OUTLOOK ’09: US methanol supply outweighs demand, for now

05 January 2009 23:08  [Source: ICIS news]

By Steven McGinn

HOUSTON (ICIS news)--The US methanol market has entered a period of oversupply with demand deteriorating due to a faltering global economy.

Global production of methanol during 2008 was estimated to be at 40.6m tonnes/year.

With several plants starting commercial production in the first quarter of 2009, supply appears to have exceeded demand, according to industry consultants.

Petronas’ methanol unit in Malaysia, which was expected to start in October but was pushed back to early 2009, will produce 1.7m tonnes/year.

National Petrochemical Company’s (NPC) Zagros II, with 1.65m tonne/year capacity in Assaluyeh, Iran, was expected to start late in the first quarter of 2009.

With the added supplies on board, production cuts at higher-cost facilities are inevitable, according to market participants, but those production cuts may help boost prices in the short to medium-term.

Methanol plants in North America have closed due to high production costs, and the same thing is expected to happen in the global market, said Dave McCaskill, global practice leader, methanol and derivatives, Chemical Market Associates Inc (CMAI).

“Low-cost producers will cut out high-cost producers,” said McCaskill.

The market shrugged off continued sluggish production levels from Methanex’ 3.8m tonne/year plant in southern Chile, as well as Methanol Holdings Trinidad Limited’s (MHTL) 1.89m tonne/year M5000 plant in Trinidad and Tobago. The MHTL plant was shut down in September due to a malfunctioning compressor.

The downstream methanol demand outlook is bleak, and other than in fuel additives growth does not appear to show any signs of life.

Formaldehyde is the largest single derivative of methanol, and plants worldwide were running below capacity due to the economic downturn.

The construction, furniture and automotive industries depend on formaldehyde for several key components. US car sales are down to 35-year lows, and European housing sales were at 15-year lows, said Hexion product line manager Mike Dodd.

Global methanol demand growth in 2009 and beyond will be driven by China, according to McCaskill. China has seen double-digit growth in methanol demand - around 15-20% year-on-year - with growth driven by acetic acid, direct methanol blending and dimethyl ether (DME) demand.

“There is nothing right now to suggest that China’s appetite will change,” McCaskill said.

However, China has postponed or indefinitely suspended 22m tonnes/year of planned methanol capacity growth because of declining demand and margins. Nearly a quarter of this amount, about 5m tonnes, involves projects that have been delayed from 2008 until 2009 and others that were due this year but have been shelved for an unspecified period.

Another 17m tonnes/year of Chinese methanol output was due for start-up in 2009-10, but could now either be temporarily delayed or held off indefinitely. China’s methanol capacity totals 27.8m tonnes/year - an indication of the size of the scale-back in projects.

The lone bright spot for methanol could be in the fuels industry.

US auto manufacturers could add methanol to the mix for its next generation of flex fuel cars.

The gasoline additive methyl-tertiary butyl ether (MTBE) will continue to be vital for fuel quality and cleaner emissions and its use will grow worldwide, according to LyondellBasell. 

“We see MTBE as filling a vital need for cleaner emissions and CO2 (carbon dioxide) control as well as filling a void for higher octane output,” said Palmer Giddings, business director for LyondellBasell’s European fuels division.

More than 5m tonnes of methanol is used each year for gasoline additives and oxygenates.

As countries look to remove sulphur and lead and reduce aromatic content from the gasoline pool, MTBE will make a significant contribution in meeting refining capacity to improve fuel quality, Giddings said.

Despite the uncertainty the market faces, once demand picks back up and all the production shutdowns and mothballed projects shorten supply, prices could eventually rebound and march back upward.

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By: Steven McGinn
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