Methanol Market Remains Flat on Soft MTBE Demand and High Feedstock Costs

12 May 2003 00:00  [Source: ICB Americas]

Despite sagging end use markets, especially methyl tertiary-butyl ether (MTBE), the market for methanol continues to hold firm. While spot prices have shown some recent weakness, they have yet to impact contract prices, which remain high on supply disruptions and high natural gas costs.

May methanol contracts have rolled over at 82 cents per gallon. This is the third straight month that prices are at 82 cents. Recently, spot pricing for methanol slipped to 76 to 77 cents per gallon after hovering around 82 cents at the beginning of April. However, the 5 to 6 cent decline has not had much impact on contract pricing. "Spot pricing has not come off enough to hurt contract pricing," notes Dick Simmons, vice president of methanol for Houston-based DeWitt & Company Inc.

While pricing holds steady, demand is declining, especially in the MTBE area. "MTBE demand is really off," notes Jim Jordan, principal of newly formed Jim Jordan & Associates LLP, a Houston-based methanol and fuels consultancy. "The presence or lack of presence of the MTBE guys really has a significant impact, particularly the on-purpose guys who have had no incentive to be out there buying spot methanol," says Dave McCaskill, director of methanol and derivatives for Chemical Market Associates Inc. (CMAI).

MTBE and PO/MTBE dehydro on-purpose production is off 12 percent so far due to reduced operating rates, says DeWitt's Mr. Simmons. "MTBE is selling for 86 cents and is costing the dehydro guys 99 cents to produce it," adds Mr. Simmons. Margins for MTBE have been so bad, Texas Petrochemicals LP has idled a dehydro MTBE unit. Last quarter, the company has another unit down due to high raw material and energy costs as well as weak demand.

Demand for MTBE in California has been shrinking rapidly thanks to the state's upcoming ban on the gasoline additive. Refiners have been switching to ethanol in advance of the December 31 deadline. MTBE demand in California is down 45 percent, says Mr. Simmons. "Last year, total demand for MTBE in California was 192,000 barrels per day. In January of this year, it was 34,000 barrels, in February 32,000 and in March 26,000," he notes. The falloff in MTBE consumption in California translates to a 750,000 ton decline in methanol consumption as noted by Pierre Choquette, president and CEO of Methanex Corp. during the company's first quarter earnings conference call.

Despite the drop in California demand, Methanex has seen an increase in MTBE demand in the rest of the US. "When you combine everything that is happening in the US, including California, the reduction in MTBE demand is about 14 percent," notes Mr. Choquette. That translates to a decline of 600,000 tons of methanol demand.

While significant, Mr. Choquette points out the falloff in methanol demand in the US due to reduced MTBE demand amounts to less than 2 percent of global methanol demand. "So it is still our view, even with lower perspectives now on global GDP and global industrial production, that we would see positive growth for methanol in 2003," says Mr. Choquette.

While demand from the MTBE markets is slow, other end markets for methanol appear stable. "Formaldehyde is strong and the chemical area is also pretty strong," notes Mr. Simmons. "Distribution is off a bit because we are coming into summer and the de-icing season is over," he adds. Unfortunately for methanol producers, most chemical buyers have contracts for methanol and do not use the spot market.

On the supply-side, producers have been running full out due to strong pricing during the first quarter and into the second. "The methanol industry is running phenomenally well; it's currently at 90 percent utilization," says CMAI's Mr. McCaskill. "The price is right, so methanol producers are making all they can," adds Mr. Jordan.

With methanol producers running so strongly, inventories have begun to build, especially on the US Gulf Coast. "Methanol inventories in places like the Gulf Coast are backing up badly," says Mr. McCaskill. "Inventories seem to be contained-maybe a little ample on the Gulf Coast," says Mr. Simmons. "Inventories in Rotterdam are okay, and the Far East seems alright as well," he adds.

Although inventories continue to grow, they are coming off very low levels. "Some of the inventories, especially on the Gulf Coast, were uncomfortably low," explains Mr. Jordan. "Most now are normal to slightly above normal," he adds. "We were so badly in the hole on inventory, we are probably only halfway caught up. The whole system has not filled yet," says Mr. McCaskill.

"We feel, because we purchase quite a bit on a global basis, that the inventories continue to be quite low," says Methanex's Mr. Choquette. "Our ability to go out and secure a large parcel of methanol is nonexistent, unless we're prepared to pay outrageous prices, which we are not prepared to do so. Our own inventories, by the end of this quarter, will be around 50 days sales, which is pretty close to what we think is a controlled level for us," he adds.

In February, Methanex learned that its natural gas allocations in New Zealand had been slashed due to shrinking reserves. The company said it would pursue natural gas from other areas, but only expected to produce about 1 millions tons at its New Zealand facility, which typically produced about 2.4 million tons.

To make up for the lost production, Methanex expects to source additional capacity from its facilities in Chile and Trinidad. In addition, the company is considering building a 1 million ton plant on the Burrup Peninsula, in Australia. The company recently decided to pass on building a 2 million ton plant at the same site. "Our thoughts of a large, 2 million ton facility in Australia have been put aside," says Mr. Choquette. "The initial attraction of lower unit capital and operating cost simply does not outweigh the risks associated with financing a very large capital project," he adds. Before the company changed its mind, estimates on the cost of the plant had exceeded C$800 million ($572 million).

Now Methanex intends to copy its Chilean model and build a series of 1 million ton units as demand calls for more methanol. "We would rather build a 1 million ton plant and then do what we have done in Chile-a little bit later, build another 1 million ton plant," comments Mr. Choquette. "So instead of adding a 2 million ton plant, we will have two times one to start with and then that becomes a production hub for us for the longer term," he adds. A decision on the Australian plant is expected by midyear.

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