China DME Market Outlook

ASIACHEM Consulting

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Comparison of global fossil energy reserves

Data source: BP Statistical Review 2008

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Coal Prices and other hydrocarbon sources

Coal prices have remained relatively flat compared to other

hydrocarbon sources

Data source: Nexant

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The MAP of Coal Chemical Industry

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A Opinion from George A. Olah
Besides the Obvious advantages of Methanol and
DME for Energy and Chemical uses, it is a
permanent solution of the CO2 pollution, particularly
in China when using Coal.

George A. Olah, Nobel

Laureate in Chemistry, the
author of <Beyond Oil and
Gas, the
Methanol Economy>

CO2+H2 ----CH3OH

CH3OH+O2 ----CO2+H2O

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1. Current Status of DME Market

A. Current status of domestic DME market – roaring capacities and

chaotic competition

1 Domestic DME supply: flat demand against rushing supply

In China currently there are more than 20 DME producers of large scale and supplying market in
continuous basis, with a totalized capacity exceeding 3.6Mt/a. However the applications of DME in
China are focused in blend with LPG which is quite limited in quantity. It results in lower operation
load in Chinese DME producers and part of the producers are forced, under the cost pressure, to
shut down their plants time by time, causing fluctuations in DME supply.

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1) A review on the domestic supply

China’s total DME capacity was mere 31.8kt/a in 2002 and produced around 20kt in that
year. The capacity exceeded 480kt/a by the end of 2006 and the output of 2006 reached
320kt, showing annual growths of 97% and 96% respectively. The capacity was further
increased to 2.2Mt/a at the end of 2007 and several new or expansion projects were put
on stream in the first half of 2008. Still there are new DME plants currently under
construction.

China DME Capacity in recent years.

Year Total capacity Output Operation Rate Capacity Growth Year on Year
2002 30 20 66.7% -
2006 480 320 66.7% 196.8%
2007 2,200 1,200 54.5% 358.3%
2008E 4,475 2240 50% 103.7%

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2) Chinese DME processes and their advantages
There are mainly two processes, i.e. 2-step and 1-step.

2-step process: Methanol is first synthesized then dehydrated to produce DME in presence of
a catalyst. The process can be carried out in liquid or gaseous phase. Earlier liquid process
used concentrated sulfuric acid as dehydrating agent at a lower reaction temperature
(130~160℃). Higher methanol single-pass conversion (> 80%) could be achieved however the
process involved in severe corrosion to process equipment and extreme toxic intermediate –
cyanomethyl sulfate, causing pollution to environment.
In a gaseous process, methanol is fed into a reactor packed with alumina or molecular sieve
catalyst and dehydrated to form DME. Methanol conversion is between 75%~85% while DME
selectivity is >99%. The process is well proven and simplified, without special requirement on
construction material and practically posing no waste and corrosion problems. The process is
easy to scale-up and has become the main choice for DME production both in China and on the
world.
1-step process: DME is generated in 1 step directly from syngas. The process can be realized
in fixed bed or slurry bed.

The 2-step process is More flexible for China Market.

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3) Location & capacity of Producers (of 20kt/a or larger capacity )
Producer Location Capacity（kt/a） Operating rate
Shandong Yuhuang Chemical Co. Heze Shandong 250 60% around
Shandong Henrui Chemical Co. Heze Shandong 50 10-20%
Shandong Dongming petrochemical Group Heze Shandong 20 20-30%
Hebei Jinyuan Chemical Co. Shijiazhuang Hebei 20 50-60%
Hebei Kaiyue Group Langfang Hebei 1,000 60% around
Hebei Zhongjie Group Cangzhou Hebei 100 10-20%
Hebei Jichun Group Cangzhou Hebei 25 50-60%
Hebei Yutai Group Handan Hebei 100 60-70%
Anyang Zhenyuan Group Anyang Henan 100 60-70%
Henan Xinhong petrochemical Co. Luoyang Henan 25 60-70%
Henan Yima Group Yima Henan 200 60% around
Henan Jinding Chemical Co. Luoshan Henan 150 60% around
Henan Zhongke Chemical Co. Xinxiang Henan 50 50% around
Xinneng Group (Zhangjiagang) Co. Zhangjiagang Jiangsu 200 60-70%
Xinneng Group (Bengbu) Co. Bengbu Anhui 20 60-70%
Hubei Biocause Pharmaceutical Co. Jinmen Hubei 100 50-60%
Qianjiang Huarun Chemical Co. Qianjiang Hubei 25 60% around
Yueyang Petrochemical Co. Yueyang Hunan 100 50-60%
Shandong Jiutai Group Linyi Shandong 100 60-70%
Jiutai Group (Zhangjiagang) Co. Zhangjiagang Jiangsu 300 60-70%
Jiutai Group (Guangzhou) Co. Guangzhou Guangdong 300 60-70%
Wei-he Coal Chemical Co. Weinan Shaanxi 60 60-70%
Tianhe Chemical Co. Bayan Nur Inner Mongolia 200 60-70%
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Sichuan Lutianhua Group Luzhou Sichuan 100 60% around
Total - 3,595
2 Domestic DME demand
Demand is focused in blend of LPG, other downstream applications
are in slack development.

1) A review on the domestic demand

In china, downstream applications of DME are focused in blend of LPG. However the
improper operation of many LPG suppliers has resulted in loss of support to DME/LPG
blend from most of consumers. The limited growth of LPG demand also restrict the
increase of DME use in fuel gas blend area. On the other hand, the application of DME in
fuel blend has accounted for 90% of the total domestic demand.

China consumed 1.2Mt of DME in total in 2007 and the 2008 consumption is estimated
around 2Mt.

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2) In China DME flows from north to south and from west to
east
Energy bases are concentrated in west and north China where rich coal reserves are
distributed, while great energy demand comes from south and east China of more
developed economy and dense population. This determines the main DME flow streams
in China.

3) A structure analysis on domestic DME-demanding

industries DME Consumption in 2007

4% 3% 2% 3%

88%

mix into LPG aerosol raw material mix into diesel oil others

a. Blend with LPG consumes nearly 90% of domestic DME output

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b. Blend in diesel fuel needs to be further studied and developed

In China, the use of DME in blend with diesel is still at the stage of research and test, the
application in this field has not widely popularized as indicated by the insignificant demand
in the field, which is influenced by the following factors: safety of DME engine and oil
supplying system; DME car license registration; rational distribution of DME filling stations
etc.

c. Less consumed as cutting gas, aerosol, refrigerant, foam generator, solvent,

raw material for chemicals and in other industrial uses
Although the growth potential of DME demand in these usages is not very large by
individual industries, however a steady average annual growth of 6% may add up to a
quite significant total.

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3 DME production cost composition

1) Methanol

In China, to produce methanol from natural gas is not preferable under Chinese
regulations; therefore most methanol produced in China comes from coal-based
process.

2) Other costs

Other cost items include equipment depreciation, labor cost and other losses.
These costs may summed up to CNY 250-300/t as recognized by the industry in
general.
3) Freight Cost

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Correlation between DME and Methanol cost

DME Cost

Methanol Cost

Data source: Shenhua Group

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3 A Look Back on DME Market Trend
1) DME market trend from 2nd half 2007 to 1st half 2008

Average DME Price from Jul.2007 to Jun. 2008

Price(CNY/t)
7000.00
6500.00
6000.00
5500.00
5000.00
4500.00
4000.00
3500.00
3000.00
Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Date
07 07 07 07 07 07 08 08 08 08 08 08

Average DME Price

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2) 2nd half 2007 to 1st half 2008 market trend analysis

1) In 2nd half 2007, DME price went up then changed into down-
going trend and caused slip of producers’ profit.
In 2nd half of 2007, China’s DME capacity showed a great increase. In Q3
2007, demand for DME as gas blend grew rapidly following after the roaring
LPG market trend. The market volume seemed large enough to hold additional
capacity and the price went up continuously until a drop of LPG demand took
appearance with the arrival of Q4 when the output from new plants became
more stable and thus forged a pattern of oversupply, resulting in a lasting
decreasing price trend and slip of producers’ profit as the price of methanol
staying at high level.
2) In early 2008, temporary demand increase caused an abrupt price
resilience.
Before the spring festival of 2008, many LPG gas stations needed to replenish
their inventory and thus caused a resilience of DME price. However the price
spring-back was transient as the storage tanks were soon refilled.

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3) In Q2 2008, DME price lagged behind the roaring methanol price and
most producers were placed under a cost pressure.
Domestic methanol price kept increasing in Q2 2008, once approaching CNY5000/t
whereas the price of DME was depressed by both the limited LPG price and flat demand.
At the highest, DME price was once at a level near to CNY6600/t, but it completely did
not match with the increase magnitude of methanol price. Those DME producers without
secured methanol supply were placed under a great cost pressure and forced to turn
down their operation load or even to totally close their plants.

4) Entering 2nd half 2008, under the state-regulated LPG price, DME price is
more difficult to go up, and decreasing into a price valley as drawn by the
fluctuating methanol price.
Although the state adjusted down VAT rate of DME since July 2008, the price of LPG on
regional markets was also strictly regulated, therefore DME producers could find no way to
increase the price. At the same time, methanol price starts to drop from its high level,
drawing down DME price gradually as the latter has lost cost support and suffered from
shrunk demand.

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3) Price influencing factors

1) Plant capacity
DME is a novel energy produced from coal with lower production cost. Before Q3 2006,
the total DME capacity in China was not so high as in nowadays and methanol was
available inexpensively, resulting in significant profit for DME producers. In the
background of increasing domestic methanol capacity, as an important methanol
derivative and supported by the state policy in favor to novel energy, also attracted by
the great profitability, DME plants were planned and constructed by many producers
possessing coal and/or methanol resources.
2) Demand-supply pattern
Chinese DME output is far below its capacity. The primary cause is that most of
producers in DME industry determine their production based on sales volume and
the slump of sales volume in turn reflects the flat market demand.

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3) Production cost
During the recent two years, domestic methanol price always showed a greater
increase magnitude than DME price, which was restricted by LPG price and
therefore could not make sufficient compensation for cost increase.

4) Objective Market
The objective market for DME is rather obscure. Most of Chinese produced DME is
used in blend with LPG, and its price is thus decided at a level under the price of
LPG otherwise the downstream demand will shrink abruptly.

5) Policies & standards

Along with the publications of industrial and local standards on DME blended LPG, the
market will be gradually normalized. Turn down of VAT rate on DME also secure its
position as a primary energy product.
The national standard on DME blended LPG to be published in near future, as well as
implementation of the standard on DME blended diesel fuel and a series of relevant
industrial policies will certainly create a market for DME as a novel energy under orderly
competition.

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4 China DME Market Outlook

As the state policy to support novel energy is expected to remain unchanged,

DME market price will be the mainly be influenced by the factors including
energy price, raw material cost, demand/supply pattern etc.

1 Energy price
China turned the VAT rate on DME down to 13% , equal to that on LPG,
starting from this year as a support to novel energy, by which DME is formally
listed in the rank of energy chemical products. Therefore the up-going trend of
energy price is in certain favorable for DME development.
However the rising energy price also causes increase of upstream raw material
cost in DME production.

2 Raw material cost

Uprising of methanol, water and power prices may have impact on DME
production cost. In current situation, DME industry is not allowed to freely
determine the sale price and the producers will be greatly influenced by the
production cost, while the market price is less affected by rising cost than the
producers.

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3 Demand-supply pattern

1) DME supplying capacity

DME capacity was, is and will be rapidly during the period of 2007-2010. Many new
DME plants under planning or construction will be brought on-stream after 2008.
New DME Projects between 2008-2010
Producer Location Capacity (kt/a)
Xin’ao Group Zhangjiagang 1,000
Jiutai Group Zhangjiagang 1,200
Chian National Coal Group Inner Mongolia 3,000
Yunnan Jiehua Group Yunnan 150
Tianhe Chemical Co. Inner Mongolia 200
Chongqing Minsheng Gas Co. Chongqing 150
Baota Petrochemical Group Ningxia 100
Shanxi Lanhua Sci-tech Venture
Co. Shanxi 100（Trial Run）
Linfen Tongshida Co. Shanxi 100
Anyang Zhenyuan Chemical Co. Henan 100
Hongkong Xiexin Group Inner Mongolia 100
Guizhou Tianfu Chemical Co. Guizhou 150
Total - 6,250
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2) Blend in LPG

DME market is greatly affected by LPG demand. When LPG market shrinks the
industry will worry for the outlet of DME in surplus. Demand on DME from the
blended LPG field is expected to be around 3.5-4.5Mt/a by the year of 2010.

3)Diesel substitute
In the field of diesel substitute, DME can be used as automobile fuel.
DME can be blended in diesel at higher proportion. If DME/diesel blending technology is
widely applied in China, and based on 80% blend proportion, DME demand in our
country will leap a great step forward, i.e. China’s demand on DME in auto fuel may
exceed 80Mt/a if all diesel-fueled auto on road will use DME-blended fuel. Even by a
moderate estimation, the wide application of DME-blended diesel will increase the
demand to a level over 10Mt/a.

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4) Aerosol & projectile
In Europe and America, around 25% of aerosol products use DME as projectile agent.
In contrast, application of DME in this field lags rather behind in China. About 32kt of
DME were consumed in this field in 2006 and the consumption is expected to exceed
40kt by 2010 assuming an annual growth of 6%.

5) Refrigerant & foam generator

DME has lower boiling point, larger vaporizing latent heat, and condensing/vaporizing
properties similar to chloro-fluorocarbons, therefore is deemed as a potential refrigerant.
Presently both in China and abroad, people are developing the applications of DME in
fridge, air conditioning and fresh food keeping etc, to replace the ozone-depleting
Freons.
6) Other downstream uses
DME can also be used to produce formaldehyde, di-methyl sulfate, di-methyl amine,
chloromethane, acetic anhydride, vinyl acetate etc.

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As pointed out in previous pages, the current DME market is squeezed by
high cost and low sale price at both ends and DME producers are caught
in difficulties. Therefore, it is a trend that DME price will be kept under its
normal value but above the methanol by a certain price difference. The
rapid expansion of DME capacity will maintain an oversupplied market in
2008 and a great uprising price is not expectable in such a background. In
2008, DME price will fluctuates around the cost baseline following after the
prices of methanol and LPG. A greater magnitude of price-up can not be
excluded as influenced by the seasonal demand variation.

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4 Production motive

1) Living space for DME industry: Price difference between DME

and LPG is the survival space for DME producers
a. In comparison with LPG price
b. In comparison with production cost

DME & LPG Price in Q2 2008

Price（CNY/t）
7500.00
7000.00
6500.00
6000.00
5500.00
5000.00
4500.00
Date
4000.00
4-7

5-5

6-2
6-9

7-7
3-31

4-14
4-21
4-28

5-12
5-19
5-26

6-16
6-23
6-30

7-14
7-21
7-28
Average price of DME Average price of LPG

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2) Profit comparison of DME and methanol:
To sell methanol or to sell DME? It shall be determined on the basis of
profitability.
a. Profit of producer from sale of methanol
b. Profit of producer from sale of DME: in comparison with profit from methanol

DME & Methanol Profit in Q2 2008

Price(CNY/t)
7000.00
6000.00
5000.00
4000.00
3000.00
2000.00
1000.00
0.00
-1000.00
Apr-08 May-08 Jun-08

DME price Methanol price Coal price

DME profit Methanol profit

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5 Analysis on DME freight cost

1) Road transportation (Main transportation way)

Lower requirement on shipping conditions, flexible transport routes, less

infrastructure investment, higher freight cost, and general delivery speed.

2) Pipeline transferring (Considering: Inner Mongolia ---- Bohai Bay)

Lower requirement on shipping conditions, fixed transport routes, larger capital
investment, lower transferring cost, and faster delivery speed.

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3) Railway transportation (no standard)
higher requirement on shipping conditions, rather flexible transport routes, less
infrastructure investment, higher freight cost, and fast delivery speed.

4) Waterway transportation (no standard)

higher requirement on shipping conditions, not very flexible transport routes, less
infrastructure investment, lower freight cost, and slow delivery speed.

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5 Advices on DME Market Developing
Strategy
1 Quality & service upgrading

2 Rational capacity expansion pace

3 Steady demand

4 Competition & cooperation

5 National standards

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