The Dow Chemical Company started out by making bleach in 1897. Its founder Herbert H Dow grew the firm into a chemicals giant, using the mantra: “If you can’t do it better, why do it?”
China’s media is now pondering whether Dow is going through another ‘why do it’ moment after years of frustration over a huge investment in Shaanxi province.
21CN Business Herald, CBN and Shanghai Securities News have all reported that Dow has withdrawn from a joint venture with coal behemoth Shenhua to build a coal-to-chemicals project. They picked up the news initially from ICIS, a website that focuses on the global chemicals business. It claimed that the Rmb128.5 billion ($20.57 billion) initiative was no longer going ahead.
Located near the city of Yulin, the complex intended to tap abundant coal reserves and convert them into plastics and other chemicals with Dow’s gasification technology. With a planned annual output of 3.5 million tonnes of olefins and polyvinyl chloride, the plant was touted as the largest coal-to-chemicals unit anywhere in the world, with the construction plan envisaging a 700,000KW power station.
The project’s gestation period has been lengthy, to say the least. Talks began as far back as 2005 when Dow and Shenhua signed a letter of intent. In 2007 they began a feasibility study and they lodged a formal application with the government for the plant three years later. The plan was to start construction in 2013 and begin production by 2016.
But when CBN sent a journalist to the proposed site in the Yushen Industrial Park, it found it “barren” and lacking in activity.
Delays in receiving state approvals have been blamed for the slow progress. Now that looks to be less of an impediment after the environmental protection agency finally gave its blessing a fortnight ago. Surprisingly the approval didn’t trigger celebratory comment from either company. Instead an insider told Shanghai Securities News: “The project will certainly not continue.”
The barrage of publicity this week earned a response from Shenhua. On Wednesday a statement appeared on its website refuting media claims and stating the initial phase of the joint venture was “progressing as planned”.
Dow had been quieter, but WiC contacted its US headquarters to get more clarity. “Dow does not address speculative reports,” a company spokesperson wrote back by email. “Dow and Shenhua Group jointly submitted The Project Application Report (PAR) to China’s National Development and Reform Commission (NDRC) in late 2010. A revised PAR to address the initial issues from the NDRC was resubmitted in March 2012, and expert panel reviews are in progress. We have undergone a series of successful project reviews over the past year. While we are awaiting government approval, we continue to work with our partner, Shenhua, to fine tune the business scope and details.”
However, those news outlets that have run stories on the Yulin project speculate that it is threatened less by regulatory concerns than plain business logic. For one thing, the outlook for China’s chemical industry has deteriorated. And as CBN points out, declines in the price of coal have eroded Shenhua’s financial resources too.
Dow already counts China as one of its largest markets, with 20 production facilities. However, the outlook for the gasification venture is considerably less bullish than in 2010 when its management approved the joint venture (media say the division of ownership gave Dow a 30% stake, and Shenhua 70%). Curiously for such a vast undertaking the Yulin project got no mention whatsoever during discussion of Dow’s results in January (for future growth, the $12.5 billion Sadara project in Saudi Arabia was cited by management).
Two trends are making life harder for chemicals firms in China. Costs are rising because of new environmental protection measures. And surplus capacity is driving down margins. Sun Weishan, the deputy secretary of the Chinese Petroleum and Chemical Industry Association, told China Energy News that the petrochemicals sector had 200 million tonnes of overcapacity last year. He estimated that potential supply would rise to 790 million tonnes in 2015, but that demand would amount to only 510 million tonnes.
A vast new chemical complex would worsen the surplus – although Yulin will not impact the capacity equation for some years. Indeed, even if construction at the site began tomorrow, production would not start before 2017.
The scheme still has cheerleaders, wed to the promise of the coal-gasification technology involved.
Over the past decade China has tried to embrace the process, seeing it as an answer to the country’s energy dilemma. China has plentiful reserves of coal. Converting it to natural gas – a cleaner option for power stations, or alternatively to make plastics and textiles – looks like a winning option.
One of the pioneers of the technology is South Africa’s Sasol, which commercialised the gasification process during the apartheid era as a way of offsetting international oil embargoes. Sasol also had a joint venture with Shenhua for a proposed plant in the Ningxia Hui autonomous region. But it pulled out of the project a couple of years ago, frustrated by decisionmaking delays, the South China Morning Post reports.
The newspaper says foreign partners like Sasol are sought for their superior technological know-how. Local designs have not always proved successful. For example, a Rmb16 billion coal-to-chemical plant commissioned by Datang in Inner Mongolia has seen “disappointing” production results “due to technical difficulties”, claims the SCMP. Indeed, one of the reasons that Shenhua views Dow as an attractive partner is its technological expertise, especially in carbon capture – where carbon dioxide from a plant is buried deep underground to prevent emissions entering the atmosphere.
In fact environmental concerns are now a major hurdle for the industry as a whole. While substituting coal for gas looks environmentally beneficial, there are snags. One problem is that many of the parts of China with coal reserves also tend to be arid. The gasification process requires a lot of water (the coal is exposed to steam at high temperature). The estimate is that 10 tonnes of water are needed to create a single tonne of liquid fuel.
This is a conundrum that has already dogged Shenhua. As we reported in WiC207, members of environmental group Greenpeace stormed a company press conference in Hong Kong last September. Shenhua’s startled management then headed for the exits, leaving activists to tell journalists their concerns about a coal-to-liquid petrochemicals plant in Inner Mongolia. Greenpeace claimed the project has resulted in a loss of 50 million tonnes of water from the Haolebaoji region over the last eight years, causing the nearby Lake Subeinaoer to shrink by two-thirds.
Yulin lies on the border of the Ordos desert, adjacent to Lake Hongjiannao, China’s largest ‘desert freshwater lake’ (it too has shrunk by half, local activists say). The shrinkage may explain why Dow and Shenhua’s gasification complex has struggled for so many years to obtain all the requisite approvals.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.