Nitrogen+Syngas 374 Nov-Dec 2021
30 November 2021
Chinese ethylene capacity slows the MTO boom
METHANOL MARKETS
Chinese ethylene capacity slows the MTO boom
In China, requirements for methanol to produce olefins, mainly propylene and ethylene, from coal, has driven much of the growth in global methanol demand over the past decade. However, a new wave of ethylene cracker investment may put a stop to new MTO plant building.
China has been the key driver of methanol markets over the past two decades, pioneering its widespread use first as a fuel; blended into gasoline for road vehicles or, via its derivative dimethyl ether, blended into LPG for domestic heating, and then over the last decade as a way of using China’s vast stocks of coal to replace its imports of olefins via various methanol to olefins (MTO) processes. In so doing, Chinese methanol capacity and demand has come to represent about 65% of the 81 million t/a global methanol industry (see Figures 1 and 2).
According to Methanex figures, of that 81 million t/a, around 14 million t/a (17%, or nearly one third of Chinese demand) has come to be represented by Chinese MTO consumption, and it has become the dominant factor in methanol trade, as several large scale MTO plants have been built without a methanol producing ‘front end’, but rather relying upon methanol bought on the open market. It is no exaggeration to say that China’s MTO manufacturing has changed the face of the methanol industry. And all of this has happened in a relatively short space of time. China’s first large scale coal-to-olefins (CTO) project was commercialised in Baotou, Inner Mongolia in 2010, but since then a further 24 plants have become operational.
The olefins industry
MTO plants produce a mixture of ethylene and propylene, which are then polymerised to form polyethylene (PE) and polypropylene (PP), the two largest plastics in terms of demand. Polyethylene is used in the packaging, construction and electrical industries, while polypropylene is used in packaging and the fibre industry to make man-made fibres, particularly water resistant ones.
The global ethylene industry produces around 150 million t/a, mainly via the thermal cracking of either naphtha (an oil derivative) or ethane (a natural gas component). There are over 270 ethylene crackers in service around the world. Propylene is produced as a co-product of ethylene cracking, but it can also be produced as a by-product of refinery fluid catalytic cracking, or via a variety of ‘on purpose’ methods such as propane dehydrogenation (PDH), which uses liquefied petroleum gas (LPG) as a feedstock, as well as methanol to olefins and methanol to propylene (MTP). On-purpose methods of propylene production have gained ground because by-product propylene production from ethylene production or refineries fell behind propylene demand as it rose faster compared to ethylene demand, leading to a shortfall.
China’s rapidly expanding industrial and manufacturing economy saw its domestic demand for PE and PP rise equally rapidly. However, as the country’s domestic supplies of oil and gas were limited, this led to increasing imports of both polymers from elsewhere in the world. This in turn led to an attempt by the government to use China’s huge domestic coal reserves as a feedstock for olefins production instead, and the easiest route for this was via MTO/MTP. In 2019, the total ethylene capacity from China’s MTO units reached 5.21 million t/a, accounting for 21% of China’s total domestic ethylene capacity. Even so, that same year, China was only able to supply around 50% of its ethylene requirements, and as a result imported 17.1 million t/a of polyethylene, and this figure rose to an estimated 19.8 million t/a of Chinese PE imports in 2020. However, because of domestic refinery and MTO/MTP production, as well as imports of propane for PDH plants, polypropylene imports were much lower, at around 5.2 million t/a in 2019, and though they rose considerably to 6.6 million t/a in 2020, this is still only one third of the comparable figure for ethylene.
Filling the ethylene gap
The boom in shale gas production in the United States has led to that country being able to close the gap between supply and demand for natural gas and even become a net exporter, as liquefied natural gas (LNG). However, it has also led to a surplus of higher chain carbon compounds, particularly ethane and natural gas liquids (NGLs) such as propane and butane.
In turn, and in order to try and achieve a greater degree of self-sufficiency in ethylene production (the philosophical question of whether a domestic industry based on imported feedstock is actually genuine self-sufficiency we will leave aside for now…) and take advantage of cheap international ethane, in the mid-2010s China therefore began a programme of building domestic ethylene cracking capacity that would be based on ethane.
The first wave of new ethylene capacity came on-stream in 2017, and has accelerated since then. Chinese ethylene capacity rose by 6.8 million t/a to 32 million t/a in 2020, with six crackers completed, and this year sees another eight crackers operational or due to become so, with another 7.8 million t/a of capacity coming on-stream, taking total capacity to just short of 40 million t/a. Between 2020 and 2025, a total of 19 new steam crackers will become operational in China, with a total nameplate capacity of 19.7 million t/a. At the same time, the covid pandemic has seen demand growth slow considerably. At the moment, Chinese cracker capacity is set to take domestic ethylene production from around 58% of demand in 2020 to 83% of forecast demand by 2025, with imports reduced comparably.
There is also considerable investment in ethylene crackers elsewhere in Asia. A total of up to 52 million t/a of capacity could be added across the region between 2020 and 2025, with China only accounting for around half of this. India and Iran also have major capacity additions planned, with India, like China also relying upon imported feedstock. One of the knock-on effects of relying on so much imported ethane and LPG for feedstock should be to greatly reduce the global surplus of those compounds and therefore decrease availability and increase the price going forward, potentially making Chinese MTO production slightly more competitive.
The impact on MTO
MTO economics depend upon the relative prices of coal, oil, gas and methanol, and whether the plant is a full coal to olefins (CTO) facility, with control of its own feedstock costs, or simply a methanol to olefins producer, relying upon merchant methanol. Much of China’s ethylene production has traditionally been based on naphtha. Therefore, when oil prices are high and coal prices low, CTO producers enjoy a considerable competitive advantage. This was the case in China from around 2010-2014, when the first wave of CTO capacity was built. Methanol prices on the world market, which impacts Chinese domestic methanol prices due to its ease of shipping, tend to depend upon the difference between gas and oil prices. Because of its increasing fuel uses, methanol prices often move in tandem with oil, whereas the margins for producers in a major exporting region such as the Middle East depend on cheap gas prices relative to oil.
A look at the price graph on page 7 of this issue will show that methanol prices were high from around 2011-2014 and again from 2017-2019, and this impacted upon the production economics of merchant MTO producers, especially near coastal regions, many of whom were forced to curtail production in 2018, when MTO operating rates fell to 78%. There has been very limited interest or investment in merchant MTO production for a couple of years – the last two projects, including one at Tianjin Bohai, came on-stream this year. There has also been an attempt by some MTO producers to take advantage of low gas prices in the US by building dedicated methanol capacity there for export to China. However, the ongoing rumbling trade disputes between the US and China and US local opposition to new chemical facilities have effectively killed many of the projects, especially the large Northwest Innovation Works plans for 20,000 t/a of methanol capacity in the Pacific Northwest.
Meanwhile, CTO economics have been impacted by rising coal prices. New investment in China has also been deterred by concerns around environmental and water supply issues. CTO producers can still compete at present with US ethane crackers. Even so, the huge investment in Chinese ethylene capacity will reduce the profitability of ethylene production from MTO and CTO producers. Wood Mackenzie has predicted that: “prices of olefins and their derivatives will be under pressure from now until 2025 due to massive cracker complex investment. This will restrict the profitability of MTO units. We expect the margins of standalone MTO units or those integrated with heavily-invested commodities to be between break even and negative until 2024 before margins recover.”
MTO producers remain towards the top of the ethylene cost curve, and there is an expectation that there may well be a shakeout, with larger, more efficient producers and/or those integrated with higher value derivatives more likely to weather the storm. IHS has gone further, and suggested that merchant MTO operating rates may fall below 70% in 2022, with difficult operating conditions persisting into 2026.
China’s methanol demand
At the moment, the worst has not yet happened for Chinese MTO producers, with operating rates averaging 82% during 2020, and keeping methanol demand relatively high. Outside of methanol for MTO production, China is a major consumer for fuel blending, and the production of fuel additives such as methyl t-butyl ether (MTBE), as well as for more ‘traditional’ chemical demand uses for methanol such as formaldehyde and acetic acid. Methanol blending into gasoline remains a major use, but a national standard outside of the coal-rich methanol producing provinces remains elusive. There is also potential competition from an ethanol blending mandate, and methanol use as a blendstock has actually fallen over the past couple of years.
All of this, and the forthcoming glut of new Chinese olefins production, points towards a more challenging future for methanol than has been the case historically. At last year’s World Methanol Conference, Mike Nash of IHS noted that demand for methanol worldwide was actually projected to fall below GDP growth for 2020, and suggested that it might rise at only around 2.8% year on year during the 2020s, compared to global GDP growth of 3.2% per year. However, Methanex is projecting much rosier forecasts of an increase in methanol demand by 4% year on year over the same period. Certainly, demand continues to be robust in China for the time being; even though Chinese methanol production rose by about 8% in 2020 in spite of losses caused in the first half of the year due to the pandemic, lower methanol prices and lack of feedstock availability, overall demand remained robust and imports still reached a record level in 2020 of 13 million t/a, up from 10.9 million t/a in 2019.
New ethylene catalyst
Another competitor for MTO may be a new catalyst launched in early October by Clariant in conjunction with Linde Engineering. The new catalysts achieve the low emission oxidative dehydrogenation of ethane in a commercially feasible manner due to a step change in selectivity and productivity. Clariant’s ODH catalysts are designed exclusively for Linde Engineering’s EDHOX™ catalytic on-purpose ethylene technology. In contrast to conventional steam cracking, which operates at process temperatures up to 900°C, EDHOX™ operates at temperatures below 400°C, enabling comparatively low CO2 emissions, as well as potential sequestration of CO2 . The new catalysts offer high selectivity to ethylene and acetic acid (up to 93%) while also minimising the formation of by-products.
On the capacity side, there is still new Chinese methanol capacity being built, much of it tied to downstream CTO production, including the new Ningxia Baofeng Energy plant, which is due to have a capacity of around 500,000 t/a of CTO and 500,000 t/a of C2-C5 utilisation, making it the largest single train MTO plant in the world, and including up to 1.5 million t/a of methanol capacity. Two more MTO plants are being backwards integrated into new coal to methanol units to become CTO rather than MTO producers. Methanol demand for Chinese CTO production will rise by about 3 million t/a by 2025, and overall, around 6.6 million t/a of methanol is due to come on-stream in China in the period 2020-2025, although this will be balanced by some capacity rationalisations. Around 1 million t/a of older, less efficient capacity using older gasification technology which requires more expensive anthracite coal feedstock rather than cheaper bituminous coal is expected to close over the same period.
The impact on methanol markets
At the moment, Methanex is projecting around 14 million t/a of new methanol capacity being commissioned in the 202125 period (see Table 1) and sees an additional 16 million t/a of new demand over that period, leaving the market short of 2 million t/a to be recovered in improved prices and operating rates. However, as the new Chinese ethylene (and some propylene) capacity starts up, this may have a significant impact on Chinese MTO production, and as a result curtail methanol demand.
