OUTLOOK '11: China drives methanol uncertainty

31 December 2010 12:56  [Source: ICIS news]

By Ross Yeo

LONDON (ICIS)--Predictions from participants of how the global methanol market will develop in 2011 are varied, with availability expected to be both tight and well-supplied in equal measure and assessments on pricing ranging from volatile to stable.

However, the large bulk of the uncertainly is derived from the Chinese market, which all agree would be the principal variable dictating global trends, while European fundamentals are easier to peg down.

Outside of Asia, the biggest unknown is the effect of the long-overdue EMethanex plant in Damietta, Egypt, which has a nameplate capacity of 1.3m tonnes/year and was originally slated for commercial production in early 2010.

Methanex, which owns 60% of the joint venture, has indicated the plant should contribute to the market in the first quarter of 2011, yet with its history of delays few market sources have been able to say with any confidence when the facility’s impact wouldl be felt.

That it will have an impact is undisputed, given its size, yet the scale and duration of that impact varies considerably depending on the viewpoint.

Buyers typically see 1.3m tonnes as a large enough chunk of capacity to have an undeniable lengthening effect of the market.

They have pointed out that a considerable proportion of the cause behind price increases in the European spot market in the fourth quarter 2010 was widely attributed to heavy buying activity of Methanex - buying activity which would surely decrease with the arrival of the EMethanex.

Yet sellers have countered this with an observation of Methanex’s policy, revealed in the company’s third quarter results press conference, of marketing around double the volume it produces, and the approximation that even with the Egypt plant’s contributions it will still need to purchase around 1m tonnes/year on the spot market.

“Methanex won’t be buying the same volumes, but in 2010 they sold twice as much as they produced…they will still be lacking over 1m tonnes,” said a producer.

Sellers have also highlighted the minimal impact felt from the addition of three other new plants in 2010 in Brunei, Oman and Venezuela which have a combined capacity of 3m tonnes/year.

These plants were generally delayed, however, and arrived at a time of numerous production outages, both planned and unplanned, buyers responded. If the global market were to experience a period of relatively uninterrupted production in 2011, the effect of the additional volumes from 2010 as well as that of EMethanex would be fully realised.

Most agree, however, that the impact of the new plant is unlikely to be felt until the second quarter. Most buyers have also conceded that any dip in pricing would be relatively short-lived in the context of the whole year.

There has been a greater degree of concurrence on demand, with both sides agreeing that European consumption is likely to grow in line with gross domestic product (GDP).

The European market recovered from the global recession surprisingly quickly and most players reported that operating rates had returned to pre-2008 levels by some stage in 2010, leaving little room for demand increases without new growth.

Growth, as opposed to recovery, has been largely expected to be limited to Asia and will be especially focussed in fuel applications, such as direct gasoline blending and dimethyl ether (DME) production.

While there have been some who have questioned whether these new fuel applications will result in the vast and rapid demand expansion to quite the extent anticipated, the general opinion has been that Asian growth, and in particular China, will be driven by these applications and itself drive the global market.

Chinese growth, which is generally estimated at over 20% per year on average, is widely expected to continue at the same pace as in 2010.

Those with bullish outlooks point to this massive expansion and question how the only new plant expected in 2011, EMethanex, could possibly balance the global market.

Yet that is to ignore the fact that only roughly 70% of global capacity is currently utilised, say many others.

Much of this unused capacity consists of high-cost plants located in China which are only cost-effective at high prices.

Utilisation rates in China are as low as 40-45% and when the market is tight, prices rise and production increases, relieving the tightness and lowering prices.

In the fourth quarter of 2010, limitations on production imposed by the Chinese government, which were linked to attempts to meet greenhouse gas emissions targets, resulted in rising methanol prices but without the usual response from production, and, therefore, still further price increases.

Such limitations are widely thought to have been lifted towards the end of the year; something partially credited with slipping Asian prices throughout December.

In the absence of limitations, many sources claim Chinese production is more than capable of coping with local demand. Furthermore, much new Chinese capacity is expected to be brought online in 2011, with some estimates as high as 8m tonnes/year.

“I think it could be a volatile year - Chinese production has to balance the market,” said one producer.

“Chinese utilisation is 45% at best, if you increase that to 50% then global supply will be sufficient,” added a buyer.

So, whether prices are high or low, whether supply is long or short, when it comes to the global methanol market, the message is clear: look to China.

For more on methanol visit ICIS chemical intelligence
To discuss issues facing the chemical industry go to ICIS connect

By: Ross Yeo
+44 208 652 3214

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