Methanol Capacity in China Has Surplus, Structural Readjustment Is Imminent

By Yang Chuanwei, China Petroleum and Chemical Industry Federation

The methanol sector in China entered a period of rapid capacity expansion in past years. After the outbreak of the financial crisis, in particular, to push economy, various local governments disregarded basic elements such as resource, environment and market and harshly approved a large group of methanol projects. The profit-making level of the entire sector was seriously affected and many enterprises could hardly make both ends meet and had to restrict or even suspend production. The methanol sector in China is faced with unprecedented challenges today. The  methanol sector will surely meet large-scale reshuffling and reorganization and start a period of readjustment.

1. Review of the sector

(1) The capacity expansion was slowed down and the operating level was still maintained at a relatively low level

The new capacity of methanol starting production in 2012 was around 6.0 million t/a. By the end of the year the total capacity of methanol in China already reached 52.0 million t/a, an increase of around 13% over 2011 and the growth was much lower than previous years. In the 10 years from 2002 to 2012 the average annual growth of the methanol capacity in China reached an astonishing 25%. Main reasons for the rapid capacity growth are as follows. (a) Methanol is a basic chemical raw material with extremely extensive applications. There is a huge potential market demand in quite a few sectors such as methanol gasoline and dimethyl ether. Stimulated by profits, enterprises have made an undue exaggeration and an advance withdrawal of such potential demand and conducted blind investment. (b) To increase financial revenue and promote employment, some big coal producing provinces blindly advocate the local transformation of coal resources. Enterprises have to launch methanol projects so as to get low-priced coal resources. (c) The methanol sector lacks the macro control and guidance of industrial policies. The only admission threshold today is that the scale of a new methanol project should not be lower than 1.0 million t/a. It is because of this threshold that some enterprises prefer to choose a bigger scale when they plan new methanol projects, aggravating the capacity surplus. Besides, many enterprises have managed to evade the threshold requirement by using the method of collective application and batched construction.
   Data shows that the output of methanol in China was 26.40 million tons in 2012 and the overall operating rate of production units was only 51%. According to statistics from China Nitrogen Fertilizer Industry Association, the output of methanol in China was 31.29 million tons and the operating rate was 60%.  

(2) Low-priced products from abroad produced impacts on the domestic market

From 2010 the methanol sector in China suffered sustained violent impacts from low-priced products from abroad. The import amount of methanol in China was 5.0 million tons in 2012, a drop of 12.7% from 2011 but the total amount was still maintained at a high level. As imported methanol gained a firm foothold in the domestic market, its price presented a trend of constant increase. The import price reached US$377 per ton in 2012, being US$8 per ton higher than 2011. In spite of this, imported methanol still had a price advantage of US$100-200 per ton over domestic methanol. Furthermore, many large methanol suppliers have their own ocean shipping fleets and the overseas sales of products are therefore extremely convenient. It is expected that the capacity of methanol in the world will be more than 100 million t/a in 2015. The capacity of methanol in the Middle East will also reach more than 35.0 million t/a. The target market of most methanol commodities in this region will be China. Low-priced methanol from the Middle East and Russia will therefore produce long-term impacts on the domestic market.

(3) The industrial concentration degree made an evident upgrading and the capacity shifted towards resource places

With the sustained scale expansion of new projects and the ongoing merging and reorganization in enterprises, a batch of large enterprise groups have appeared in the methanol sector in China. The upgrading of the industrial concentration degree is promoted. There are 11 methanol producers with a capacity of over 1.0 million t/a in China today. They include CNOOC Kingboard Chemical Co., Ltd., Shenhua Group Corporation Limited, Yuanxin Energy Co., Ltd., Shandong Yankuang Group Co., Ltd., Huayi Group Company, Jiutai Energy Group, Henan Coal Chemical Group Co., Ltd., China Datang Group, Jingcheng Anthracite Mining Group, ENN Group, Xinjiang Guanghui Industry Investment Group Co., Ltd. The total methanol capacity in these 11 enterprises accounts for around 50% of the national total. The average capacity of methanol producers in China has also increased from 150 kt/a to 170 kt/a.
   The methanol sector is a resource-intensive sector and has heavy dependence on coal and natural gas. Methanol producers located in resource places and their peripheral areas can effectively control their production cost on the strength of raw material price advantage. The shift of the methanol capacity towards resource areas, coal producing areas in particular, has become more and more prominent in China in recent years. Most of coal-to-methanol capacities recently starting production are distributed in Inner Mongolia, Shaanxi, Henan, Shanxi and Xinjiang. The output of methanol in Inner Mongolia was 5.525 million tons in 2012, accounting for 21% of the national total. The output of methanol in Shandong was 4.032 million tons, accounting for 15%. The output of methanol in Shaanxi was 2.694 million tons, accounting for 10%. The output of methanol in Henan was 1.781 million tons, accounting for 7%. The output of methanol in Shanxi was 1.472 million tons, accounting for 5%.
   Different from the methanol capacity distribution mode, however, production units of major methanol downstream products and their projects being constructed or planned for construction are mainly distributed in consumption places and their peripheral areas, coastal areas with advanced economy in particular. For example, dimethyl ether capacities that need to purchase methanol from outside sources are mainly distributed in Jiangsu, Hebei, Guangdong, Henan and Shandong. Oxo-synthesis acetic acid capacities are mainly distributed in Jiangsu, Shanghai, Shandong and Heilongjiang. Formaldehyde and methanol gasoline producers are also mainly concentrated in central and eastern regions. There is therefore already a divorce between production and consumption in the methanol sector. Except for Shandong, eastern regions such as Jiangsu, Guandong and Shanghai all need to purchase great quantities of methanol from outside sources. The resultant transportation pressure and safety problem will surely bring considerable negative impacts to enterprises and even the entire sector.

(4) There were problems in the application of methanol gasoline

A series of problems such as corrosion to engine parts, carbon deposit in combustion chambers, unduly high consumption of fuel and unqualified higher alcohol content in tail gas have appeared in some automobiles using methanol gasoline. Questions raised by insiders and consumers have seriously affected the progress of methanol gasoline dissemination.
   Moreover, there are also worries over methanol gasoline following the same old road of dimethyl ether. When the market was not yet well developed and standards and matched facilities were not yet complete, the dimethyl ether sector made a crazy capacity expansion. To digest the capacity in serious surplus, enterprises had to stealthily blend dimethyl ether into liquefied petroleum gas. Quite a few accidents happened to the use and a very bad impression was produced for consumers. The dissemination and application of dimethyl ether were therefore seriously affected. Methanol gasoline is faced with the same option today. The output of methanol in China has made a rapid increase in past two years and the output in 2012 was 11.0 million tons higher than 2011. Foreign enterprises also make a dumping of around 5.0 million tons in China a year.

2. Development trend

The capacity of methanol in China has a serious surplus today. It has been already imperative in the methanol sector to seek outlets in downstream sectors to digest the surplus capacity. The market volume of traditional downstream products such as formaldehyde, acetic acid and MTBE is however almost saturated and the demand growth is slow. The development of application markets for dimethyl ether has been delayed again and again. Judging from the present status, only methanol gasoline and methanol-to-Olefin can hopefully become straws for the methanol sector to clutch at. Due to poor matched conditions, low public recognition and problems with the product itself, it will take some time for methanol gasoline to achieve large-scale dissemination. Faced with the huge pressure of serious capacity surplus and the temptation of economic benefits, the methanol gasoline sector must maintain extreme coolness and restraint, refrain from making blind development to topple the market supply/demand balance and making an illegal addition to destroy its own future.
   Methanol-to-olefin projects are already spread nationwide and there seems to be a booming development. Along with the rapid expansion, potential risks in the methanol-to-olefin sector are also on the increase. First of all, many enterprises have not yet mastered core technologies. Process equipment and key technical personnel are totally introduced from abroad. The production and management level can hardly be guaranteed. Although methanol gasoline and methanol-to-olefin have huge potential market space, there are considerable uncertainties in their future development and a powerful backing to the methanol market is unlikely to be formed in near future. The methanol sector should therefore adhere to the principle of “being strict to import and lenient to export”, suppress investment impulse, mitigate partial surplus capacity through various channels and calmly wait for most optimal development opportunities.

3. How to mitigate surplus capacity

It is suggested that relevant departments should issue the “Admission Conditions for the Methanol Sector” as soon as possible, raise the admission threshold of new projects in terms of energy consumption, material consumption, environmental protection and carbon emission instead of making restrictions merely through capacity so as to check the blind expansion of the methanol capacity. At the same time, the mechanism for eliminating outdated capacities should be established to force methanol capacities with small scale, high energy consumption, high material consumption and poor competitiveness quit the market.
   Local governments should formulate strict and feasible coal chemical industry development programs and lay down strict restrictions in total amount control, industrial distribution, product structure, energy conservation, emission reduction and outdated capacity elimination. Besides, the industrial policy of making the local transformation of 50% coal resources should be resolutely discarded.
Cooperation between coal suppliers and natural gas supplies should be strengthened. Cooperation between methanol producers and downstream clients should also be strengthened. Long-term stable price coordination mechanism should be established with downstream enterprises. In this way not only unfavorable impacts on downstream sectors caused by drastic ups and downs of the methanol price can be avoided, the stability in the production and operation of methanol producers can also be ensured and win-win in upstream and downstream enterprises can be achieved.
   As methanol is a most basic organic chemical product, relevant production enterprises, research institutions and universities should strengthen coordination, jointly develop new methanol downstream products and expand consumption sectors.
It is suggested that matched facilities such as filling stations and methanol automobiles should be improved as soon as possible to accelerate the dissemination of methanol gasoline. In so doing, the lack of oil/gas resources in China can be made up and the oversupply status in the methanol sector can also be eased.