By John Mayes and John Auers
Opportunities and challenges come in many sizes. Some are large and may be announced with great fanfare. Responses for these can be carefully evaluated, and there is ample time for preparations. Other opportunities however, may not be so obvious and can sneak up on you. These surprises may be the most lucrative simply because the competition may not be ready to react. Being prepared for the next business cycle is often the deciding factor in determining who will be leading the pack.
One such opportunity (or challenge depending on your perspective) is developing around a refinery product which gets little attention: anode grade petroleum coke. This specialty product is of great importance in that it is a critical element in the production of aluminum since ½ ton of anode grade green petroleum coke is required to produce 1 ton of primary aluminum. Because global aluminum consumption is rising rapidly while anode coke production is forecast to remain relatively flat (at best), a shortage of this vital product appears imminent. Further complicating this outlook will be the actions of the International Maritime Organization to reduce sulfur levels in bunker fuels in January 2020. Since there is no alternative production process to produce primary aluminum (unlike steel which can be produced by a variety of different processes) it is intuitively obvious why petroleum coke, particularly anode grade, is such a critical raw material.
Petroleum coke can be produced in multiple forms depending on the quality of the feedstock and the operating parameters of the coking unit. The three basic types of coke are: fuel grade (shot, sponge or a combination of both), needle, and anode grade petroleum coke. The largest of these (by a large margin) is fuel grade petroleum coke. The coke is generally removed by high pressure water cutting jets and results in pieces that range in size from sand to fist-sized or slightly larger.
Anode grade petroleum coke (known in the industry as Green Petroleum Coke or GPC) is lower in metals and usually lower in sulfur with a “sponge-like structure as compared with fuel grade coke and is suitable for use to produce anodes, which are a critically needed component in aluminum production. Needle coke is produced when heavy slurry oil is utilized as the coker feedstock (instead of vacuum tower bottoms). The heavy slurry oil is the bottom fraction of the products from a Fluid Catalytic Cracking (FCC) unit. Shot coke, which looks like BB’s and is sometimes agglomerated together, tends to be very hard and is unsuitable for the production of anodes. The exact cause of shot coke is not well understood but is likely related to coker feedstocks which are unusually heavy (less than 7°API), have a high asphaltene content in relation to Conradson Carbon as well as a low paraffin content.
To make an anode, the GPC is calcined (resulting in Calcined Petroleum Coke or CPC), a process which, occurring at over 1000 oC in a kiln, drives off the volatiles and moisture in the GPC and changes the crystalline structure of the carbon from an insulator to a conductive material. The CPC is then mixed with 10-15% Coal Tar Pitch or CTP, and molded into large rectangular blocks weighing a metric ton or more and then baked for hours resulting in a solid block of carbon with small impurities of metals and sulfur (impurities coming from the original GPC and CTP).
Anode Supply and Demand and the IMO
Only about 10% of the U.S. petcoke production is of anode quality, but approximately half of the petcoke produced in China is used to make anodes. The lower output in the U.S. is reflective of the high degree of processing of very heavy and high sulfur crudes from Venezuela, Mexico, and Canada. Turner, Mason & Company is in the process of completing a new multi-client study of the anode coke market in conjunction with AZ China and Cascade Resources. This evaluation concludes that global anode coke production between 2017 and 2020 will only grow by 2.0%. Through 2025, global output will only increase by 2.6%.
Driven by ever-increasing aluminum consumption, global anode coke demand is forecast to increase by over 10% between 2017 and 2020. By 2025, demand is expected to accelerate and could rise by as much as 30% or more. This imbalance is expected to bring considerable opportunities and challenges to both the refining and aluminum industries.
Complicating this picture is the impending transition to low sulfur bunker fuel in 2020. When the sulfur cap is reduced from the current 3.5% to only 0.5%, much of the new low sulfur fuel will be produced by blending significant volumes of ultra low sulfur diesel, and low sulfur gas oils to augment the modest levels of lower sulfur resids which can be segregated. This development will initiate a substantial spike in low sulfur bunker prices (being predominantly distillate and gas oil based) and a corresponding sharp decline in high sulfur resid prices. This new pricing structure may also initiate a series of unintended consequences by realigning refining objectives which could also adversely impact the projected anode petcoke balance.
Because the anode coke requirements of aluminum smelters require a lower sulfur content than fuel grade petcoke (many times due to environmental constraints), those refiners generating anode grade petroleum coke process a lower sulfur crude slate; however, this also allows these refineries to be potential candidates to produce low sulfur bunker fuel. The increase in low sulfur bunker prices could induce some coastal refiners to temporarily (or permanently) shut down their cokers. Coker operations can be difficult for refiners, and while the unit produces higher valued raw gasoline and distillate, these intermediate products must undergo considerable additional processing through reforming, catalytic cracking, and desulfurization units. Petcoke is also becoming increasingly scrutinized globally for a variety of environmental reasons. The opportunity to forgo these issues could become an attractive alternative for numerous coastal refineries.
In addition to the potential loss of existing anode grade petcoke production, the post-2020 IMO environment also increases the possibility that some current low sulfur anode grade petcoke producing refineries could decide to sell all or part of their coker feedstock in the low sulfur bunker market and replace it with higher sulfur residual fuel oil which will be plentiful and very inexpensive after the IMO implantation of 2020. These lower high sulfur resid prices could easily induce refiners to purchase higher sulfur resid to fill up any unused coking capacity and degrade the petcoke quality. The expected downturn in high sulfur resid prices is also expected to widen the light/heavy crude differentials. This could also induce a shift to higher sulfur crudes to optimize refining margins, but also with the result of degrading petcoke quality.
While there is always a high degree of market uncertainty, the forecast of anode petcoke production and demand appears particularly tenuous. The base forecast is troubling enough but many of the unknowns (IMO effects and environmental constraints on petcoke handling and operations) could easily make the situation much worse. If anode grade petcoke prices rise high enough however, some refiners could be enticed to convert feedstock slates and/or operations to yield anode quality grade petcoke. This change in operations will not be undertaken lightly and may require additional economic incentives. Whatever actions which can be taken will require time and should optimally be done before the crisis occurs.
These issues are a key component in the new “Anode Coke Supply – The Gathering Storm,” a market study through 2025 which will be released later this month. In addition to supply forecasts by country and refinery, the study also forecasts global consumption requirements and potential solutions to the impending imbalance. Furthermore, our partners in this study have extensive experience in the primary aluminum industry and can help navigate these new and potentially lucrative opportunities for refiners interested in tapping this market. More information on this product can be obtained by visiting the TM&C website at turnermason.com or calling Cindy Parker at 214-754-0898.