When the war in the Persian Gulf began back in February, it triggered a series of events that would be felt for decades to come, not only in the world of geopolitics but also in the balance of global energy consumption and manufacturing.
By cutting off much of the supply of oil, gas, fertiliser and other vital commodities to Asia in particular and the rest of the world, leaders were forced to confront this new challenging reality.
In the Indian subcontinent, one of the first impacts was the shortage of gas and chemicals for fertiliser plants in India and Bangladesh, leading to dozens of major plants across the two countries significantly slowing their production or shuttering it entirely.
From naphtha for plastics to sulphur used to make industrial acids, the war in the Persian Gulf was a wake-up call, a message in no uncertain terms that a nightmare scenario in which the supply of vital commodities was cut off was entirely plausible.
But as most developing nations in Asia struggled to come to terms with the war’s impact on commodity supply, there was one notable exception: China.
Part of this resilience was driven by the large-scale strategic reserves held by Beijing in a wide variety of different commodities, but there was another element that kept the Chinese chemical industry humming along as if it was business as usual: the enormous coal-to-chemicals complex.
Preparing For Reality
Amidst a high reliance on imported gas and oil, Beijing chose to build a huge coal-to-chemicals industry, consuming 380 million tons each year to produce everything from fertiliser urea to ethylene for plastics and a multitude of other applications.
By expanding on technology pioneered in Germany in the 1920s that converted coal into oil and other hydrocarbons, China has built an enormous and resilient domestic chemical supply chain with minimal reliance on foreign material inputs.
To put the scope of the Chinese coal-to-chemicals industry into perspective, if it were its own country, it would be the third largest consumer of coal globally.
Instead of facing shortages of vital chemicals like urea, which saw significant supply issues at the height of the war in the Middle East, China was able to continue to supply its needs.
According to reports from Bloomberg, China relies on the coal-to-chemicals industry to produce around 80% of its urea, leaving it far less reliant on imported fertiliser or gas to feed its populace.
India Looks To Repeat Beijing’s Success
As one of the hardest-hit nations by the war in the Middle East, the conflict has provided an even greater impetus for India to become more self-sufficient.
The Modi government’s ‘Made in India’ campaign has been emphasising this heavily since 2014, but the recent war has further crystallised the need to be self-reliant when it comes to vital commodities.
While New Delhi had previously explored the concept of an Indian coal-to-chemicals industry, it did not eventuate into a broader industry at the time.
In more recent times that has all changed, with New Delhi slating $4.5 billion to help with the genesis of its own coal-to-chemicals industry, announcing a goal of consuming 75 million tons of coal per year to produce chemicals by 2030.
If this were to come to pass, the Indian coal-to-chemicals industry would become the 14th largest consumer of coal in the world.
As part of the planned support program, the Indian government is covering 20% of the cost of constructing production plants and has stated it will reserve coal to be used in production, offering a guarantee of future supplies.
The Takeaway
On paper this sounds like yet another development that will reward Australia’s economic strategy of reliance on resource exports, where lady luck ensures that even when you fall down in the mud, you find a nice gold coin in the process.
But on a long-term time horizon it’s quite a different story.
India desires a coal-to-chemicals industry because it wants to be self-reliant, not because it just wants to burn tens of millions of tons more coal each year.
As part of that self-reliance, there were already plans for India to dramatically expand its domestic coal production prior to the war in the Persian Gulf.
It was forecast by the Indian Ministry of Coal that production was set to rise dramatically, from 1,012 million tons in 2023-24 to 1,512 million tons by 2029-30.
This leaves Australia in something of a strange position, on the cusp of a coal boom that is intended to benefit no one other than India on a long-term time horizon.
Ultimately, this development is further proof of nations increasingly putting energy and commodity security as one of their top priorities.
