Challenges and Development Strategies for China's DME Industry   

By Yang Chuanwei, China Petroleum and Chemical Industry Federation

In recent years, China's production capacity for dimethyl ether (DME) has grown very fast, reaching about 8.5 million t/a in 2010. However, infrastructure facilities are insufficient and policy support has not been as effective as expected. Hence, the domestic demand for DME has grown more slowly than forecast, and serious overcapacity has developed. As a result, DME producers have had to maintain low operating rates or even stop production.

Capacity grows fast

China has adequate sources of DME's raw materials and mature DME production technology, and proper uses of DME result in virtually no pollution, so DME has become an energy product that is a preferred alternative to oil and natural gas. Since 2006, enthusiasm for investing in DME production has been growing constantly in China, leading to the rapid rise in DME capacity. From 2007 to 2010, more than 2 million t/a of new DME capacity was put into operation here every year. As of the end of 2010, China's total capacity had reached 8.5 million t/a, growing 2.5 million t/a compared to 2009 and nearly 800 million t/a compared to 2006. From 2006 to 2010, capacity increased 16-fold. The capacity expansion is shown in Figure 1.
   On the other hand, the promotion and application of DME as an alternative energy product has advance slowly, so the market demand has not kept up with the supply. As a result, DME sales are difficult, market competition is intense, and DME prices have declined. In July 2010, DME prices in some areas dropped below RMB3 500 /t, while the price of methanol, the main raw material of DME, in the same period was more than RMB2 000 /t, making the raw material cost of DME exceed RMB3 000/t. So many DME producers were forced to reduce their operating rates or even stop production. Due to the uncertainty of DME's market prospects, the boom of investment in DME capacity has begun to cool down gradually.

Demand is not as large as expected

As an emerging alternative energy source, DME has a huge potential market demand in household fuel and vehicle fuel. But in fact, its promotion and application in these areas have not gone smoothly. In order to support the promotion and application of DME, China's central government and some local governments have introduced a lot of favorable policies, regulations and standards. Since 2007, Shandong's provincial government permits DME to be used as a household fuel. DME for Urban Household Fuel Gas, a nationwide industry standard issued early in 2008, also gives DME legal status as household fuel gas. In the same year, the Chinese Ministry of Finance and the State Administration of Taxation reduced the value added tax of DME from 17% to 13%.
   These favorable policies have greatly stimulated investment in the DME industry and promoted the rapid growth of capacity. But at the same time, some problems with the use of DME become increasingly apparent and severe. For example, as a household fuel, DME needs related facilities, such as gas tanks and stoves, to be modified. But in order to save costs, many gas suppliers continue to use ordinary cylinders as the containers of DME-blended fuel. However, the sealing elements of ordinary cylinders are very easily corroded by DME, resulting in a number of serious leaks or explosions. In some areas, it is required that the proportion of DME in the liquefied petroleum gas (LPG) should not be more than 20%. But some dealers often add 30% or more DME to LPG, resulting in a significant decline in the performance/price ratio of the blended fuel. In September 2010, DME for Urban Household Fuel Gas was officially released as a national standard. It clearly states: DME as an urban household fuel gas should not be mixed with other fuel gases but only be used alone with dedicated cylinders. But in the domestic market, 90% of DME is now mixed with LPG to be used as household fuel gas. Therefore, the release of the national standard means that the largest existing consumer market of DME has been eliminated for the time being.
   Because the application of DME in the household fuel area has not been as successful as expected, the demand for DME in that sector was only 3.5 million tons in China in 2010, growing nearly 1 million tons compared to 2009, but the demand growth was only half of the capacity growth. In 2010, China's output of DME was 3.7 million tons, increasing by nearly 1 million tons compared to 2009, but this was somewhat less than the capacity increase because the industry-wide operating rate declined to 43%, far lower than those of other petrochemical and chemical sectors.

Reducing costs is inevitable

Methanol is the main raw material for the production of DME, accounting for 70-80% of the production cost of DME. Therefore, having a sufficient supply of cheap methanol is crucial for DME producers to reduce their costs and improve their product competitiveness, so with DME sale prices being forced down by competition, the construction of methanol plants has become the preferred way forward for them. In 2008, 36% of DME plants in China had auxiliary methanol production facilities; in 2009, 46% had them; and in 2010, this proportion reached 55%. It is expected that this proportion will continue to increase in the next five years, exceeding 70% in 2015. The remaining twenty-odd percent will be in a very unfavorable competitive position.
   The calorific value ratio of DME and LPG is about 1:1.6, and the calorific value ratio of DME and 0# diesel oil is about 1:1.3. (That is, energy-wise, 1t LPG = 1.6t DME; and 1t diesel = 1.3t DME.) Thus, as a new alternative energy product entering the market, DME must offer a large advantage in price. Otherwise, it can hardly compete with LPG, diesel and other traditional energy products. In 2008 - 2009, due to the world financial crisis, international oil prices kept falling, leading to a rapid decline in the prices of LPG, diesel and other energy products, consequently hampering the promotion and application of DME and other new energy products. Currently, as international oil prices are up again, a price advantage appears for DME. But in the long run, because coal prices continue to climb, the prices of methanol and other coal chemical products are rising, leading directly to rising DME prices. Thus, controlling or occupying coal resources is an inevitable way for DME producers to reduce their costs, enhance their overall competitiveness and achieve sustainable development.

Suggestions for the DME industry

1) Work out related standards as soon as possible, and speed up the construction of supporting facilities

Government authorities should work out and promulgate new vehicle fuel-related standards as soon as possible, giving DME legal status as a vehicle fuel and strengthening the development and production of DME-fueled vehicles, thus broadening the near-term potential applications of DME. In addition, it is suggested that authorities move to speed up the construction of relevant supporting facilities for DME as an urban household fuel, so as to create favorable conditions for the widespread promotion of DME and to achieve the anticipated partial substitution of DME for LPG.

2) Speed up the promotion and application of DME in industrial areas

In addition to its use as household and vehicle fuels, DME can fuel furnaces and boilers. Thus, it can be widely used in factories for building materials and other industries. Therefore, it is proposed that government departments, enterprises and research institutes all should promote research on industrial applications of DME, speeding up the promotion and use of DME in these areas, reducing the dependence of industry on gasoline,