OUTLOOK ’12: Global methanol has potential to remain stable

02 January 2012 14:20  [Source: ICIS news]

By Ross Yeo

LONDON (ICIS)--As ever, the year ahead for the global methanol market holds myriad variables and uncertainties.

However, these unpredictable elements notwithstanding, there is a widespread perception in Europe that the fundamentals of the market – both locally and globally – are not likely to be vastly different in 2012, on average, when compared with 2011.

The past year in Europe was broadly characterised by a strong performance in the first half of the year, with some consumers reporting near-record demand, followed by stagnating – or even declining – offtake in the latter half.

Many players, particularly those consumers who have suffered from decreased derivatives demand, envisage a similar pattern for the next 12 months, but in reverse: a period of poor – but gradually improving – performance, followed by a return to healthy levels in the second half of the year.

Some buyers have compared the current situation to the sharp downturn and eventual recovery of 2008/2009, but stress that there are important differences from which to take hope. In 2008, inventories were at such high levels that when the economy collapsed, the decline in demand was sharply exaggerated.

One producer of formaldehyde-based resins – the largest methanol-derivative by consumption – estimates that if, by 2009, underlying demand had decreased by 10%, actual consumption was down by closer to 50% as buyers attempted to clear stocks.

“I think we’ve learned a lesson... We’ve kept a tight leash on inventories and working capital. And I believe most players in the value chain have done the same,” the producer told ICIS.

Of course, just as 2011 unfolded differently for different players, so the performances in 2012 are likely to vary. Indeed, some methanol consumers have been fortunate enough to report largely stable demand over the past year, and expect to see more or less the same in 2012.

“I think it [the market] will carry on at 2011 levels ... so business will be at a good level. It’s really not so bad,” said one large buyer.

Many on the sell side view reports of decreased demand with scepticism, and are keen to stress their perspective that methanol consumption remains at healthy levels.

“You have to separate the sentiment from the real economy, and the sentiment is worse. Overall, 2011 has been rather constant, and I expect the same for next year,” said another European producer.

However, there are real uncertainties and potential sources of deviation from the forecasts above.

One of the more controversial variables affecting European prices is the euro/dollar exchange rate. Europe is a net import market operating in euros amid a global market dealing in dollars. As such, changes to the exchange rate affect the cost of bringing material into Europe.

Almost every quarter, when the key European players negotiate the quarterly contract price, this factor is routinely held as pivotal – and yet is also dismissed as too unpredictable to take into account. Nevertheless, the exchange rate undoubtedly affects the European price, and all forward-looking predictions invariably include the caveat of a stable rate.

Perhaps the most consequential unpredictable factor is the state of the global economy. The forecasts for demand recovery above all rely on the assumption that GDP growth will resume in Europe and the US, but the prospect of another recession refuses to disappear.

“Do we get a recession? That’s the question. Methanol growth will be linked to the general market development during the year. If we have a recession, it will impact everything,” said a consumer.

It is often suggested – particularly by producers and traders with a global perspective – that weak economies in Europe and the US will be offset by growth in Asia, primarily China. However, even China’s rapid GDP growth of around 10% in 2010 has eased off, and is anticipated to be closer to 8% in 2012.

“China has been a bit more pessimistic than many expected. It’s dependent on exports, so it’s linked to the US and Europe. China will be affected, as well, if we have a recession,” said another buyer.

Nevertheless, one producer feels that even if the US and Europe remain stagnant, Asian methanol growth will result in a tighter global market in 2012, amid what it feels are insignificant production capacity additions.

There are various potential additions to global capacity on the horizon, but doubts surrounding the actual date of contribution in many cases are further adding to the uncertainty.

In the US, a mothballed 750,000 tonne/year plant at Beaumont, Texas, is expected to start up around the middle of next year. And in Libya, the National Oil Corporation’s two 330,000 tonne/year plants at Marsa el Brega are mooted to return in early 2012, after they were shut amid the political and civil upheaval in February 2011.

The Azerbaijan Methanol Company (AzMeCo) had originally expected its new 560,000 tonne/year plant in the Garadag region to come on stream by the end of 2011, but start-up is now expected at some point in 2012 at the earliest. Methanex is on track to restart its second 850,000 tonne/year plant in Motunui, New Zealand, around mid-2012. Also affecting the Asian market is the unreliable performance of Petronas’s combined 2.36m tonnes/year of capacity in Labuan, Malaysia.

Although the new or restarting plants amount to almost 3m tonnes/year of global methanol, few sources genuinely expect them to all commence production on time. However, during 2011, there were several significant outages that did not lead to price gains, included many in the supposedly robust Asian market. Furthermore, Chinese capacity utilisation, which is usually around the 55% mark when feedstock curtailments are not in place, was lower – at around 48% – for much of 2011.

The fact that this reduced output did not lead to large price increases has led many sources to assess that the global market is not at risk of becoming tight next year, and the consensus is for a more or less balanced market.

Affecting Europe specifically is the somewhat unreliable output from the 1.3m tonne/year EMethanex plant in Damietta, Egypt, caused by political and civil instability in the country. This plant’s unexpected closure in November caused the only real price reaction to a supply interruption in 2011.

On the one hand, 2012 could essentially be a repeat of 2011. On the other hand ... who knows?

By: Ross Yeo
+44 208 652 3214

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