Methanol Pricing Jumps as US Spot Market Withers

12 January 2004 00:00  [Source: ICB Americas]

Soaring natural gas costs and firm demand have prompted an increase in methanol pricing for the start of the year. At the same time, a recent acquisition by Methanex Corp., as well as a dwindling market for methyl tertiary-butyl ether (MTBE), could spell the end of the US spot methanol market.

With natural gas prices skyrocketing in December and demand stable, methanol producers launched several increases. Southern Chemical Corp. an-nounced a 2 cent increase to its posted price, bringing that price to 70 cents per gallon. Meanwhile, Methanex launched a 7 cent increase, which boosts its reference price to 75 cents per gallon. Mil-lennium Chemicals Inc. announced a 10 cent increase to bring its posted price to 83 cents per gallon.

Methanex's price in Europe is also out of step with other prices there. Methanex had nominated  200 per metric ton, while several other buyers and sellers have agreed on a rollover of the fourth quarter price of  190 per ton.

In all likelihood, it appears January will have a two-tiered pricing structure because other product is not available. "Southern is not in a position to increase market share, so we are well poised for a two-tier price structure for January," notes Dave McCas-kill, director of methanol and derivatives for Chemical Market Associates Inc. (CMAI). "The jury is still out about what will happen, but with gas prices where they are and Methanex now having 2 million tons of North American production, I think they will hang tough," adds Dick Simmons, vice president of methanol for Houston-based DeWitt and Company Inc.

The difference in price between Methanex and Southern may stem from Methanex's increased exposure to the fluctuations of US natural gas prices, owing to its recent acquisition of the production rights and customer contracts of Terra Industries Inc.'s 700,000 metric ton methanol plant in Beaumont, Tex., for $25 million. The company now has exclusive rights to all methanol produced at the unit until the end of 2008.

"Now that Methanex has cost exposure in Beaumont and the Lyondell facility, they will be much more responsive to what natural gas is doing," notes Mr. McCaskill. "They are the largest US Gulf Coast manufacturer as of the beginning of the year," he adds. "Methanex now controls 43 percent to 45 percent of the North American methanol production," says John Ockerbloom, director of methanol for PCI Ockerbloom and Company Inc.

Besides increasing Methanex's exposure to US natural gas costs, the Beaumont acquisition may also spell the eventual end of the US spot market for methanol. Historically, Methanex was the largest buyer of spot material in North America, while the Beaumont facility provided a significant amount of spot material.

"Terra was a large spot seller. I do not think we will see spot reported as frequently as in the past," says Mr. Ockerbloom.

"There are very few consumers who buy spot these days," adds Mr. Simmons. "It is a very small market. Methanex used to be a big spot buyer but they now have all the Beaumont and Lyondell material."

Further crimping the spot methanol market is a diminishing market for MTBE. On January 1, both New York and Connecticut enacted a ban on MTBE, following the lead of California, where refiners have already made the switch from MTBE to ethanol. "In addition to MTBE shutdowns and turnarounds, MTBE production is off 12 percent, which has reduced methanol demand by 5 million gallons per month," says Mr. Simmons.

MTBE producers had been major players in the US spot methanol market, and with the declining demand for MTBE, there will a decrease in demand for spot methanol. "California, New York and Connecticut have all banned MTBE, so we have much less MTBE production in Texas, which squashes spot demand," notes Mr. McCaskill. "We are seeing some dynamics change," he adds. "The US spot market may take shape like Europe. When the arbitrage is right, spot volumes find their way to Europe and prices are up and down accordingly. The US market will be more exposed to the ebb and flow of the world market, as it will take price differentials for traders to bring in spot material now."

"The US spot market is increasingly irrelevant in having an impact on contract pricing," says DeWitt's Mr. Simmons. "There is no longer any liquidity. The wild card is importation of spot volumes from 'export' plants in Russia and elsewhere."

Following the jump in natural gas prices in mid-December, prices had plateaued during the holidays as mild weather enveloped much of the US. However, the first week of January brought frigid weather to much of the Midwest and Northeast US, as well as a significant rise in natural gas costs. Prices jumped by as much as $1 before settling around the $6.80 per mmbtu mark.

The run-up in natural gas prices has left many people scratching their heads, for outside of the weather forecasts, there are no factors to dictate an increase in pricing. "US inventories are good and the drawdown has not been out of the normal range," says Mr. McCaskill. "The reality is this is a much smaller industry without the Enrons and the Dynegys. At times, they were a stabilizing factor. Without the higher volumes, we are probably more vulnerable in terms of volatility now than we ever were two years ago."

Last February, Methanex suffered a setback when a redetermination process found that the company had almost no remaining entitlements to the Maui gas field offshore New Zealand. The company has been unable to find a suitable replacement source for the natural gas and has reduced production substantially. Methan-ex was expected to produce less than 1 million tons last year at its New Zealand facilities, which had nameplate of more than 2 million tons. The company was expected to announce its production expectations for the New Zealand plant in December but has yet to offer a target.

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