Review & Outlook for China's Coal Chemical Industry in H1 (I)     

In H1 2009, upward oil price has secured the confidence of coal chemical industry to develop. And planned Chinese coal chemical projects were pushed forwards, however only fewer of them brought on-stream due to the influence of market environment, such as the methanol price persistent at lower level. "More projects under planning or construction but less on-stream" is the proper attributive to describe coal chemical of the first half year 2009, reported by ASIACHEM.

1. State authorities called for steady development of coal chemical industry demonstration

On May 18th, 2009 the State Council published the Relocation & Stimulus Program for Petrochemical Industry. Among the six major planning targets, the fifth is aimed at coal chemical industry, which says "to realize local delivery of equipment packages for large sized pulverized-coal-based ammonia units etc, and to construct and bring on-stream demonstration units of coal-to-liquids (CTL), coal-to-olefins (CTO), coal-based MEG and other novel coal chemical processes". (CCR2009 No.18)
    ASIACHEM thinks the fields of novel coal chemical industry, including CTL, CTO, DME (dimethyl ether), SNG (coal-based synthetic natural gas) and MEG will obtain further supports from the state authority. Upon successful demonstration, whether these productions shall be popularized can be determined based on current macro-economic environment, market conditions and the cost of these processes.

2. Coal chemical industry: high cost

During the first half of 2009, coal chemical industry including coal-based methanol and derivatives, coking and carbide-route PVC and many other sectors suffered from lower operating rate and less profitability starting from Q4 2008, which was affected by the economic crisis, oversupplying capacity and dumping imports. Fortunately most CTL, CTO and SNG projects avoided the depression as they were not ready for commercial operation.

2.1 Imported methanol flooded the domestic market

Cost of coal-based methanol produced in China was staying at high due to the relative higher coal price in Chinese market. Considering freight added, coal-based methanol production in China lost the competition with imported gas-based methanol in southeast coast region.
   To protect Chinese methanol industry, the Ministry of Finance increased the methanol export tax rebate rate from 9% to 11% effective April 1st and further to 13%.
   In addition, the National Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and Standardization Administration of PRC (SAC) jointly published the national standard of "Motor Fuel Methanol", to be validated November 1st. It is also reported that the national standard for M85 gasoline shall be published this year. ASIACHEM believes that an established motor fuel methanol standard system is in favor to Chinese methanol industry.

2.2 DME industry: dilemma

In the first half of 2009, operation rate for Chinese DME industry was lower than 20%. Along with the resurgent economy, the production of LPG as a refinery byproduct was increasing, and more LPG abroad with lower price entered into China, which resulted in a deeper drop of LPG price in the Chinese market. The downward price once dropped to below RMB3000 per ton, even lower than the cost of DME, would cause negative profit by blending DME in LPG.
   As known to ASIACHEM, main target market for DME industry is cylinder filled LPG, therefore profitability of the industry should improve once LPG price goes up after the oil price. However, oil price increase will also bring up the price of methanol and hence the cost of DME. In addition, extension of natural gas pipelines network would cause DME to face, on town gas market, the competition of natural gas from different sources.
   As the cost of DME is determined by methanol price while the sale price is constrained by LPG price, it is predicted that DME industry in China may not achieve generous profit in 2009. Furthermore, the operation rate in the second half of the year would hardly return back above 30% because of the capacity of nearly 8 million t/a in severe surplus. (to be continued)