China needs coal-to-olefins projects to meet demand for next 5 years: HSBC

Dubai (Platts)--24Jun2011/510 am EDT/910 GMT


China will need to bank on coal-to-olefins projects to meet olefin demand over the next five years, HSBC's global research team said in a report issued Thursday.

"Though the olefins demand outlook in China does not look strong in the short-term, over a five- year period, refinery-based olefins capacity in China will not be able to meet the expected rise in demand," Sriharsha Pappu, the HSBC Middle East North Africa petrochemicals analyst who led the team that wrote the report, told Platts.

The report titled "How elastic is plastic" follows comments from a senior official of China's National Petroleum and Chemical Planning Institute, or NPCPI, who said that by 2015 coal-based methanol-to-olefins project will become viable even though the technology being used in China is still experimental and many of the plants are still run on a pilot basis.

A coal-to-olefins project involves the conversion of coal to synthesis gas. The purified synthesis gas is then converted to methanol, which is in turn converted to olefins.

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While Yi Bai, the vice-president of NPCPI said the expected buoyancy in crude prices would stimulate coal-to-olefins projects, the HSBC analysts said the limited growth of refining capacity in China, and in turn, the limited growth of refinery-based olefins capacity would support such projects.

"Crude oil prices over 2011-2015 will be higher than in the previous five years," Bai said Thursday at the China Petrochemical Focus 2011 conference being held in Shanghai.

REFINERY-BASED OLEFINS CAPACITY INADEQUATE TO MEET DEMAND

HSBC's Asian oil and gas team expected Chinese refining capacity to grow by 2.9 million b/d over 2010-15, and this implies an expected increase in olefins capacity of 3.2 million mt/year.

However, HSBC expected olefins demand to grow by 9.1 million mt/year in the same period. "It is clear that refinery-based expansions alone will not be sufficient to serve the market and that alternative routes to adding capacity are required," the HSBC analysts wrote in the report.

Coal-to-olefins capacity will rise at the rate of 6 million mt/year in the coming years, the HSBC report said.

While Bai said in Shanghai that in a few years time it would be clear that it was not mere optimism that led to the construction of these plants, and that they were using proven technologies, the HSBC analysts said the key questions surrounding the coal-to-olefins process pertained to process economics, stability and competitiveness versus the traditional routes of chemical production.

"The successful startup at the Shenhua Baotou plant in August 2010 has helped alleviate some concerns regarding the coal-to-chemicals route. While the Shenhua Baotou methanol-to-olefins plant has faced some initial teething trouble, the stabilizing of its operations will go a long way in establishing the viability of the process," the HSBC report said.

WHAT'S HOLDING COAL-TO-OLEFINS PROJECTS BACK?

The HSBC report said that while the fragmented nature of the industry with small plants, difficulties in accessing coal and access to commercially viable technologies had emerged as the main roadblocks in coal-to-olefins projects, China's National Development and Reform Commission, or NDRC, had recently set standards for minimum plant capacities required to gain approval for a new projects.

The minimum capacity for a coal-to-olefins plant has been set at 500,000 mt/year olefins capacity, while a 1 million mt/year limit has been set for coal-to-methanol projects. "This bodes well for the prospects of coal-to-chemicals, preventing the emergence of subscale players," the HSBC analysts said in their report.

As for the problems of coal supply, which includes low grade coal and reserves which are far inland, the HSBC analysts said: "The Chinese government, in its 12th five-year plan, is further targeting to reduce the number of coal enterprises from 11,000 in 2010 to 4,000 by 2015. The bulk of the announced coal-to-olefins projects are from companies that have coal arms or utilities businesses with coal supply, thus ensuring feedstock supplies for the project."

According to Platts data, there are at least five major methanol-based petrochemicals plants online, with 13 plants and expansions being built or in the preparation phase.

--Shashank Shekhar, shashank_shekhar@platts.com