In the good or maybe the bad old days depending on your standpoint, methanol was a fairly straightforward product.
You had chemicals demand and that was more or less it. But as the extended analysis below explains, chemical producers who use methanol as feedstock have to factor in direct blending of gasoline into methanol, DME, biofuels and fuel cells as shapers of demand.
Direct blending of gasoline into methanol and the use of DME as a transportation fuel are the biggest of these two new sources of demand in China. Expect a big increase in consumption from these two applications over the next few years.
Whereas the US has opted for ethanol in order to increase energy security (and for bogus environmental reasons), China has chosen the methanol route based on its big coal reserves.
The $64,0000 question is what this wil mean for the affordability and pricing of methanol for chemical consumers.
By John Richardson
Predicting what’s going to happen 24 hours from now, as stock markets roller-coaster from gains to losses and possibly back again, is as difficult as extracting a tooth from a charging, bad-tempered elephant.
And so Mark Berggren, managing director of Singapore-based methanol consultancy MMSA, probably deserves a fair amount of credit for daring to predict where the methanol markets are going to be in 2027.
“With the increasing use of methanol into fuels, now more than ever the exercise is like trying to find a black cat in a dark room that may or may not be there,” he says, admitting it was a tricky task to predict its direction.
Methanol is seeing the growth of new sources of demand - dimethyl ether (DME), direct blending of methanol into gasoline, biodiesel and fuel cells – that were on hardly anybody’s radar screens a few years ago.
In DME alone, MMSA predicts that capacity in China will grow from 995,000 tonnes/year in 2007 to more than 6m tonnes/year in 2012.
Recent capacity announcements have included 3m tonnes/year by Sinopec in five phases of 600,000 tonnes/year.
This all makes perfect sense to China as it attempts to reduce its dependence on imported crude oil in favour of domestically sourced coal. The coal is used to make methanol and then DME.
Before we get on to the predictions of what’s going to happen in 2027, the immediate prospects for DME itself may not be that rosy. Berggren believes that there is a likelihood of too much capacity being built.
Markets for DME in China are now “easy,” as DME has been typically less costly to manufacture than liquefied petroleum gas (LPG) and sells at a discount to the latter product.
However, the ramp-up of DME production will quickly saturate the most easily accessible market for DME in China - LPG retail/household consumption.
Another emerging use for methanol in gasoline is direct blending. There are no national specifications for blending, but “trial” provinces are being allowed to set their own specifications and mix methanol with gasoline.
The reality probably is that all provinces are involved in blending, whether legally or illegally, because of the economics: gasoline is around CNY5.50/litre ($0.76/litre) and spot domestic China methanol CNY2.20-2.30/litre, says Berggren.
The consultant adds that until recently “the state-owned refineries have thrown roadblocks in the way of using methanol in gasoline,” but he believes that Sinopec is considering higher percentage blends of methanol into gasoline.
Additionally, new National and Development Reform Commission-supported national-level specifications for high methanol containing gasoline blends (M85 – M100) are expected by April 2008.
Several Chinese automobile manufacturers have been quick to jump on to this trend, claiming they will have methanol-ready vehicles available this year.
Therefore, three important legs of the methanol-gasoline table are being strengthened: government, the refineries and the automotive sector.
But to make a radical difference to dependence on crude oil, China will of course need lots and lots of methanol production.
The environmental impact of the coal-to-liquids (CTL) process to make methanol is a major concern and could limit how much further supply is brought on stream.
The process, it is argued, consumes large quantities of water - a scarce resource in western China where many of the CTL projects are located.
However, major coal producer Shenhua Group argues that after water is recycled in the syngas process, CTL technology consumes 7 tonnes of water per oil equivalent.
This compares with 6.5 tonnes of water needed to produce and process a tonne of crude oil.
Shenhua signed an agreement with Dow Chemical in May last year to study the feasibility of a coal-to-chemicals plant in Shaanxi province.
The plant would produce 3m tonnes/year of methanol with downstream consumption into transportation fuels and conversion into olefins through the methanol-to-olefins (MTO) process.
The other environmental argument levelled against the CTL industry is the level of CO2 emissions.
“Yes, these are an issue but since the streams from syngas [synthetic gas] production are more concentrated than in refineries, the mitigation techniques are more realistic, particularly reinjection into coal beds and spent gas fields,” says Berggren.
And so add all these factors together and Berggren is prepared to stick his neck out and predict that in 2027 “continued Chinese demand into gasoline and DME from locally produced coal looks set to be economically and environmentally feasible with regulations also in place to make this possible”.
The US and Europe have yet to develop an enthusiasm for methanol as a solution to their energy problems. In the US, ethanol is king as it keeps farmers happy.
No presidential candidate in 2008 - and perhaps in 2012 and beyond - will dare to upset the farming lobby because of the risk of losing votes.
Nevertheless, Berggren predicts that 68% of the 55.8m tonne increase in global methanol demand from 2007 until 2027 will come from fuel uses. This would require 38m tonnes/year of yet-to-be-announced capacity.
The 68% prediction is disturbing. If realised, methanol consumption would be firmly in the hands of the energy producers, meaning the chemical guys might struggle to source and afford their feedstock.
But you could argue that more sources of demand could suck in more supply, thereby forcing methanol suppliers to accept lower margins. This would, of course, benefit the chemicals industry.
Who really knows, though? As physics nobel laureate Nils Bohr said: “Prediction is very difficult, especially if it’s about the future.”
*The 11th IMPCA Asian Methanol Conference takes place between 20 and 22 May at the Westin, Kuala Lumpur, Malaysia. The event is co-organised by MMSA and Jim Jordan & Associates. Click here for more information.
By: John Richardson
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