Nitrogen+Syngas 368 Nov-Dec 2020
30 November 2020
A blueprint for 2025
CHINA
A blueprint for 2025
Every five years since 1955, the Chinese government has prepared its ‘Five Year Plan’ for the country’s economy over the coming half decade. This year, the 14th Five Year Plan is being drafted, and given the influence of the Chinese economy over the global chemical sector, its conclusions will be eagerly awaited.
In late October China held the Fifth Plenary Session of the 19th Central Committee of the Communist Party. Its purpose was to discuss the forthcoming 14th Five Year Plan for the Chinese economy, which will be formally ratified in March 2021, and which will set the template for investment decisions over the period 2021-25. Given the importance of China’s decisions to all global industries, the shape of the plan will have a major impact on the trading environment over the coming years, and agriculture and chemicals are no exception. It’s worth remembering that the 13th Five Year Plan, which ends this year, saw China pivot to a strategy giving greater emphasis to the environment and less to industrial production, and led to mass shutdowns of urea plants in areas with poor air quality, while the previous, 12th Five Year Plan came in the wake of the global financial crisis and continued a massive industrial stimulus package that led to severe overcapacity in many industries.
The 13th Plan also set a cap for consumption of fertilizer at 2020 levels, and an expectation of falling demand going forward as the agricultural sector achieves more efficient nutrient use, and capped coal-fired power capacity at 1,100 GW. The potential impact of the new plan on the nitrogen and other syngas-derived industries could be a considerable one.
Broad aims
The National Development and Reform Commission (NDRC) typically begins drafting the next plan two years before it is approved, so many of the broad outlines are already known. The 13th Five Year Plan set a target of 6.5% annual GDP growth for the country as a whole, although in reality this fell from 6.9% in 2015 to 6.1% in 2019, and is likely to be around 3% this year because of the Covid pandemic. It is believed the 14th Plan will aim for a more realistic rate of 5% out to 2025 but may be more flexible in terms of setting absolute numbers.
The 14th Plan has also been trailed to revolve around the theme of what the NDRC is calling “dual circulation”. This means a coupling between the domestic economy (“internal circulation”) and the global economy (“external circulation”), and ways of better integrating the two. This will no doubt continue to be built around the ‘One Belt, One Road’ initiative.
Other aims of the 14th Plan are expected to be a new emphasis on fostering urbanisation (mainly in developing metropolitan areas and city clusters), continued infrastructure investment and measures to support employment in small and medium-sized enterprises and improve the social safety net, and hence consumption.
Environmental protection
The 13th Plan placed an unexpectedly strong emphasis on environmental protection. The 14th is expected to build on this. The country’s target of achieving peak carbon emissions by 2030 was recently confirmed by President Xi Jinping in a virtual address to the UN General Assembly, and he added a new target − that China is aiming to be ‘carbon neutral’ by 2060. This goal will have significant consequences for the country’s huge oil, gas, coal and resources sectors. One idea that has been floated is replacing the 13th Plan’s energy consumption cap of 5 billion tonnes of coal equivalent with a carbon emissions cap.
Reducing the carbon intensity of the economy, especially heavy industry, will of course mean a continued move away from coal, which has powered China’s industrial boom, and which still represents 66% of electricity generation capacity. Natural gas use, which made up 8% of energy consumption in 2019, is targeted to reach 16% by 2035. Renewables will of course play a major part, with the 14th Five Year Plan expected to highlight major investment in geothermal energy, solar and wind power, with a target of providing 18-20% of total electricity demand by 2025. There is also expected to be more nuclear power, as well as carbon capture and storage projects and greater focus on energy efficiency.
Fertilizers and chemicals are among the most energy hungry industries, and one area where energy efficiency is likely to be promoted is in the continuing closure of older capacity in industries such as fertilizer, especially in areas where there is overcapacity. It will also mean that investment in new capacity is subject to much greater scrutiny. A recent government document on the chemical industry said that: “decisions on new production capacities must be taken with caution,” and highlighted the methanol to olefins sector in particular. It is also likely to mean the continuing drift in the Chinese chemical industry away from sites which can pollute the environment close to major population centres and towards major industrial parks, as well as continuing tightening of environmental controls.
However, it may also mean that there is increased focus on a switch to capacity for which there are cleaner and more efficient production routes available. While still coal-based, it has been striking the extent to which urea production has switched in recent years away from smaller scale plants using older gasification technology which requires anthracite coal to larger scale bituminous based plants which are far more productive and efficient. In March CRU forecast that China would close nearly 13 million t/a of urea capacity over the period 2018-2023, but nearly 9 million t/a of this would be replaced by newer, more efficient capacity.
Hydrogen
There is also a growing move to a ‘hydrogen economy’. During the first six months of 2020 alone, 37 policies in support of the hydrogen economy have been published by various level governments, including 7 by central government authorities, and 30 by local governments. One of the areas of focus is on vehicular transport, with plans to encourage alternatives to oil-fuelled vehicles. In addition to its major focus on purely electric vehicles, China has said that it also hopes to have 50,000 hydrogen fuel cell vehicles on the road by 2025 and 1 million by 2030, by which time it aims to have 1,000 hydrogen refuelling stations, centred on Wuhan, which will have 100 of these and become a ‘hydrogen city’. At present there is not a corresponding focus on producing the hydrogen from ‘green’ technologies – only 3% of China’s hydrogen currently comes from green sources. However, given the country’s commitment to net zero carbon emissions by 2060, this seems likely to become an increasing focus. Using nuclear energy to generate hydrogen has also been suggested.
Self-sufficiency: real and ‘virtual’
Achieving domestic self-sufficiency in key areas has long been a Chinese policy. The country has been self-sufficient in urea production since the early 2000s, for example, and moved to self-sufficiency in ammonium phosphate production later in the decade. But following the trade war with the USA and the way that the Covid crisis has highlighted potential vulnerabilities in global supply chains, the move seems set to intensify and deepen. For example, China has been moving to self-sufficiency in sectors such as refining and petrochemicals, and gradually moving up the value chain to speciality and fine chemicals. This will be accompanied by more concentration on areas such as technical and process expertise and catalyst development in these areas.
One area which has become a focus is olefins. The 13th Plan aimed for a move from 67% to 92% self-sufficiency in polypropylene production – a factor which has driven the rapid investment in methanol to olefins capacity. In fact it has achieved around 87%, but the 14th Plan will no doubt seem renewed progress in this area. For ethylene the self-sufficiency figure is only around 62%, and as a result a large number of ethylene crackers are under development in China.
Where self-sufficiency cannot be achieved, it is likely that China will seek a form of ‘virtual’ self-sufficiency, via investment in overseas capacity that can feed back to China. Economic commentators have suggested that the ‘One Belt, One Road’ initiative may be a key part of this, in other words, that the aim will be for few, if any, imports to come to China except from Belt and Road initiative partner countries.
However, the drive to self-sufficiency also hints that China will be willing to continue to put up with domestic industry being less competitive than overseas suppliers on a cost per tonne basis, provided that the jobs and production remains in China.
Agriculture
China must feeds 20% of the world’s population using only 7% of the world’s arable land. The food supply chain and food security has consequently always been a key priority for the Chinese government and is regarded as a national security issue. China is self-sufficient (or about 95% so at least) in many staples such as wheat, rice and corn, but nevertheless remains the largest importer of food in the world, and the figure is growing. China’s food self-sufficiency rate has fallen from 100% in 2005 to 82% in 2017. A report released this year by the Chinese Academy of Social Sciences noted that by 2025, China will have a shortfall of about 130 million tonnes of food. Increasing urbanisation and an ageing population, as well as the potential impact of climate change are all exacerbating the problem, while increased animal rearing has increased the demand for eg soybeans to feed them. Most of China’s food imports are soybeans.
The result of this trend has been a renewed focus on feed security. In August this year president Xi Jinping unveiled an initiative to cut food waste and make food security a priority, via strengthening assistance plans for the food sector, safeguarding food production resources, strengthening the country’s grain reserve system. It also appears to have marked the end for a brief flirtation with using corn ethanol as a vehicle fuel. In 2017 China mandated that 10% of fuel would come from corn-derived ethanol, similar to mandates in the US and Brazil. However, this was abandoned in 2020 due to concerns over falling maize stocks.
Some of the drive to regain self-sufficiency will no doubt also feed back into ‘virtual’ self-sufficiency once more, via targeted investments and agreements overseas to ensure continuity of supply. This may be especially so in the soybean sector, where China currently produces only 15% of its own needs.
In terms of demand for fertilizer, China’s application rates for nitrogen fertilizer are some of the largest in the world, and almost double the global average. But an increasing drive to greater nutrient use efficiency (NUE) is likely to see that fall over the period of the 14th Five Year Plan. To some extent, greater fertilizer use on the rapidly expanding fruit and vegetable sector has masked some of the decline in traditional cereal crop production. However, as the complexion of China’s agricultural sector changes, increasing farm sizes and efficiency, greater use of multi-nutrient and speciality fertilizers, fertigation, and greater spread of experience and good practice fertigation will couple with the the continued push from government to avoid nitrogen leaching into water courses and lead to falling application rates overall.
