Some coal-based methanol plants begin cutting production

With daily coal consumption increasing, the price shows an uptrend, but National Development and Reform Commission (NDRC) steps up regulations to stem excessive coal price rise.

In the end of May, NDRC issued Interpretation of Coal Price Regulation Policy, setting regulations for coal for electricity generation, while specifying the marketization of coal for non-electricity generation use. Therefore, the so-called double-track pricing system is made clear, that pricing of coal for electricity generation is set by long-term contracts while pricing for coal for non-electricity generation use is market-oriented.

On Jun 9, the Ministry of Emergency Management, the National Energy Administration and other departments jointly issued the Notice on Strengthening the Examination and Approval of Advanced Coal Production Capacity. On Jun 20, under the unified deployment of the NDRC, local development and reform departments, together with market supervision and other departments, formed investigation teams to comprehensively carry out investigation on the implementation of coal price regulation and supervision policies. As a result, coking coal, coke and thermal coal futures slumped. The regulations are implemented to curb high price of coal for electric power generation, while coal for chemical production remains high, unaffected by the regulations.

With coal price increasing since May, economics of methanol production based on coal has squeezed sharply, with methanol processing spread (methanol-2*coal) to around 0yuan/mt in Inner Mongolia in early Jun. The processing spread has even dropped to negative territory, to around -200yuan/mt to -300yuan/mt in Henan and Shandong. Under this impact, Zhongyuan Dahua plans to shut its 500kt/yr methanol plant in Henan in end-Jun and Xinlianxin cuts the operating rate of its 600kt/yr methanol plant in Henan to 50-60%. The recovery of plant operations would be dependent on coal price.

As international crude oil price has been rising in 2022, economics of crude oil-based chemicals, including PP, PE and MEG are less attractive than that based on coal. However, with coal price hiking in China since May, profits of coal-based chemical production have been squeezed even to negative territory.

As of Jun 2022, China methanol capacity reaches 98.32 million tons. Coal-based methanol capacity amounts to 72.91 million tons, 74% of the total. Though coal-based capacity mainly concentrates in Xinjiang, Inner Mongolia, Shaanxi and Shanxi where there are abundant coal resources, 54% of the capacity still needs to purchase merchant feedstock coal. It is because that firstly the quality of coal cannot suffice, and secondly, several companies reduce the ratio of internal coal supply to achieve independent accounting and management.

The degree of self-sufficiency of coal is high in methanol plants in Inner Mongolia, Shaanxi and Ningxia, while producers in Shanxi, Henan and East China regions rely on merchant feedstock coal. Therefore, they are sensitive to coal prices.

The market is focused on whether coal for chemical production would be impacted by the double-track pricing system. As coal consumption increases, while supply remains tight, price of coal for chemical production is expected to hover high in the short term. Whether there will be more coal-based methanol producers cutting production due to losses needs further attention.