China eyes coal revolution

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Unlike in the U.S., where more than 60 percent of the crackers are fed by ethane extracted from natural gas that comes out of abundant gas reserves, China is eyeing a revolution of its own. Coal-to-olefins, an alternative route from the conventional oil route for the production of olefins, looks promising in order to lower China's position in the production cash cost curve.
Being the largest producer of coal and holding the third position in terms of largest coal reserves in the world, China is poised to pounce on this opportunity and give a fight back to its Middle East — and of late, Western — foes who sit comfortably in the lowest position of the cash cost curve and eye the huge demand potential that China offers.
Higher returns can be enjoyed when the oil prices are higher and in order to be protected from fluctuations in oil prices and higher raw material costs, vertical integration is the key. The majority of players entering the CTO market are backwardly integrated.
Supply is expected to remain short of demand and a market that depends upon imports of PE is always susceptible to higher prices due to supply tightness. Does this mean that an alternative feed, CTO, is the answer?
Under the 12th Five Year Plan of the world's second-largest economy, China has set an ambitious plan to raise current levels of ethylene self-sufficiency at 53 percent in 2012 to 64 percent in 2015. Domestic ethylene capacity is expected to rise by a mammoth amount to reach 25.6 million metric tons (56.4 billion pounds) per year in 2015, representing 49 percent of the total capacity in 2012. While crude-based units are anticipated to contribute the majority of the capacity expansions, alternative feedstocks are expected to account for a consider-
able chunk of the total olefin production in the region. With shale gas out of the equation until 2015, coal-based olefin plants are tipped to account for almost 15 percent of the total feedstock base for ethylene in 2015 from a current share of 2 percent.
Ethylene prices in Asia are a function of Brent prices and downstream supply-demand dynamics, and prices tend to shoot up due to any tightness caused by unexpected shutdowns or reduced cracker operating rates in the region, while higher production costs due to fluctuation in Brent prices often lead to higher prices for the monomer. There have been instances in the past where ethylene prices have defied the trend witnessed in the crude oil price because of regional supply-demand dynamics of the monomer.
Around 60 percent of ethylene goes into the manufacturing of PE production and the current, as well as future, capacity additions in the monomer will not be able to cater to the feedstock demand for domestic PE. Despite planned expansions expected in PE, producers of polyolefins are expected to operate at reduced rates since there won't be enough availability of the monomer to cater to domestic requirements.
Importing of monomers in China is another challenge that the downstream players have to face. Due to its volatile composition, ethylene has to be transported in a cryogenic condition that is not a popular practice in the petrochemicals market.
Besides this, cheap imports from the Middle East, due to that region's lowest place in the ethylene costs curve, makes it less economical for the domestic PE producers to import the monomers and produce PE.

There have been imports of monomers in the past from other Asian economies, such as South Korea and Japan, accounting for only 3 percent of the total ethylene demand for the production of downstream derivatives other than PE. However, suppliers are expected to restrain from such practices in future, due to ethylene's volatile nature and transportation difficulties.
Currently, there are only two plants operating that use alternative feedstocks, though several other producers are expected to enter that field by 2015.
China holds a huge potential in plastics as the per-capita consumption of plastic lags far behind developed economies. Demand from PE, which occupies a greater share of the overall plastics industry, is expected to grow at a healthy rate of above 6 percent in the region. Despite PE capacity additions, supply will remain short of demand and China will have to rely on imports greater than 8 million tonnes (17.6 billion pounds) per year in order to fulfill the demand for the next 10 years. Saudi Arabia, Iran and South Korea will capture major shares of the imports picture.
Domestic ethylene capacity is expected to remain short, which will lead to price fluctuations in the monomer during tight supplies caused by cracker outages or reduced operating rates. Prices might even see higher pull during the peak times when the demand picks up and downstream players look forward to replacing their inventories.
CTO, which promises a lower position in the cash cost curve from the conventional oil route for the production of ethylene in the region, will give favorable returns as long as the crude oil price remains higher (in the range above $100 a barrel). With most of the players vertically integrated, from the raw materials to polyolefins, CTO producers seem to be sitting on a gold mine.
From a buyer's perspective, things won't be much different. The production route will be open to several feedstock slates, but it is likely to give an edge to the producers as the production will remain short of the domestic capacity. Resurgence in the domestic petrochemicals industry in China will depend upon how the initial investments in CTO will shape up, as it might take two to three years before all the plants come on line and acquire a stable production.
China is continually wanting to raise self-sufficiency levels and current investments will lead to 64 percent of ethylene demand being met domestically by 2015 and increasing to 68 percent by 2020.
There are several other hurdles, such as environmental damage and water consumption, that need to be addressed; but ultimately, CTO might lead to a promising sustainable future for the petrochemicals industry in China and create a pathway for alternative feedstock routes in the country.

Mohil Pandey is a research analyst for Cary, N.C.-based Beroe Inc., a global market research firm.