*New naphtha crackers with capacity of less than 800,000 mt/yr will not be allowed, and the existing ones with capacity of no more than 300,000 mt/yr will be phased out;
*Relatively small impact on aromatics, fiber and coal-to-methanol.
Guangzhou (JLC), June 3, 2024 – The State Council of the PRC issued an action plan for energy conservation and carbon reduction during 2024-25 (hereinafter referred to as “Action Plan”), according to a circular released on May 29, outlining the targets for energy consumption and CO2 emissions. (see more details in China reiterates target to remove CDUs below 2.0 million mt/yr)
JLC has assessed the potential impact the Action Plan may have on China’s chemical industry.
Impact on olefins
Before 2020, China’s olefins were mainly produced through either steam cracking or coal-methanol-olefins (CTO). With China’s implementation of carbon reduction policies in recent years, the country has boosted the development of chemical projects using light feedstocks, including propane dehydrogenation (PDH) and ethane cracking, to produce olefins.
For propene production, China has put many PDH projects into operation over the past few years, with more to come in the next 2-3 years. In the first quarter of 2024, PDH surpassed steam cracking as China's leading propene production method.
The impact on the olefin market is mainly reflected in two aspects:
On the one hand, the number of CTO projects will be limited in the future, due to its characteristic of “high energy consumption and high emissions”. For CTO projects under planning or construction, most have been approved or are in the process of being approved. Most of them adopted the new generation of processing technology and environmentally-friendly equipment, which could be more expensive but “greener”. Investment in and construction of CTO projects have been slow, compared to those projects using light feedstocks (such as PDH or ethane cracking). Light feedstock projects have gained greater market share, especially since 2023.
On the other hand, the action plan established requirements for newly constructed ethylene production units, prohibiting the construction of new naphtha crackers with a capacity of less than 800,000 mt/yr. Any company seeking a "capacity replacement" shall shut down and remove its primary production units in a timely manner. The government will take actions to phase out naphtha crackers with a capacity of no more than 300,000 mt/yr, and will step up efforts to remove idle capacity.
Impact on aromatics
China’s aromatics industry has been expanding rapidly since 2019, but will likely slow down by 2025. However, there may still be a supply shortage for products including benzene and paraxylene (PX). As a result, aromatics will continue to be quite popular in the oil-to-chemicals industry.
The Action Plan did not provide specific guidance on the aromatics industry.
In the 2022 version of the Guidelines, the government mentioned that it would phase out small and outdated PX units. Over the past two years, some companies have begun to remove their obsolete capacity. For example, Sinopec Luoyang Petrochemical shut down its PX unit (225,000 mt/yr) indefinitely on May 15, 2023. Sinochem Hongrun Petrochemical’s PX unit (600,000 mt/yr) has been offline since August 2023. Currently, most PX producers are large scale oil-to-chemicals complexes which house their own aromatics complexes. These complexes fully utilized benzene and toluene resources to maximize PX production. As a result, most PX units in China now comply with the policy requirements.
Due to the removal of outdated steam crackers, aromatics output may be partly affected. In addition, due to capacity control in the steel industry, some independent cokers will also be phased out. This will limit the aromatics production from these cokers.
However, the overall supply of aromatics will not be greatly affected, as aromatics produced from these coking units were quite small, and China did not have many naphtha steam crackers with a capacity of less than 300,000 mt/yr.
Impact on fiber
China’s fiber industry has seen rapid development over the past years, achieving the industrial chain of “PX-PTA-PET”. The trends of “large scale and integration” in this sector are good for reducing emissions. In the future, PTA and PET units will not be isolated ones, and they will be part of the bigger complexes. With the advancement of technology, some PTA units could produce power on their own. The Action Plan did not specifically mention the PTA sector.
For ethylene glycol (EG), the Action Plan may mainly focus on coal-based EG.
China previously mentioned that it would promote the technology of coal-based EG and the reduction of energy and carbon emissions. During the 14th Five-Year Plan period, the policy requirements on the EG industry have shifted from “orderly construction”, “industrialization” to “energy saving and consumption reduction”.
The Action Plan is expected to have a relatively small impact on the fiber industry.
For PTA, some small and medium-sized units have previously been shut down due to low operating rates. New PTA units were all technologically mature. As a result, the action plan may not have a significant impact on the PTA sector.
For EG, coal-based grade capacity accounted for 34% of China’s total EG capacity. Coal-based EG capacity expansion only began in 2020 when sub-standard capacity accounted for 40% of the total coal-based EG capacity. Those coal-based EG units coming on stream after 2022 were all relatively large ones with improved technology and lower energy consumption.
At present, 95% of the domestic coal-to-EG units can meet the benchmark standards. Those coal-to-EG units still in operation are relatively large. China may have completed the removal of outdated, small and high energy-consuming EG units. Therefore, the action plan won’t have much impact on the coal-based EG industry.
Impact on coal-based chemicals
China has been at the forefront of producing chemicals from coal for many years. At present, the industry mainly covers coal-to-oil, coal-to-natural gas, coal-to-olefins, coal-to-methanol and coal-to-EG.
Over the past few years, with the implementation of the policies of "carbon neutrality and carbon peak", the pace of capacity optimization in the industry has accelerated, and the removal of outdated production capacity has been underway.
China’s methanol industry has been slowing since 2020, with an average annual growth rate of less than 5%. Meanwhile, the “functional capacity” has been on the decline since 2019, falling by 2-3 million mt per year, according to JLC data. The methanol industry is now shifting to a trend of “larger size, larger enterprise, and more focused on industrial chain”.
The Action Plan may have little impact on the methanol industry.
Coal-to-methanol companies with a capacity of no less than 1 million mt/yr now account for about 52% of China’s total coal-to-methanol capacity. Most of them can meet the current requirements after completing the technological upgrade since 2020.
The action plan said the country will basically root out those “low-level” or “inferior” coal-to-methanol units by 2025, aiming at removing those with capacity under 200,000 mt/yr. At present, these small units only accounts for 5.8% of the total coal-to-methanol capacity, and most of them remained shut.
For new capacity, the growth rate of new methanol projects will be slower this year.
New projects for green methanol, including CO2-hydrogenation-to-methanol or biomass-to-methanol, will come online gradually in the future. For coal-to-methanol new projects, they are all relatively large in scale and position themselves as “green” projects, therefore the carbon emissions should be less of a concern.
In general, the policy will have relatively small impact on coal-to-methanol, but the market should watch closely how fast China is phasing out the outdated capacity.
