OUTLOOK '13: Europe methanol tightness to ease in first half

03 January 2013 11:30  [Source: ICIS news]

By Ross Yeo

A Methanex plant in TrinidadLONDON (ICIS)--Methanol spot prices in Europe are expected to decrease in the first half of 2013, as the tight Atlantic supply that has gripped the market throughout the fourth quarter of 2012 begins to ease.

While market participants broadly agree the market trend in the opening stages of 2013 will be downwards, there is, not surprisingly, less consensus as to the rate and extent of this softening.

What is perhaps more surprising, given the persistent poor health of the European economy in recent years, is that the biggest questions marks hang not over demand, but supply.

Despite increasingly routine predictions of declining demand as a consequence of struggling downstream sectors, such as the automotive or construction industries, overall methanol offtake has proved fairly resilient to macroeconomic woes.

Although growth continues to evade the market, buyers and sellers alike are forecasting stable demand in the first quarter, with nominations indicating no significant changes from the fourth quarter in terms of volumes requested. That is not to say the potential for demand to suffer has been dismissed, but participants are looking more at the evidence of recent stability than at gloomy predictions that, all too often, have not materialised.

“Since the financial crisis [of 2008/2009], negative views have been coming in waves for the past three years or so, but it’s never quite that bad. We’re basically planning for a flat year,” said one buyer.

“I hope for stable demand. I’m concerned, of course [about the economy], there are a lot of clouds on the horizon, but I hope for stable demand,” said another. 

Instead, the greatest uncertainties lie with production, specifically those plants serving the US and European markets, problems at which have caused such protracted tightness in the fourth quarter and beyond.

Various separate elements have been identified as contributing factors to the overall lack of material in the fourth quarter, but the two most significant were problems in Trinidad and Egypt.

Trinidad’s seven methanol plants, which total over 6.64m tonnes/year, underwent a period from September to November of planned and unplanned outages and reduced output, largely due to gas curtailments.

In Egypt, Methanex’s 1.3m tonne/year plant in Damietta was taken offline for around a month from late August because of electricity shortages. After being restarted, the plant was run at 70% - a rate the company said would likely persist into the near future, until the political situation in the country becomes more stable.

The situation in Trinidad has substantially improved since. No curtailments are currently in place and the state-owned utility said methanol producers should be getting full gas supplies. But curtailments have been taking place in Trinidad since 2010, and there are few players who are confident that production there will not see any interruptions in 2013.

When a source with one of the European marketers for, and part owner of, several of Trinidad’s plants was asked how reliable he expected gas supplies to be in 2013, he joked: “Perhaps you could call Trinidad and let us know?”

Nevertheless, many European sources feel the island is unlikely to provide the same level of supply headaches in 2013 as in 2012, and that the supply situation in Europe will more likely be determined by how the Egyptian plant runs. This, in turn, will depend in part on how political stability in Egypt develops.

While there are some expected additions to the supply chain in 2013, the impact of these will be limited.

Libya’s National Oil Corporation was expected to restart its second 330,000 tonne/year unit in Marsa El-Brega before the end of 2012, having rebooted its sister plant earlier in October. Both plants were taken offline in February 2011 at the onset of the Libyan civil war. The plant’s small size will limit its ability to offset the reduced Egyptian output.

The Azerbaijan Methanol Company (AzMeCo) is also expected to start up its new 620,000 tonne/year plant in Karadagh in the first half of 2013. The geographical location of the plant, however, means sources are unsure what proportion of the volumes produced will arrive in Europe, and how much in Asia Pacific.

One producer described the AzMeCo plant as a “drop in the ocean.”

Another aspect of the European supply chain which has caused uncertainty is the fact that such a wide price spread has existed between the Atlantic markets and the Asian markets for such a prolonged period of time.

Since mid-October, the average European spot price has been at least $54/tonne (€41/tonne) higher than the average Chinese spot price, with the spread often surpassing $70/tonne.

Yet the fact that this spread has persisted indicates that no methanol has been shipped from east to west, or redirected from the Middle East, to take advantage of the arbitrage.

Many sources believe Middle Eastern producers simply do not have the flexibility they once had, and that the majority of their volumes are now contractually committed so they cannot adjust the flow of material to take advantage of regional price differences.

“If there was any swing volume in the Middle East, it would have already moved to Europe. Look at the price,” said one producer, who was not confident that any such material would find its way to Europe in the near future.

Yet methanol is a global commodity, and many others feel it is inevitable that trade flows will be adjusted in the face a persistent price difference.

“Europe has been paying the price, so it should attract the additional molecules. Experience says tightness, or indeed length, will be addressed by a shift of global supply patterns,” said another producer.

As a result of these unknowns, expectations for the tightness easing vary. Some players are confident European supply will have normalised by the end of January. Others feel the end of the first quarter, or even early in the second quarter, is more likely.

($1 = €0.76)

By: Ross Yeo
+44 208 652 3214

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