OUTLOOK '14: Europe methanol prices to stay historically high

03 January 2014 10:00 Source:ICIS News

By Ross Yeo

LONDON (ICIS)--The European methanol market appears likely to remain structurally tight in 2014, with prices supported at historically high levels.

New production capacity is generally not expected to be sufficient to balance out the market, particularly with three domestic plant turnarounds scheduled for the second quarter.

However, there are a number of developments set to occur that have as-yet-unknown consequences for the market, as well as some other potential developments which may or may not take place.

One such development is the EU’s revision of its Generalised Scheme of Preferences (GSP), which imposes lower duties on imports from developing countries.

A number of countries, including several major methanol producers, have been assessed as no longer qualifying for GSP. From 1 January 2014, methanol imports from Venezuela, Libya, Russia and the Middle East will be subject to 5.5% duty, up from 2% currently.

Some sources do not expect there to be any tangible impact on the methanol market.

With other key producing countries such as Egypt and Trinidad not subject to any duty increases (indeed, both countries are currently subject to 0%), as well as the fact that domestic supply has the advantage of no such additional costs, it has been argued that in order to maintain market share, exporters in those countries with higher duties must simply absorb the costs.

The counter argument is that if any producers decide to focus on other markets that offer higher netbacks, overall supply to Europe will decrease and prices will rise.

It has been noted that for Middle Eastern producers, Asia-Pacific markets already offer superior netbacks, and the increased cost of selling to Europe will simply increase this regional disparity. However, whether or not this results in fewer Middle Eastern exports to Europe remains to be seen.

Many European consumers whose supply chains will be affected are understood to have applied for exemption from the increased duty, although what proportion of the affected volumes will be exempt, if at all, is not yet clear.

Another development is the deal struck by Iran to curb its nuclear programme in exchange for relief from international trade sanctions. Although the probable timeline remains unclear, the obvious consequence of this will be ability of Iranian methanol to be sold into Europe (although some sources were not convinced that Iranian material will ever be treated like that from any other origin).

While this would essentially be just a readjustment of trade flows (the only effective outlets for Iranian methanol are currently China and India), one European producer said Iranian sellers may aggressively offer methanol to European buyers in order to quickly diversify their sales base.

The EU sanctions also prohibit the export of technology and equipment related to petrochemicals, which many believe is a contributing factor as to why Iranian methanol production has not been operating at full rates. Iran is currently understood to be producing 3.5m tonnes/year out of a nameplate capacity of 5m tonnes/year.

The lifting of the sanctions could, therefore, enable proper maintenance of Iranian plants and thereby contribute to greater overall Iranian production, which would impact not just Europe by the global market.

“Could it mean increased [Iranian] production? I’ll tell you one thing, there are a lot of people, all different kinds of people, eager to get started, eager to start doing business with Iranians again,” said one European supplier.

Another global impact could come via the return of significant volumes of uncommitted, flexible methanol. Sources agree that Iran was traditionally the most flexible producer in the Middle East, with producers often selling to traders on a spot basis rather than engaging in term supply contracts.

This flexibility meant that Iran provided important swing capacity that could take advantage of regional price discrepancies, and thereby facilitate global price parity.

One unusual feature of the global market in 2013 was a pronounced and sustained price gap between the Atlantic and Asia Pacific markets. While regional variance is not uncommon, the lack of available volumes that could be sold to the region of highest price and so balance out the market meant the disparity persisted several months.

“If Iran comes back… it could contribute to the disappearance of these anomalies,” said a trader.

One development that many sources believe is a possibility, but not a certainty, is demand erosion because of high prices. The first-quarter European contract price was confirmed at €445/tonne ($610/tonne), up €37/tonne, the second highest price on record behind the first quarter of 2008.

Consumers have often warned of the potential for demand erosion in previous quarters, although this was largely a warning against wide regional price differences that would put European derivative producers at a competitive disadvantage, rather than absolute price levels. Furthermore, no such demand erosion was observed.

However, with prices reaching historically high levels, even some suppliers have agreed it is possible that some consumers may not survive. However, as opposed to being a negative outcome, many suppliers said such rationalisation of the demand base would, if it happens, be seen as necessary for the re-balancing of the supply and demand equilibrium.

Another unknown is the impact on the Atlantic markets of the restart of LyondellBasell’s 780,000 tonne/year plant in Texas, which was mothballed in 2003 because of then-high natural gas prices. The plant’s output is pre-contracted and so will have no direct impact on spot prices, yet the overall supply pool will be increased.

With the Atlantic basin structurally short, the new capacity will go some way to addressing this imbalance, but there are no expectations for supply to outstrip demand.

The long-awaited 560,000 tonne/year AzMeCo (Azerbaijan Methanol Company) plant in Baku, Azerbaijan, is another source of uncertainty. The plant was originally expected on stream by late-2010, but has suffered such a series of delays that few sources really expect to any volumes from it by the first quarter of 2014.

However, one producer did note that if the material is sold via the European spot market, rather than being contracted, then prices could come under pressure.

($1 = €0.73)

By Ross Yeo