future of the coal chemical industry; there is no longer the same level of enthusiasm as in previous years, which has forced them to decide to significantly reduce the scale of coal chemical projects during the 13th Five-Year Plan period. On the other hand, it is difficult to decide what to do with those coal chemical projects for which research and development efforts have already been undertaken, plans have been made, or construction has already started. At the beginning of the 13th Five-Year Plan period, the editorial team of \"China Coal Chemical Industry\" faced a pressing need from within and outside the industry to understand how to deal with those coal chemical projects that had already started construction. With these questions in mind, the journalists conducted in-depth interviews. “It is now certain that the goals set for the coal chemical industry under Xinjiang’s 12th Five-Year Plan will not be achieved. This is due to falling prices of oil, coal, and gas, increasing pressure on the macroeconomy, investment in coal chemical projects yielding results below expectations, and various other factors. ‘During the 13th Five-Year Plan period, Xinjiang will significantly reduce the scale of coal chemical industry development. ”At the end of last month, Chen Weidong, deputy director of the Energy Department of the Xinjiang Uygur Autonomous Region’s Development and Reform Commission, revealed this in an interview with reporters. He said that the original plan for the coal chemical industry in Xinjiang during the 12th Five-Year Plan period was to establish seven industrial chains related to coal-based synthetic ammonia, coal-based dimethyl ether, coal gas, coal oil, coal-based olefins, coal-based ethylene glycol, and coal coking, as well as modern coal chemical industry clusters of a certain scale by 2015. The goal was to achieve production capacities of 2.6 million tons of coal-based urea, 800,000 tons of coal-based dimethyl ether, 60 billion cubic meters of coal-based natural gas, 3.6 million tons of coal oil, 1 million tons of coal-based olefins, and 1 million tons of coal-based ethylene glycol per year. By the end of December 2015, the vast majority of these goals had not been achieved, and some of them would remain difficult to attain even by the end of the 13th Five-Year Plan period. Given the current economic viability of coal chemical projects and the uncertainties surrounding their future, the Xinjiang Uygur Autonomous Region significantly reduced the scale of such projects in its draft submission for the NDRC’s 13th Five-Year Plan. Among them, the coal-to-gas production capacity alone was reduced from 60 billion cubic meters per year, as set in the 12th Five-Year Plan, to 30 billion cubic meters per year during the 13th Five-Year Plan period. In fact, Xinjiang Uygur Autonomous Region is by no means the only place that has reduced the scale of coal chemical industries during the 13th Five-Year Plan period. Among the industries that Shaanxi Province plans to prioritize during the 13th Five-Year Plan period, as announced by the Provincial Department of Industry and Information Technology, the coal chemical industry remains on the list. However, projects such as coal-to-gas, coal coking, coal-based fertilizer production, and coal-to-dimethyl ether—which were listed in the 12th Five-Year Plan—are no longer mentioned. Responsible officials from relevant departments in Inner Mongolia, Shanxi, and Gansu also made it clear when interviewed by reporters that although nothing has been finalized yet, the new scale of development for the coal chemical industry under the 13th Five-Year Plan will definitely be smaller than that envisioned in the 12th Five-Year Plan, and the investment volume will also be significantly reduced. On the corporate side, a responsible official from Datang Coal Chemical Company revealed recently that the company is making every effort to push forward with the overall sale of the coal chemical business unit under the group. As for whether any new modern coal chemical projects will be established during the 13th Five-Year Plan period, or to what extent, there is no clear answer at present. Additionally, executives from companies such as Yitai Group, Lu’an Group, Yankuang Group, Shaanxi Coal and Chemical Industry Group, and Yanchang Petroleum Group also made it clear that although they cannot disclose the specific details of their companies’ 13th Five-Year Plan at present, the scale of coal chemical industry development will definitely be scaled back. Going forward, enterprises will never simply expand recklessly. Instead, they will concentrate their limited funds on selecting coal chemical projects that feature advanced and mature technologies, a large market potential, and still generate certain profits under current circumstances. These projects will be thoroughly evaluated before construction is initiated at an appropriate time. “It is believed that other coal-producing provinces across the country, as well as more energy and chemical enterprises, and even at the ** level, will all reduce the scale of coal chemical industry development to varying degrees when formulating the 13th Five-Year Plan. ”Yousiti, the executive vice president of Shaanxi Coal and Chemical Industry Group, said. He said that the transition of China’s coal chemical industry from a period of rapid growth to one of cooling down is the result of multiple factors at play. It is a practical choice for adjusting the industrial structure and economic development model in response to environmental constraints, the “new normal” of the economy, and new changes in the international energy landscape. It is also a short-term direct consequence of the current plunge in international oil prices; moreover, it represents a wise move by ** and enterprises. Industry experts tend to agree on the reasons behind the cooling down of the coal chemical industry. Firstly, the economic viability of coal chemical projects is not as good as expected. After the financial crisis in 2008, the global economy took a turn for the worse. Although major economies such as China, the United States, and the European Union have adopted quantitative easing policies to stimulate their economies, these measures have only prevented a hard economic landing and have not managed to reverse the downward trend in the economy. The continuously weakening global economy has led to a significant decline in the demand for energy resources, including oil, natural gas, and coal. Coupled with the large-scale development of shale gas and tight oil in North America, as well as changes in the international geopolitical landscape, there has been a shift from a supply shortage to an oversupply of major energy resources such as oil, natural gas, and coal worldwide. As a result, the prices of coal and oil have continued to fall sharply since 2012 and the second half of 2014 respectively, which in turn led to a steep decline in the prices of commodities and many chemicals. With sharp declines in coal prices, oil prices, and product prices, many coal chemical products have experienced cost inversion. Some coal chemical projects have even become a burden that hinders the healthy development of enterprises, leading to a change in their attitude toward coal chemistry. Secondly, the impact of coal chemical projects on local GDP has weakened. On the one hand, after “*”, there was a significant change in the policy orientation of the central government. The most notable feature is a greater emphasis on the ecological environment, with GDP no longer being the sole criterion for success. This change at the macro level has led local authorities to no longer have, subjectively, the urge to rush into launching coal chemical projects in order to achieve rapid development. On the other hand, due to the unsatisfactory performance of coal chemical projects, many of them have incurred significant losses since last year, and the extent of these losses is continuing to increase. Investing in coal chemical projects not only fails to increase local fiscal revenue; it may instead force local governments to spend money to rescue these highly loss-making projects, thereby increasing their financial burden. Additionally, the funding for large-scale coal chemical projects primarily comes from bank loans. Once these projects incur losses, it becomes difficult to repay the loans on schedule, potentially leading to financial risks. In such circumstances, local authorities naturally change their stance toward the coal chemical industry. According to the reporter’s research, in recent years, the investors in coal chemical industries, particularly large-scale coal chemical projects, have been coal companies, oil companies, and power companies in that order. Affected by the continuous and significant decline in the prices of traditional energy sources, the coal industry is now facing industry-wide losses, while oil companies are encountering a historic crisis. These companies lack the funds needed to maintain normal production and operations, and they are unable to undertake new projects even if they wish to do so. As for power companies, although their situation is slightly better, they face greater difficulties, setbacks, and risks in entering the coal chemical industry due to a lack of technical expertise and specialized management teams in this field. The precedent of Datang Energy Group’s coal chemical division attempting to sell itself as a whole due to huge losses has deterred many non-chemical companies from getting involved in the coal chemical industry. Finally, the overall costs and risks of coal chemical projects are quietly increasing. Previously, the scale of coal chemical industry was small; modern coal chemistry was just in its infancy, and environmental and water resource constraints were not yet significant. However, today the scale of coal chemical industries is already large, and **environmental regulations are becoming increasingly strict. This has led to a significant increase in the initial investment required for such projects, as well as heightened policy-related risks (over the past year, many coal chemical projects have had their environmental impact assessments rejected or have been unable to obtain land use permits, putting many companies in a difficult situation). In the later stage, as the pressure to reduce emissions continues to increase, international oil and gas supplies remain abundant, and China is able to import such resources at low costs, **the approval process for coal chemical projects that require large amounts of investment, consume significant resources, and generate high levels of emissions will inevitably become more stringent. The policy-related risks faced by these projects will continue to rise, which effectively acts as a factor that slows down the development of the coal chemical industry. An expert who preferred to remain anonymous told reporters that during the 13th Five-Year Plan period, at the **level, no new coal chemical projects will be approved, except for those key coal chemical projects that began construction during the 12th Five-Year Plan period and those modern coal chemical projects that already have the necessary approvals and complete documentation. These pathways are generally regarded as promising. Although the profitability and economic viability of current coal chemical projects leave much to be desired, with the industry experiencing a downturn and its construction scale set to be significantly reduced during the 13th Five-Year Plan period, this does not mean that the coal chemical industry has no future prospects. This is also the consensus among industry experts. Yuciti said that the slowdown in investment in coal chemical industry is a pragmatic approach by governments, enterprises, and society to view coal chemicals in an objective and rational manner. Clarifying the key priorities and directions for the development of coal chemical industry involves focusing limited funds, talent, and resources on research and development of promising and strategically important technologies, as well as on project construction and management. This approach helps to improve the technical standards, environmental protection capabilities, and resource utilization efficiency of the coal chemical industry, which is highly beneficial for its healthy and sustainable development in the long term. He believes that, taking into account the performance of demonstration projects over the past few years, the level of investment, the advancement and reliability of process technologies, the market size for the products, as well as foreseeable policy and market changes, it is recommended to continue to focus on the following approaches: first, coal-to-olefins. Whether it is the world’s first demonstration project – Shenhua Baotou’s 600,000-ton/year coal-to-olefins plant – or the Shenhua Ningxia Coal’s 500,000-ton/year coal-to-polypropylene plant that came online later, or even the China National Coal Group Yulin’s 600,000-ton/year coal-to-olefins plant which began operations just last year, all of these projects have achieved good economic results. In particular, the ability to achieve decent profitability even when international oil prices remain below $50 per barrel indicates that coal-to-olefins projects possess strong risk resistance and profitability. From the demand side, China imports over 10 million tons of polyolefins each year, resulting in a significant supply-demand gap. Even at current low oil prices, the cost of ethylene produced from petroleum remains much higher than that of olefins produced from coal in the western regions, so there is limited potential for capacity expansion in the future. With the widespread use of family cars and the need for lighter vehicles, the automotive industry’s demand for polypropylene and polyethylene will continue to rise. Therefore, coal-based olefins should be the priority in coal chemical industry. The second are coal-based ethylene glycol and p-xylene. It is estimated that in 2020, China’s apparent consumption of ethylene glycol and p-xylene will reach 18 million tons and 27 million tons respectively. The limited increase in production capacity presents a historic opportunity for coal-based ethylene glycol and coal-based p-xylene. Judging from the performance of several coal-based ethylene glycol production units in 2015, some were able to operate stably at high loads over extended periods, with their products meeting the quality requirements of the polyester industry; others have already been successfully applied in this industry. All these indicate that our country not only possesses the complete set of industrial technologies for producing ethylene glycol from coal, but has also developed experience and methods for managing and operating such production facilities. As long as production management and marketing keep up, coal-based ethylene glycol remains highly profitable even under the current low oil prices. More importantly, compared to other modern coal-based chemical production methods, the investment required for coal-to-ethylene glycol projects is relatively low; no higher-level approvals are necessary. These projects face fewer political risks and financial pressures. Given that most companies are struggling with funding constraints, coal-to-ethylene glycol represents an ideal investment option. As for the conversion of coal to p-xylene via methanol, there is a market demand, it is competitive, and profit prospects are good. However, since there are currently no large-scale industrial installations available for demonstration, and there is a risk that such projects may not be implemented successfully (given that p-xylene has been stigmatized and is viewed with fear by the public, many p-xylene projects have failed to proceed or were aborted halfway), it is recommended that companies pay close attention to the situation and consider getting involved to an appropriate extent. Third, coal quality-based utilization projects led by coal pyrolysis. The differentiated utilization of coal not only conforms to the principles of material utilization, such as using high-quality coal for high-value applications and low-quality coal for lower-value ones as well as hierarchical energy utilization, but it also helps to minimize energy consumption and emissions. The clean blue carbon, coal tar, and gas obtained through pyrolysis can be sold directly as commodities, or they can be further processed in conjunction with various industries to produce high-value-added products; this approach has been identified at the ** level as one of the key paths for the future development of the coal chemical industry. To date, breakthroughs have been achieved in various coal pyrolysis technologies; advanced processing of medium- and low-temperature coal tar has given rise to several hydrogenation techniques such as delayed coking hydrogenation, fixed-bed full-range hydrogenation, suspended-bed full-range hydrogenation, and fluidized-bed full-range hydrogenation, all of which have been validated through industrial application. Clean blue carbon produced using techniques such as water quenching or dry quenching is not only widely used in industries such as fertilizer production, calcium carbide manufacturing, ferroalloy production, and blast furnace feeding, but it is also highly favored by manufacturers and users in regions including Beijing, Tianjin, Hebei, Shandong, Henan, and Shaanxi due to its compliance with the health standards for coal used for direct combustion, as well as its significant role in reducing coal-related emissions and preventing haze weather. Since the onset of winter, over 150,000 tons of Yulin blue carbon have been sold to the Beijing-Tianjin-Hebei region alone. Once residents who use semi-coke can be granted the same coal subsidy as those who use anthracite, the cost advantage of semi-coke will become evident, and it will surely be able to quickly capture the market for domestically burned coal thanks to its significant cost-performance advantage. Li Wei, General Manager of China National Coal Jingbian Energy Chemical Company, while agreeing that coal-based olefins hold great prospects, suggested that in the planning and design of future projects, it should be avoided to continue producing polyolefin products of ordinary grades. Instead, focus should be placed on producing cross-linked polypropylene, polypropylene for use in automotive applications, metallocene polyethylene, as well as ethylene-vinyl acetate copolymers – products for which China is highly dependent on imports and that offer significant market potential in the future. This would allow companies to take advantage of the business opportunities arising from the continuous development of China’s automotive industry and high-end packaging sector. Fang Gang, Executive Director and General Manager of Shaanxi Coal and Chemical New Energy Co., Ltd., suggested focusing on the development of ultra-fine coal powder and high-efficiency coal powder boiler projects. He said that, according to several experts including Academician Jin Yong of the Chinese Academy of Engineering, any process that converts coal into other products or energy can be referred to as coal chemical industry. Ultra-fine coal powder is obtained by using special physical processing methods to grind high-quality washed coal into micron-sized particles. Due to the small particle size and high specific surface area of coal powder, when it is injected into the furnace in a mist form and comes into full contact with air, it can burn rapidly at temperatures below 1000 degrees Celsius. This reduces significantly the likelihood of nitrogen being oxidized into nitrogen oxides at high temperatures, thereby greatly improving the combustion efficiency of the coal and the thermal efficiency of the boiler. Compared with traditional coal-fired boilers, high-efficiency coal powder boilers achieve a coal combustion rate of over 98% and a boiler thermal efficiency of over 90%; the emission levels of particulates, sulfur dioxide, and nitrogen oxides are all below the limits set for gas-fired boilers, thus enabling the clean and efficient utilization of coal. At present, there are over 400,000 small and medium-sized coal-fired boilers across the country that have high energy consumption, cause severe pollution, and require thorough renovation. “During the 13th Five-Year Plan period, even if only half of them are replaced with high-efficiency coal powder boilers, there will still be market opportunities worth hundreds of billions of yuan. Moreover, since ultra-fine coal powder boilers are used in centralized heating systems as well as in systems that provide heat, electricity, and cooling simultaneously, they represent both a sector within municipal services and an environmentally friendly industry with promising prospects. Entering this industry in a timely manner can also help coal and coal chemical enterprises, which are already facing difficulties, to accelerate structural adjustments and achieve a successful transformation. An immediate reevaluation of these “incomplete” projects is needed. What troubles companies the most at present are those coal chemical projects that have been built but not yet put into operation. To move forward, substantial additional funding will be required continuously. Even if the project is completed against all odds, it is likely to start operating at a loss, with increasing operational burdens following; if construction is halted, the initial investments will become sunk costs, some of which will be lost, and in the worst case, responsibility for poor decision-making may have to be assumed. However, experts believe that given the significant changes in the current market environment and policy trends compared to when the projects were initiated, a dynamic evaluation mechanism should be established for these incomplete projects as well as for all projects in the later stages of construction. This approach, which is truly market-oriented, allows for timely adjustments to the project plans and timelines, thereby minimizing losses for companies and maximizing benefits. Yuciti said that the original intention behind developing modern coal chemical industry was to serve as a substitute for oil, reduce China’s dependence on imported oil, and ensure **energy strategic security**. Therefore, many coal chemical projects were planned and constructed during periods of tight oil supply and high prices. But with oil prices already halved, the economic viability of these coal chemical projects has clearly changed. There are currently two options: one is to move forward with the construction plan without turning back, persisting in carrying out the project; the other is to slow down, that is, to suspend the construction of projects that are no longer considered promising and to pause to reassess the situation. According to the reporter’s understanding, both of these approaches are reluctant measures taken by enterprises, with both advantages and disadvantages. The advantage of the former is that it prevents initial investments from being wasted; once the project is completed and put into operation, it generates effective production capacity, which in turn creates cash flow to sustain the operation of the project. Even if there are losses, they are operational losses resulting from sudden market changes, and the investment decisions can be justified. And once circumstances change and the market recovers, companies still have a chance to turn things around. However, if the project continues to incur substantial losses for a long time after it is completed, this will only add to the difficulties faced by the companies that have done their utmost to bring the project to completion. The advantage of the latter is that companies can conduct further analysis and evaluation, and may even make some adjustments; this can also help alleviate the company’s subsequent financial pressures and debt risks. The downside is that delays increase construction costs, and the delay cannot last indefinitely. Eucity suggests that for those \"incomplete\" projects, it is necessary to immediately assemble professionals from various fields to conduct a thorough reevaluation. Based on the progress of these projects, the following actions should be taken: first, for those projects that can still break even or generate profits despite low oil prices, the construction process should be accelerated without hesitation, so as to achieve operational capacity and start yielding results as soon as possible. Second, for projects where production capacity is already in severe oversupply, resulting in industry-wide losses; where it is expected that the market conditions will not improve for several years or even longer; and where actual investment has not exceeded one-third of the planned amount, construction should be promptly halted to minimize losses to the greatest extent possible. However, if the project’s investment level has already exceeded 40%, then under any circumstances, it is necessary to proceed with the construction in hopes of seizing future market opportunities. Third, for those projects that are not profitable under the current market conditions, but for which **changes in policies or the external business environment are possible – such as adjustments to the consumption tax on coal-based oil products, or the transmission and price monopoly issues plaguing coal-based gas companies potentially being alleviated or even eliminated as reforms progress – it is necessary to adjust the pace of construction according to the specific circumstances, carry out thorough preliminary work, and then accelerate progress once the market improves or policies become clearer. Li Dapeng, the lead scientist in coal chemical engineering at Yanchang Petroleum Group, put forward more direct suggestions. He said that although modern coal chemical industry still has good prospects, it remains uncertain when international oil prices will bottom out, how long they will remain at low levels, when they will rebound, and to what extent they can rebound. Therefore, all large-scale modern coal chemical projects with an investment amount of less than 1 billion yuan should be halted. For projects with an investment of over 1 billion yuan, those that are purely coal-to-oil or coal-to-gas projects should also see their construction postponed appropriately, in order to avoid tying up the companies’ valuable working capital. Liu Yanwei, deputy chief engineer at the Petroleum and Chemical Industry Planning Institute, said that any project that lacks complete approval procedures, starts construction before authorization is obtained, fails to ensure proper utilization of water and coal resources, does not pass environmental impact assessments, or has a site selection that does not comply with relevant regulations, should be halted without exception, regardless of the amount of investment involved. Otherwise, as efforts to address pollution and violations intensify, the risk of these projects being shut down in the future will increase. By then, the more an enterprise invests in the early stage, the greater its losses will be. Zhang Xiaojun, deputy chief engineer of Shaanxi Coal Chemical Group and former deputy general manager of Weihe Group, believes that a one-size-fits-all approach should not be adopted regarding the continuation or discontinuation of coal chemical projects that have already been launched; instead, decisions should be made after conducting a comprehensive, thorough, and scientific dynamic evaluation. For example, what were the reasons and conditions for starting the project in the first place? Have these reasons and conditions changed now? To what extent have they changed? What risks and consequences might arise from such changes? Can the company afford such consequences and risks? If it is found that the reasons and conditions for starting the project no longer exist, or if the technology chosen at the time no longer meets industry policies or environmental requirements, thereby creating significant policy and ethical risks, then the project should be stopped immediately. Under no circumstances should project construction be pushed forward on the grounds that \"once the arrow is released, it cannot be recalled.\" “In this regard, outstanding foreign companies have set an example for us. ”Zhang Xiaojun said. In 2007, the American company Dow Chemical signed an agreement with China’s Shenhua to jointly conduct feasibility studies on what would become the world’s largest coal chemical project – the Shenhua Dow Yulin Circular Economy Coal Comprehensive Utilization Demonstration Project, which required an investment of hundreds of billions of yuan. However, after nearly 10 years of deliberation and significant investment in terms of human resources, financial resources, materials, and effort, Dow found that as international oil prices declined, the economic viability of the originally planned coal chemical project had changed drastically. Continuing with the construction of this project could expose the company to substantial financial pressures and burdens, thereby affecting its global strategy and long-term development; as a result, the company decided to withdraw from the Yulin project. Also, back then, the American company DuPont planned to collaborate with China’s Weihua Group to build an acetic acid-vinyl acetate project using its own vinyl acetate technology. However, upon learning that the initial stage of this project planned to use the calcium carbide method to produce acetylene and then ethylene, DuPont immediately stated that it would not grant WeiHua Group its vinyl acetate technology. The reason is that calcium carbide belongs to an industry with high energy consumption, high pollution levels, and high emissions, which has a significant negative impact on the environment on which human life depends. If vinyl acetate is produced using DuPont’s technology, it means that DuPont is cooperating with outdated processes and indirectly encouraging the continued use of such processes that could harm the environment, which will damage DuPont’s reputation and long-term interests. “Although Weihua Group ultimately did not proceed with the acetic acid-vinyl acetate project, this incident left a deep impression on me. I think that in the process of companies deciding whether to proceed with a project or not, in addition to considering economic benefits, they should also give the environment a veto power, just like DuPont does. In other words, whether it is new projects to be launched in the future or ongoing projects that are still uncertain at present, any project that could have a significant impact on the environment should be abandoned without hesitation. ”Zhang Xiaojun suggests. In the view of Jiang Kejun, a researcher at the Energy Research Institute of the National Development and Reform Commission, any coal chemical project for which companies feel they lack the capacity to carry it out or are hesitant to proceed with it should have its construction halted immediately. Because the Paris Climate Conference reached a consensus, establishing the global target of 2 degrees Celsius and setting a more ambitious target of 1.5 degrees Celsius. In line with this goal and China’s commitments, over the next 30 years countries around the world will strive to reduce the use of fossil fuels, especially coal, and will continue to increase investment in and the use of renewable energy sources, thereby entering a post-oil economy era; as a result, international oil prices are unlikely to exceed $80 per barrel. Under low oil prices, coal chemical projects lack competitiveness, and it is even less realistic to expect **policy support for the development of coal chemicals. On the contrary, due to increasing pressure to reduce carbon emissions, **regulations on high-carbon-emission industries, including modern coal chemical industries, will continue to tighten, with a carbon tax policy likely to be introduced at an appropriate time. By then, the costs of coal chemical projects will increase further, and economic benefits will be unlikely to be favorable. He suggested that those coal chemical projects that have not yet reached half of their investment phase and are not yet completed should cease operations immediately, so that limited funds and resources can be directed toward more promising projects, thereby accelerating the company’s transformation and upgrading and opening up broader prospects for its future development.