Analysts expect profits to rise at crude-oil-based chemical plants in Asia over the next three years owing to a lack of new capacity and delays in proposed projects to turn Chinese coal into chemicals. However they warn the party will end in 2017 when plants fed by cheap natural gas in the United States start to export their chemicals. This leaves Asian producers a narrow window to improve their profitability, depressed in the past two years by weak demand and excess supply. “[Coal-to-chemicals] plant delays could be more severe than current market projections,” Por Yong-liang, head of Asia energy research at BNP Paribas, wrote in a research report. “In conjunction with slowing capital expenditure, ongoing supply disruptions and recovering demand, we project an ethylene up-cycle for next year to 2016.” Having examined 15 coal-to-chemicals projects that are supposed to start production between next year and 2017, Por and his team found that only six plants are on schedule, five face delays of three to nine months, and four could be set back by one to two years. Water shortages, delays in the construction of transportation and utility infrastructure, and the lack of government approvals for land use and infrastructure were cited for the delays. [Coal-to-chemicals] plant delays could be more severe than current market projections Por Yong-liang, BNP Paribas Even if the plants are commissioned, capacity utilisation rates could be restrained by technical difficulties, since most of them are built by coal miners that have not established a track record in running chemical plants. Finding and retaining sufficient engineers to work in remote areas where the plants are located is also a challenge, Por said. An example is Datang International Power Generation, which struggled with low utilisation rates for 18 months at its Duolun coal-to-chemicals plant in Inner Mongolia since beginning trial production in March last year before achieving 70 to 80 per cent utilisation in September last year, according to a Citi research report. The project recorded a loss of 600 million yuan (HK$761 million) this year’s first nine months, the report said. Environmental protection has also been an area of concern for coal-to-chemicals projects. Shenhua, China’s largest coal miner, was fined 100,000 yuan in January last year and was ordered by the Ministry of Environmental Protection to shut down its 17 billion yuan coal-to-chemicals project in Baotou, Inner Mongolia. It had failed to make timely application to the ministry for its environmental protection facilities to be approved, despite having started production in June 2010. While it did not suspend production and finally obtained the approval in March, it effectively began production long before it was supposed to. Por projected that only 4.6 million tonnes of annual coal-to-ethylene capacity will start up between this year and 2017, with just 2.8 million tonnes of output in 2017, or 1.8 per cent of BNP’s forecast global demand that year, owing to low utilisation. Ethylene is a base chemical from which a wide range of chemicals used in multiple manufacturing industries are derived. We expect Asian ethylene margins to be structurally challenged due to the US [projects’] start-ups Citi report A Citi research report said despite the 4 million tonnes of annual coal-to-ethylene capacity being built, “delays will be common due to execution risks”. Coupled with a lack of completion of new naphtha-based chemical plants in 2015 and 2016, profit margins of ethylene makers are expected to rise to US$450 a tonne in those years from US$320 next year and US$250 last year’s first nine months. But Citi’s analysts warned that Asian ethylene makers’ margins would be under pressure come 2017 when US surplus supply hit the market. This will be the result of an oversupply of cheap natural gas produced from advanced technologies that crack open shale rock formations to release trapped gas. “We expect Asian ethylene margins to be structurally challenged due to the US’s [projects’] start-ups,” they wrote. They forecast the US would add 10 million tonnes of annual ethylene capacity between 2017 and 2020, or 6.6 per cent of current global capacity. Some 6 million tonnes is expected to be exported outside North and South America to displace high-cost output, with half possibly to Asia. Cash production costs at mainland coal-to-chemicals projects, at US$500 to US$600 per tonne, are lower than the US$1,180 or so for naphtha-based projects in Asia, but higher than the US$230 or so in the United States for projects that use natural gas, they estimated.