China coal chemical industry developed steadily in 2008, under the directing and regulating of government. Although the dramatic fluctuation of international oil price caused a lot of perplexities to the development, the industry did play an important role for China's energy supply security and guarantee the supply of chemical feedstock. In 2008, how about the investment of coal chemical in China? How about the policies going?

 

* Policies Promulgated to Regulate Coal Chemical

 

Before 2008, previously promulgated policies applicable to coal chemical industry, including "Coal Industry Development 11th-5 years Program" issued in July 2007, "Energy Development 11th-five Years Program" and "West China Development 11th-five Years Program" both issued in April 2007 were still valid to direct the development of China's coal chemical industry. However the "Mid- and Long-Term Development Program for National Coal Chemical Industries", for which a draft was set off for circulation as early as by the end of 2006, can not so far become an official publication owing to discrepancy of comments from different interest groups.

In 2008, China further clarified the authority supervising over coal chemical industry. The Ministry of Industry and Information Technology (MIIT) and the National Energy Administration (NEA) took their formal appearance in July and August 2008 respectively. According to an official document issued from MIIT, "NEA shall be responsible for the industry supervision for refinery, coal-based fuels and fuel-use ethanol, while MIIT shall be responsible for other petrochemicals and coal chemicals."

In September, the National Development & Reform Commission (NDRC) issued "Notification on Several Issues for Strict Regulation over CTL Projects", halting of any CTL projects in China with only two exceptions of Shenhua Erdos Project and Shenhua Ningmei-SASOL Project. In October, MIIT issued a document, ordering further restructuring of calcium carbide, iron alloy and coking industries and eliminating of poor capacities of out-of-date technologies.

 

* Profitability Impacted by the Weak Demand and Price

 

The market price for most of basic chemicals was cut by half as the result of abrupt drop of oil price and reduction of downstream demand brought by the global finance crisis. Data from ASIACHEM shows that in January eastern China market price of methanol has dropped to RMB 1 800/t from the top point of RMB4 500/t, DME (dimethyl ether) dropped to RMB3 400/t from RMB6 700/t, and calcium carbide route PVC down to RMB5 000/t from RMB8 800/t.

Under such conditions, most coal chemical producers were reducing operation rate to avoid more losses. Operating rate of the methanol industry as a whole decreased from 60% to 40%. Coking furnaces could not be totally shut down due to the technological issue but, as disclosed by coking enterprises, thus caused losses in September and October had offset all the profits gained in the preceding 8 months.

Dropping oil price even dimmed the prospect of coal-to-liquids (CTL) and coal-to-olefins (CTO) industries. For most CTL and/or CTO projects, their feasibility used to be evaluated at the oil price level of US$40/bbl as the basis. As WTI price kept sliding and once approaching this critical level, price of HDPE in eastern China market correspondingly dived from RMB 16 400/t to RMB7 500/t, causing greater worry about the profitability of such projects of tremendous capital demand.

Although so far no CTL or CTO project has entered commercial operation, ASIACHEM believes in the bright foreground and urgent necessity of these projects. First, they shall be deemed as strategic technology reserves to protect the national energy supply security and shall not merely judge by financial criteria; second, the price of oil, as a non-renewable resource, is destined to rebound when demand is restored.

 

* Coal Chemical Absorbed Keen Investment

 

Coal chemical industry attracted interests and concerns of investors from other industries in early 2008 when oil price staying at high level. Even after the economic situation started going downward, these investors were continuing to study the feasibility of coal chemical projects.

In September, CEO of BP's global coal business visited Xinjiang region to survey the coal resource exploration in the region and the local government's policy on coal chemical development. In October, the president of Shell China Group also paid an investigation visit to Xinjiang and expressed Shell's intent of participation in Xinjiang's energy development and construction. Sinopec Group also started feasibility study of large size CTL and coal chemical projects located in Xinjiang.

In addition to oil giants, other industries were making investment in coal chemical fields. In May, China National Tobacco Corp announced a coal chemical project to be built in Erdos, Inner Mongolia. In September, Shiyuan Resource Investment, a subsidiary of Shimao Group, one of top real estate majors in China, signed an agreement with Hami government, Xinjiang, to invest in a coking tar processing project. In October, the global largest private-held coal enterprise US Peabody Energy signed contract with the government of Inner Mongolia on a coal-based liquid fuel project. Top Chinese hydropower company Three Gorges Project Corporation also started construction of a 1.5 million t/a methanol and 1.0 million t/a DME project in Pucheng, Shaanxi province.

 

* Coal Chemical Technology: Come In and Go Out

 

In 2008, more advanced foreign coal chemical processes were introduced to China's coal chemical industry whereas Chinese processes of self-owned intellectual property right were getting matured and sold to foreign licensees.

In November, experts from ConocoPhillips introduced the company's E-Gas process and its application potential in synthetic gas projects. E-GAS has enjoyed over 2 decades of commercial operation experiences. The unique 2-stage slurry-feed gasification design can offer higher energy efficiency and its dry-type dust arrestor system may bring additional environment advantages--totally free from black water and floating dust--a best fit with China's Energy Conservation & Pollutants Reduction policy.

In October, East China University of Science & Technology (ECUST) signed an agreement with US Valero Energy to license its water-coal-slurry gasification process to the latter. This is the first time a China-developed chemical process package licensing to a developed country.

 

* Methanol/DME Standards in Finalization

 

Existing Chinese national standards on refined oil products can be directly applied to oil products from direct or indirect CTL and methanol-to-gasoline processes. For methanol/DME--fuel alternatives, a specific standard system is necessary to support their applications. If China's huge methanol capacity will cause a state of oversupply or not, which will depend on whether the above said standard system can be promptly finalized and popularized with efforts.

In fact China's standardization of methanol/DME fuels gained new ground in 2008. In August, the "M85 Methanol Gasoline" standard passed the audit organized by Petrochemical Standard Committee (PCSC) in Shanghai. In October, the "Methanol as Vehicle Fuel" standard passed another PCSC audit in Qingdao. A road test of 80 000km mileage on the standard of the "M 15 Vehicle-Use Methanol Gasoline" is currently carried out by Shanghai Volkswagen Automotive Company.

As for DME fuel, "DME Used as Town Gas", a standard issued by the Ministry of Construction, has been validated since January 2008. In July, the draft standard of "DME Blended LPG Used as Town Gas" was prepared for circulation.

In September, the National Methanol/DME Fuel Standardization Technical Committee was set up in Taiyuan, Shanxi province. The committee is under the supervision of the National Standardization Commission and receives technical directions from the National Methanol/DME Fuel & Methanol/DME Fueled Clean Vehicle Special Committee. Set up of the committee shall provide warranty for consequent issuance of national standards on methanol/DME fuels.

In general, the overheated investment trend in China's coal chemical industry was abated in 2008 by the dual action of governmental regulation and market situation. But the interest of investors on coal chemical projects is still strong. Progress of standardization on methanol/DME provided new outlets for these products to be used as civil and vehicle fuels. As viewed by ASIACHEM, along with the ongoing advancement of self-developed coal chemical processes and introduction of foreign technologies, as well as commercialization of pioneering coal chemical projects, China is destined to become the center and focus of global coal chemical industry.