INSIGHT: Methanol may surprise

17 September 2010 14:46  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Methanol prices could spike again some time in the next few years, industry executives suggested this week. That hardly seems possible given current overcapacity and the uncertain demand outlook. But take a step back from the raw capacity numbers and from demand growth projections and there are factors at work that could shift market fundamentals.

The world is never as simple as some would like it to be. In methanol as in most other chemicals, China is a key driving force. Its demand could come close to matching that of the rest of the world put together by 2015. But China’s coal-based methanol plants are not exactly secure sources of supply, requiring maintenance at surprisingly frequent intervals.

Jim Jordan of methanol consultants Jim Jordan & Associates suggested on Wednesday that China methanol prices might be constrained within a relatively tight window for the next couple of years. Global merchant market producers of methanol can survive at a cost and freight (CFR) China price of $250/tonne and flourish if the price rises to $350/tonne, he calculates.

World methanol prices respond to China's actions, Jordan said in a paper presented at the Methanol Forum in Houston, and Chinese producers’ actions respond to prices.

On paper, global methanol overcapacity is significant, but there is only one new plant outside of China that might be expected to start up between 2011 and 2015. And there are real concerns about the stability of supply from plants in Russia, and consumers’ continued ability to source methanol from Iran.

Tightened international sanctions against Iran are making it increasingly difficult for Chinese buyers to secure lines of credit to buy material, some suggest. It is difficult for Iran now to place material in most global markets.

Effectively taking out millions of tonnes of capacity paints a different supply picture. Add into this mix the international potential for methanol use in fuels - a possible game changer - and the methanol world begins to look different.

But is there new-found buoyancy in the business, or simply the suggestion that market players have to realise that commodity markets cycle and that it’s best to plan or at least be prepared for every eventuality?

"I never dreamed in my wildest dreams that we would ever restart that plant," Methanex CEO Bruce Aitken told investment analysts at a conference this week. He was referring to the planned re-start of the company’s methanol plant at Medicine Hat, Alberta. The facility was idled in 2001.

Methanex wants to take advantage of the widened disparity between oil and natural gas prices. Methanol prices closely follow crude oil: the primary feedstock for methanol in North America is natural gas.

To put the disparity into perspective, under the 6:1 rule of thumb for oil and gas prices - oil contains about six times the energy equivalent of natural gas - natural gas prices in North America should be around $12.50/MMBtu.

But current natural gas futures prices are close to $4/MMBtu and have dropped 29% this year. Methanex says it has been able to secure a year’s supply of gas for the Medicine Hat plant at under $4/MMBtu.

Methanol demand in North America remains constrained because of the deep slump in construction. European markets seem to be faring a bit better.

China demand growth is linked to its impressive economic expansion but also to increased use in the LPG fuel blend dimethyl ether (DME) - although the China DME market has already been described as “mature”.

“There are more surprises out there than supply/demand balances indicate,” a Statoil executive said at the World Methanol Forum. Factor in high oil prices and methanol prices look set firm.

Bookmark Paul Hodges’ Chemicals & the Economy blog
Read John Richardson’s Asian Chemical Connections blog
For more on methanol visit ICIS chemical intelligence 
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By: Nigel Davis
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