FocusChina cautious on methanol-blended fuel prospects

By Heng Hui

SINGAPORE (ICIS news)--China’s methanol-gasoline blenders want to be assured of a market large enough to absorb their hybrid gasoline with the expected release of new regulations on fuel-blending late this year, industry sources said on Tuesday.

“If blending were to take place, it had better be a large scale adaptation,” said a Singapore-based fuel blender.

Car manufacturers have their own reservations about the sustainability of supply if they embark on massive production of vehicles that are compatible to run on methanol-blended gasoline, industry sources said.

As to which of the two groups will take the first initiative to push growth in the methanol-blended gasoline market remains unresolved, they added.

Blending gasoline with methanol makes sense in China because of its abundant coal reserves. Methanol is a clean-burning fuel that is derived from coal.

To support methanol production and partly to address illegal fuel blending activities in China, the government announced in May that standards governing the use of methanol-blended fuel will be announced from November 2009 to next year.

Illegally-blended fuel was around 2m tonnes in 2008, based on estimates from Chinese commodity markets intelligence service CBI China.

The standards would apply to gasoline blended with 15% methanol blend (M15) and with 85% methanol (M85), as well as pure methanol (M100). Existing automobile engines would have to be modified to run on pure methanol or on blended gasoline with an 85% methanol.

Blended fuel is a cheaper and an environment-friendly alternative to ordinary gasoline, market sources said, but the government ultimately leaves it to car owners to decide whether or not to make the switch.

The balancing scale just tipped in favor of blended fuel at the start of the month when China implemented its second fuel price hike this year caused by spikes in crude costs, some players said.

93-Ron gasoline prices are currently around yuan (CNY) 6,700/tonne ($980/tonne) ex-tank, whereas the production cost of M15 to M85 blends will be around CNY2,670-5,990/tonne ex-tank, based on methanol’s traded price of CNY1,960/tonne ex-tank last Friday, according to chemical market intelligence service ICIS pricing.

Once fuel blending is legalized, other issues may crop up as state-owned energy companies PetroChina and Sinopec would have to deal with lower sales of regular gasoline and would have to invest on specialised fuel distribution equipment if they decided to sell methanol-blended gasoline, some players said.

Provincial governments would also be deprived of revenues generated from gasoline taxes, others said.

“By implementing this, you are shifting wealth from the government and the provincial authorities to the privately owned methanol enterprises,” an industry source said.

“The methanol people would be happy but not the government-controlled companies,” she added.

Based on China’s vehicle actual gasoline consumption of 70m tonnes in 2008, demand for methanol could be jacked up by 5m tonnes/year if half  of the country’s car population uses the blended fuel M15 (15% methanol:85% gasoline).

Such increased demand will help soak up present oversupply and be a driving force for prices to rise, traders said.