September 28, 2021

Higher costs drive re-examination of Covestro MDI plant location plans – CEO

Author: Tom Brown

2021/09/28

LONDON (ICIS)–A significant increase in construction costs in the US has become a factor in Covestro moving to re-examine the potential location of its planned flagship methylene diphenyl diisocyanate (MDI) plant, with China mooted as an alternative.

The company announced on Tuesday that it intends to proceed with work on a world-scale MDI plant, after suspending plans to build a unit in the US in early 2020.

The producer had announced in January 2020 that it would halt work on its planned 500,000 tonne/year MDI plant at its Baytown, Texas, production complex, in the face of challenging global market conditions.

A substantial increase in construction costs in the US, both in terms of labour and materials, since the project was first announced in 2018 could result in a lower return on capital employed (ROCE) than originally anticipated, prompting the re-examination of the location for the investment.

“Construction costs in the US have significantly increased, leading to a lower return on capital employed versus our original plan,” said Covestro CEO Markus Steilemann, speaking on an investor call.

“In China, construction costs have remained relatively flat, with attractive ROCE. Strong demand growth in China and Asia creates the need for another plant in Asia,” he added.

The company targets a return of at least seven percentage points above its cost of capital, according to CFO Thomas Toepfer, meaning a target ROCE of around 15%.

“That is certainly a challenge for a greenfield investment. But we think that we will be at least close to that, and therefore, this is also why we’re critically looking into all the options with respect to locations,” he said.

The company’s existing MDI assets are fully utilised at present, according to Steilemann, with a project to increase capacity at its Tarragona, Spain, plant, still underway but expected by 2025 instead of the initial estimate of 2022 when the project was first announced at the end of 2017.

“We are only able to grow below demand growth until the start-up of a new plant,” he said.

Covestro had originally guided for capital expenditure of $1.5bn for its new world-scale plant, but that figure may be set to rise irrespective of its final location in China or the US.

“I would say it’s not a secret that there has been significant cost inflation since [the project was announced], especially for materials like steel but also for labour, especially in the US, so this is one of the reasons why we are looking into all the options we have,” Steilemann said.

“Relative to the $1.5bn, there would be a slight increase to that in China, but there would certainly be a significant increase in the US,” he added.

A decision will be announced at the next stage of project development, he added, with the plant expected to be commissioned in 2026, two years after the original forecast start date for the Baytown project. The plant capacity is also likely to be around the originally forecast 500,000 tonnes/year, but the final figure is still to be determined.

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The firm is also planning to expand its toluene diisocyanate (TDI) production by de-bottlenecking facilities in Dormagen, Germany, expected to be complete by 2023. The unit currently has a production capacity of 250,000 tonnes/year, according to ICIS data.

Also earmarked for investment are coatings and adhesives, and specialty films, with planned expenditure of €300m and €200m apiece by 2025, while the firm is planning more investment in the circular economy.

“In order to achieve our ambitious objectives and become fully circular, we are planning targeted capex spending of around €1bn on circular economy projects over the next ten years,” Toepfer said.

Covestro is planning to increase capital spending over the next few years, with an estimated €800m of investment this year expected to expand substantially in the near future, he added.

On the back of new investments, the realignment of the business into solutions and specialties and performance materials in mid-2021, and the acquisition of DSM’s resins and functional materials business, Covestro expects to increase mid-cycle earnings before interest, taxes, depreciation and amortisation (EBITDA) from €2.2bn to €2.8bn by 2024, the company added.

(update re-leads, adds CEO, CFO comment)

https://www.icis.com/explore/resources/news/2021/09/28/10689596/higher-costs-drive-re-examination-of-covestro-mdi-plant-location-plans-ceo

September 28, 2021

China’s crackdown on intensive energy use ripples across petrochemical sector

Highlights

Cracker, PDH plants mull output cuts, hikes amid impact on margins

Coal shortage further constrains operations in coal-olefin sector

Bigger producers can gain — if they manage energy costs

China’s increasingly strident efforts to curb intensive energy use and hasten carbon emission cuts are prompting petrochemical makers using LPG or naphtha as feedstock to adjust run rates in response to the various impacts the move is having across the petrochemical sector.

The crackdown comes at a time when prices of LNG, a cleaner but costlier alternative to coal as a generating fuel, are rallying ahead of winter and coal usage by households for heating is being prioritized over industrial requirements amid low stockpiles and concerns over generation capacity.

The coal shortage is constraining operations in the coal-olefin industry, while higher LNG costs for generation are impacting the economics of petrochemical plants that use other feedstocks.

China’s total electricity consumption rose 13.8% over January-August, outpacing an 11.3% increase in power generation over the same period, National Development and Reform Commission data showed.

The coal-olefin sector has cut runs to reduce intense power usage after the Yuan 126 billion ($19.6 billion) coal-olefins plant in northwest Shaanxi province was suspended for flouting energy consumption limits.

That sector is estimated to account for 20%-25% of China’s polypropylene production. The rest is estimated to come from oil — mainly naphtha cracking at steam crackers — at 55%, with LPG cracking at propane and mixed alkane dehydrogenation plants accounting for 12%-14% and methanol around 6%, according to data from domestic information provider Longzhong and industry sources.

LPG demand from the chemical and petrochemical sectors was estimated to account for more than half of China’s total LPG demand in 2020, Longzhong data showed.

Coal-fired power plants generate around 50% of China’s electricity supply.

Lower PP output

Reduced PP production from coal-olefin plants could result in higher PP margins, which could theoretically provide more market share for the LPG cracking sector, including PDH plants and boost LPG demand by 10%, a trade source with China Gas said.

However, operating rates at some PDH plants, especially those in eastern Jiangsu and southern Guangdong provinces, are also expected to be affected by local governments’ power-rationing policies, market sources said.

The NDRC has alerted 10 provinces or regions including Guangdong, Jiangsu, Yunnan, Fujian, Shaanxi, Guangxi, Ningxia, Qinghai, Xinjiang and Hubei that they have not met energy-consumption targets for the first half of 2021.

Guangdong recently imposed a new round of power rationing on industrial users, cutting their power supply for 4-5 days a week, according to a report by the province’s development and reform commission Sept. 25.

Dongguan Juzhengyuan in Guangdong shut its PDH plant for four days in September due to power rationing, reducing its operating rate to 69.75% from full capacity in August, according to domestic energy information provider JLC.

Jiangsu has also enforced power rationing on industrial users, supplying power for two days and cutting supply for two days, local media reported.

Oriental Energy has lowered the operating rate at its Zhangjiagang PDH plant in Jiangsu in September due to power rationing, market sources said.

Crunching margins were also constraining operating rates at many PDH plants. Their LPG feedstock import costs have risen significantly in recent months, while the domestic price of their propylene has lagged far behind amid weak demand from downstream plants.

Chemical and petrochemical plants are also considered energy-intensive enterprises and their operating rates have been limited or cut by some local governments, domestic media reported.

“We are still watching for more government announcements regarding the power cut issue,” an industry source said. “So far we are not expecting much impact on the PDH side, more on the coal-to-olefin side. As for crackers/PDH plants, as long as they are not under maintenance or facing technical issues, they will be running at maximum rates.”

LPG demand boost

But another trade source said power cuts by provinces and shrinking margins had prompted SP Chemical to lower operating rates at its 700,000 mt/year LPG-based cracker at Taixing in Jiangsu to 60-70% of capacity, while a company source said Jiangsu Sailboat Petrochemical was delaying the restart of its methanol-to-olefins plant.

The trade source said major petrochemical producers that were able to afford and procure alternative generating fuel such as LNG or Russian piped gas – as happened in 2018 – could boost operating rates at PDH plants or steam crackers to leverage the prospects of higher PP margins.

Soaring LNG prices have encouraged some factories, mostly ceramic makers, to switch to LPG as burning fuel from natural gas. This was expected to lift LPG demand to a limited extent, a trade source in Shanghai said.

Natural gas demand from the power generation sector was estimated to comprise 16% of China’s total gas demand in 2020, National Energy Administration data showed.

Regional LPG prices hovering near seven-year highs have prompted some ethylene producers to switch to cheaper naphtha as feedstock, though this is estimated to reduce LPG demand by less than 10%, another source said.

“The strength of naphtha is because of expensive LPG. There is more demand from petrochemical producers as they are cutting their use of butane and propane in cracking,” a Singapore-based naphtha trader said.

But one Chinese petrochemical source said trading firm Unipec was heard buying less naphtha than in previous years, and increasing imports of light crude.

https://www.spglobal.com/platts/en/market-insights/latest-news/energy-transition/092821-chinas-crackdown-on-intensive-energy-use-ripples-across-petrochemical-sector