Methanol Market Still Looks Weak

31 August 1998 00:00  [Source: ICB Americas]

By John Hoffman

The methanol market remains shaky despite a recent increase in spot prices, and producers and analysts expect the industry to remain weak for the foreseeable future.

Spot prices have come back up to a range of 30 to 34 cents per gallon after collapsing to 25 cents per gallon at the start of the summer, but analysts say the current price is artificially high because of plant turnarounds and spot buying by producers looking to cover contracts.

Producers generally expect spot prices to recede back to 25 to 30 cents in the third quarter, when a range of plants are scheduled to come back from turnarounds. They expect pricing to stay soft for the rest of the year and remain weak through at least 1999.

"The methanol market is oversupplied on a global basis, and the Asian crisis, though not as bad for methanol derivatives as for other products, is weakening demand," a producer says. "Spot pricing is up, but only relative to levels that were near cash costs, and we're expecting it to slide back down in the third quarter."

Other analysts concur and say that spot prices are being propped up by turnarounds and purchases by Methanex, the world's largest buyer and distributor. "The spot market is still relatively weak and very little material is moving in it," an observer notes. "One deal was conducted at 30 cents per gallon last week, though Methanex is buying at 33 to 34 cents."

An analyst adds that "nothing has fundamentally changed" since methanol collapsed to near cash costs earlier this year. "The market looks healthier than it is because a lot of plants are down, but almost the entire spot market is going from one trader to another," he says. "Methanol got way too expensive a few years ago and a lot of people rushed to build new capacity. Now the market is long and will remain soft for the next few years."

Methanex says it is not propping up the spot market and disagrees with forecasts of a long-term oversupply. Michael Macdonald, the company's director of industrial relations and corporate communications, says the company is buying spot material at the market price of 33 to 34 cents to cover its contracts.

"We're sensing some tightness on a global basis," Mr. Macdonald says. He notes that the spot market fell from 55 to 60 cents per gallon last year to a low of 25 cents, during which time Methanex lowered its posted price to 34.5 cents. Spot pricing has since recovered to around 34 cents in the US Gulf, and Methanex has brought its posted price back to 41.5 cents.

"We're buying spot material at the market price," he says. "Why would we pay more than we have to?"

Methanex posted huge profits when methanol pricing was high, but the company has suffered because of the market's oversupply. Methanex had a net loss of $28.1 million in the second quarter, down from earnings of $2.2 million in the first quarter and $64.7 million in the second quarter of 1997.

Methanex lost $25.9 million in the first half of the year despite earning $115.4 million in the first half of 1997. The average realized price for methanol was $137 per metric ton in the first half, down from $189 per metric ton in the first half of 1997. Methanex's sales were 2.8 million metric tons after reaching 3.5 million metric tons in the first half of 1997.

In a statement issued on July 22, Pierre Choquette, Methanex's president and CEO, said the company's financial position "remains strong with approximately $400 million in cash and $387 million in undrawn credit facilities" at the end of the second quarter. "The company is continuing with its share buy-back program and has repurchased approximately 1.1 million shares since the program began in late April."

Methanol's average realized price in the second quarter was $114 per metric ton, down from $158 per metric ton in the first quarter. "US Gulf Coast methanol prices fell sharply during the first quarter of 1998 to around $114 per metric ton and remained stable at approximately this level during the second quarter," Mr. Choquette noted.

European contracts settled at DM 205 ($114) per metric ton, equivalent to 34 cents per gallon. Methanex says its Chile III project is on schedule and will come on in the first half of next year. The plant will reduce production costs by $5 per ton across Methanex's 7-million-ton system.

James R. Crocco, executive vice-president of methanol studies at Chemical Market Associates Inc., Houston, and Brian Grigsby, a consultant for methanol and MTBE at CMAI, warn that the world is heading toward "a very serious surplus" of methanol.

"Based on operating rates, the coming surplus can be more serious than that experienced in the mid-1980s," the analysts warn in a report issued earlier this month.

"Between 1998 and 2001, nearly 6 million gallons of methanol capacity that is currently under construction will come on line. This compares to demand growth which is expected to be only half as much, leaving a surplus of about 3 million tons equaling roughly 3.5 worldscale methanol plants.

"This comes at a time when the crisis in Asia results in reduced methanol demand in that region. MTBE demand for oxygenated and reformulated gasoline has leveled off in the US and is not progressing very rapidly in other countries, and methanol demand for fuels purposes in Brazil has practically come to a halt."

The consultants note that new meth-anol facilities are under construction in Trinidad, Chile, Saudi Arabia, Qatar, Equatorial Guinea and Iran. Next year, construction is scheduled to begin on new plants in Kuwait and Argentina.

"By 2001, we are going to see shutdowns, mainly in the US and Europe," Mr. Grigsby cautions. "Most US producers are downstream integrated, but they may find it cheaper to buy methanol. New projects in the US that were announced when methanol was $1.55 per gallon are very unlikely to move forward."

Methanex is more confident about the market. "We recognize that more supplies are coming on, but we think the market is more complex than just the addition of new capacity," Mr. Macdonald says.

"It only takes one event to put the market out of balance. We think it's foolish to look three or four years out and condemn the market solely because of projections of new capacity, given the number of incidents that have happened over the years and the number of high-cost plants that may shut down or run at reduced rates."

ACRYLONITRILE--Prices for acrylonitrile in Asia have plunged to a historical low of less than $500 per metric ton for August cargoes, all but eliminating producers' hopes of raising prices for third quarter contracts. Spot prices have fallen to as low as $480 to $490 per metric ton for August deliveries.

BTX--Softening prices for crude oil and gasoline are keeping BTX prices down. Spot benzene prices remain between 70c. and 71c. per gallon, and contracts are expected to settle at 70c. Analysts blame increased imports and say US producers have reacted by cutting back on production.

The end of the gasoline season should exacerbate an oversupply of toluene and xylenes. Toluene has softened to 59c. per gallon. Xylenes have slid to 59c. to 60c. per gallon. A decline in polyester production has lowered para-xylene consumption.

ETHANOL--Prices for ethanol have either stayed flat or decreased slightly to $1.05 to $1.10 per gallon for fuel-grade material and $1.30 to $2 per gallon for industrial material.

FLUOROCARBONS--Dealers say prices for refrigerants are increasing because of tight supplies and efforts by manufacturers to maintain their profit margins. Recycling and conservation efforts by consumers in the refrigerant industry, brought on by fears of high prices, hurt demand despite the hot summer.

The price of HCFC-22, the most widely used HCFC refrigerant, is $55 to $60 per 30-pound cylinder, a 20 percent increase from last year. The increases were a result of growing demand in the PTFE market and tightness of supplies in Europe.

Although HCFC-22 is scheduled to be phased out within the next 30 years, the conversion to non-CFC alternatives is proceeding slowly because of the high prices of these alternatives.

People within the industry expect further price increases. "There could be some continued tightness next year depending on market conditions, the weather and the European situation," says Jay Kestenbaum, president of Refron Inc., Long Island City, N.Y.

MTBE--Spot prices for MTBE have fallen below 61c. per gallon, according to CMAI analyst Brian Grigsby. Mr. Grigsby blames the fall in MTBE pricing on weak gasoline demand and the end of the summer driving season. Margins for the oxygenate are strong, however, because of low feedstock costs.

"MTBE is following our outlook for 1998," Mr. Grigsby says. "Prices are lower, but margins are actually better because feedstocks are significantly lower."

Mr. Grigsby expects MTBE demand to pick up because its octane blend value is higher than its spot price. "MTBE's spot price and octane blend value have to meet," he says. "We will see stronger and stronger draws on MTBE until that happens."

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