Li Xunjun, SCI
China’s olefin industry may usher in the capacity expansion phase in 2021-2025. Cost competitiveness of coal-to-olefins (CTO) will show up as feedstock diversification is poised to intensify cost competitions. However, the heavy-coal-consuming industries will come under pressure from the policy side as China is endeavored to peak carbon dioxide emissions by 2030. The CTO industry will face opportunities and challenges. There are 35 CTO projects built up in China, with a combined olefin capacity at 16 620 kt/a, accounting for around 21% of the domestic total. The capacity increase may touch the ceiling in the following years.
Increasing competitions between olefin feedstock
The olefin industry has been witnessing feedstock diversification in recent years. Apart from the traditional naphtha cracking for ethylene production, CTO registered a fast development in the past decade and is holding a share of 23% (including MTO). Lighter feedstock becomes the new development trend in the past two years and light hydrocarbon cracking took a larger proportion of around 8%, as shown in Figure 1 and Figure 2. With the start-up of PetroChina Tarim ethylene project and PetroChina Lanzhou Petrochemical Changqing Project, light hydrocarbon will take a larger share. The diversification of propylene feedstock is more obvious, mainly represented by steam cracking, C (M) TO, propane dehydrogenation (PDH)/cracking and catalytic cracking processes. Declined crude oil prices in 2020 narrowed the cost difference among varied production processes, as displayed in Figure 3. The costs of naphtha cracking, MTO and PDH are relatively sensitive to crude value changes and hence fell dramatically in line with the softened crude prices. Their cost gap narrowed to almost non-existent.
Figure 1 Ethylene capacity distribution by process
Figure 2 Propylene Capacity Distribution by Process
Figure 3 Feedstock cost comparisons for olefin
The rally in international crude values has gathered pace in 2021, buoyed by the easing COVID-19 concerns and economic recovery. Decreased shale gas supply after the US cold snap and OPEC+’s new output cut agreement boosted crude oil prices, with Brent crude once topping US$70/bbl, which set a new high. This notably pushed up the production costs of naphtha cracking, MTO and PDH. As for CTO process, its cost decreased significantly as feedstock coal prices fell amid loosening supply.
When crude oil prices are below US$40/bbl, the crude-to-olefin process shows some cost competitiveness, but when crude prices are higher than US$40/bbl, the CTO process is more cost-competitive. In the medium to longer term, there is a slim possibility of crude values falling back to below US$40/bbl given the global economic recovery. This may give the CTO route more cost competitive edge. China’s import reliance rate of crude oil and natural gas continued to increase in 2020, to reach 74% and 44%, respectively. China needs to adopt the strategy of feedstock diversification as it is rich in coal, poor in oil and has limited natural gas resource. The development of new-type coal chemical industry is such a strategy that adapts to the chemical feedstock diversification.
Levy of carbon tax will weaken cost competitiveness of China’s coal chemical products
In September 2020, China announced at the United Nations General Assembly the goal of achieving a "peak carbon dioxide emissions” by 2030. China's 50% of air pollution emissions and more than 70% of carbon dioxide emissions are closely related to coal consumption. Hence, It is an important prerequisite for the coal industry to take the lead in reaching the peak in carbon dioxide emissions. On February 25, 2021, the Inner Mongolia Development and Reform Commission issued on its website the Several Safeguard Measures for Ensuring the Completion of the Energy Consumption Dual Control Targets and Tasks in the “14th Five-Year Plan” Period (Draft for Comment), which stated that no new modern coal chemical projects will be approved in principle during the “14th Five-Year Plan” period. CTO capacities in Inner Mongolia and Ningxia accounted for 31% of China’s total. If the two regions jointly issue restriction measures against the coal chemical industry, it will greatly hamper the industry development.
The levy of carbon emissions tax will impose impacts on the cost side as CTO products generate large-volume of carbon dioxide emissions. Taking into account the hit from the ethane route in the Middle East and lower-cost shale gas process in North America on China’s chemical products, the carbon tax collection is poised to weaken the cost competiveness of Chinese coal chemical products.
The CTO process has a relatively broad growth potential from the cost advantage and energy strategy security side. However, the growing environmental concerns, especially the propose of the “peak carbon dioxide emission” strategy will lead to moderate inventory management and stricter incremental control on the CTO industry during the “14th Five-Year Plan” period. The rising threshold will accelerate the concentration of capacity and resource in leading enterprises and will optimize the competition pattern in the industry.
