China plans to implement E10 gasoline nationwide in 2020. The government has been contemplating this policy mandate since 2001, but it had faced major setbacks in the past due to the concerns that domestic ethanol production compromises food supplies. The current plan to blend 10% ethanol in the gasoline pool will literally displace equal amounts of current gasoline consumption together with other blending components from the gasoline pool. Based on current gasoline demand of 3.3 million bpd, about 330 Mbpd will be displaced from the gasoline pool, adding to China’s surplus gasoline supply. Gasoline displacement from ethanol blending will increase to 550 Mbpd as gasoline demand is expected to reach 5.03 million bpd in 2030. One of the key issues relating to the new ethanol policy is whether China will be able to adequately supply required ethanol from domestic sources in the longer term, although China can import ethanol from the US and Latin American countries.
The government’s plan to introduce ethanol appeared to be driven by China’s push to transition to low-sulfur, high-octane gasoline markets. As most of the countries in Asia are moving to high-octane gasoline market, particularly to RON 95 and RON 97 grades, China needs to keep up to maintain gasoline exports of similar grades. A look at the Asia Pacific region’s gasoline demand by grades in the table below indicates the bulk of gasoline demand is concentrated in RON 90-92 and RON 95 grades.
Asia Pacific Region’s Gasoline Demand by Grade (2018) Unit | Mbpd
Source: Stratas Advisors
China has the second-largest refining capacity after the US, and its refining system has become increasingly complex. However, China’s refining industry has not been able to supply enough octane supplies to support transition to high-octane gasoline markets nationwide. One of the key reasons is that China has a significantly low light oil processing to CDU ratio, which currently stands at 7.8% in 2018. This ratio is low compared to other regional counterparts, including Japan, South Korea, Singapore, Australia and India. Reforming to the CDU ratio was inherently low as most of the refineries built during the economic boom period were designed to maximize diesel to accommodate surging demand from industrial, manufacturing and power-generation sectors. As a result, China needs to import reformate to satisfy octane demand from refining industry.
Light Oil Processing* to CDU Ratios by Country (2018) Unit | Mbpd
Source: Stratas Advisors
*Light Oil Processing capacity includes reforming, isomerization, alkylation and polymerization.
Transition to ethanol-blended gasoline market will affect refinery operations and demand for blending components. Refineries currently producing high-octane gasoline will need to cut octane levels in gasoline. Refiners will also be pressured to adjust the operations of fluid catalytic cracker (FCC) and production of butanes as gasoline-blending components. Gasoline-blending oxygenates, including MTBE, ETBE and methanol, are most likely to be affected by the new ethanol policy. MTBE is most likely to be affected because the bulk of MTBE produced in China is used for blending with gasoline. MTBE producers will be pressured to cut operating rates or face shutdowns. China has a long list of MTBE projects planned to be built between 2019 and 2021. Similar MTBE plants are planned in Malaysia and Taiwan, which are key sources of China’s MTBE imports in 2017 and 2018. The new E10 mandate will certainly allow China to cut MTBE imports from abroad. In addition, China’s imports of octane boosters such as reformate will be significantly reduced if the new ethanol policy is implemented nationwide by 2020. It will also allow China to export MTBE and ethanol-blended gasoline to regions, where ethanol-blended gasoline is widely adopted in European countries including Australia, South Korea, Singapore, India, Philippines and Vietnam in the East.
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