China and India pivot to coal-to-chemicals as energy security trumps net-zero targets

China is rapidly scaling up its coal-to-chemicals and coal-to-gas production capabilities, utilising coal as a strategic domestic feedstock in response to elevated oil and gas prices. This expansion is driven by energy security concerns following disruptions in the Middle East, including the closure of the Strait of Hormuz, which has rendered gas expensive and difficult to source. Consequently, power supply security has overtaken emission reduction targets as the primary policy objective for both nations.

The scale of China’s industrial shift is substantial. Its coal-to-chemicals industry consumes approximately 380 million tons of coal annually; if treated as a sovereign entity, it would rank as the world’s third-largest coal consumer. Recent data indicates that while China’s coal production, imports, and power generation from coal dipped in the first four months of the year, overall consumption remains robust due to increased utilisation in chemicals and metals smelting.

Investor interest in this pivot has been significant. Chinese coal-to-chemicals stocks jumped by 30% between late February and mid-March, driven by market appetite for producers capable of manufacturing fertilisers and petrochemicals using coal rather than petroleum. PetroChina is further advancing this strategy with a project to extract gas from coal rock, targeting an output of 30 billion cubic metres by 2035. The company employs hydraulic fracturing technology for this purpose, a method reportedly unique to China for extracting so-called rock gas.

India is now seeking to replicate this model to mitigate its vulnerability to global price fluctuations, given that it imports over 80% of its oil consumption. The Modi government has outlined a plan to invest $4 billion to jumpstart the industry, aiming to convert 75 million tons of coal into fertilisers and other chemicals by 2030. The government intends to provide funding for processing facilities and guarantee local feedstock supply to enhance reliance on domestically sourced goods.

However, replicating China’s success presents significant hurdles. Indian coal differs chemically from Chinese coal, making it harder to convert into chemicals. Furthermore, China has spent approximately 20 years refining its extraction technology, establishing a substantial competitive advantage. Analysts note that India’s $4 billion investment may be insufficient to make its industry competitive once Middle East tensions ease and natural gas prices retreat to pre-war levels.

Despite these challenges, the broader trend underscores a global prioritisation of reliability and affordability over environmental goals during periods of tight supply. China produced 4.2 billion cubic metres of rock gas last year, and the expansion of these industries in Asia is set to further erode net-zero plans as nations seek to insulate themselves from external market controls.