Europe methanol enters age of mega plants and shocks

Source: ECN

2019/01/11

“Unpredictable” may continue to be the watchword for Europe’s methanol market in 2019, caught in the middle of global trade wars, a changing supply landscape as mega plants open their doors and the infancy of new financial instruments.

That is on top of economic jitters and short-term supply shocks that appeared out of nowhere at the end of 2018, all of which spells a bracing ride for players large and small.

LONG OR SHORT?

2018 was the year that surprised Europe, as a result of tight supply of methanol and the resulting strong prices, after a bearish trend had become fairly entrenched. The tsunami of material some had expected from new Iranian, US and Russian material was delayed.

The US bulldozer approach on international affairs created pressure on both Iran’s expected methanol exports at new plants thanks to stronger sanctions and on China and its economic performance through tariffs.

This helped contribute to consistently strong pricing.

Europe methanol

The fourth quarter of 2018 saw the second highest quarterly European price in a decade.

Other factors were also at play, but these were the head-line grabbers.

Extra supply is on the horizon at home and abroad – in Trinidad, the US and at BioMCN’s mothballed Netherlands plant, which was due to come online in late 2018 but for which the market expects a slight delay.

Once upon a time, plants in Europe with just under 500,000 tonnes/year of capacity were considered large.

Fast forward past the next way-point on the growth journey to around 1m tonnes/year in capacity, to the megaplants of today – around 1.5m-1.7m tonne/year units.

And now in the era of megaplants, an even bigger beast is almost upon us. Iran’s Kaveh Methanol, due in the second quarter of 2019 would have capacity of 2.4m tonnes/year, according to ICIS data.

Could the length that loomed over contract discussions in late 2017, but never materialised, finally sink home?

Perhaps, perhaps not. Timing is everything in this market. And new supply is expected to be met by growing methanol-to-olefins (MTO) demand.

Methanol projects

GEOPOLITICAL RISKS

Concerns for 2019 lie in the risks methodically laid out by Russia’s Metafrax in its 2017 annual report, given that many of the same issues are still bubbling away.

At the time, the nation’s largest methanol maker lasered in on the “re-escalation” of geopolitical risks.

It listed economic sanctions, the performance of global markets and economies, instability of world prices for oil and gas – all of which remain key factors for 2019.

Economic wobbles may also feed into the equation. Construction output declined in the eurozone and the EU in October, the latest figures available.The eurozone’s private sector output growth slipped to a four-year low in December.

NEW FINANCIAL TOOLS

Another feature that may grow in prominence – at least for parts of the industry that are more active in trading – is the financialisation of markets.

European futures launched 
on the clearing house CME’s NYMEX exchange in March 2018.

At time of writing, 61,000 tonnes had traded on the futures which settles against the ICIS European spot price.

It is part of a desire for some players in the market to see greater liquidity and opportunities to manage their risk, such as in the methanol-consuming biodiesel market which is used to the highly traded energy markets.

On the other hand, it is clear sizeable methanol users, such as slower moving formaldehyde or chemical buyers, are not yet so geared up for futures. Whether they will be, or if futures are adopted by a smaller segment of the market, remains as another question mark.

FIRE, OIL MIX UP PICTURE

Beyond the seasonal, predictable and not so predictable, there was the totally unpredictable. A fire struck Europe’s largest methanol plant, Equinor’s 900,000 tonne/year Tjeldbergodden site on the northeast coast of Norway, at the end of 2018.

The blaze broke out in a substation on 19 December 2018 at the site of the company formerly known as Statoil. It was unclear how long it would be closed for investigation and repairs.

This could change the short-term outlook for Europe’s market, and there has been a suggestion that a significantly lower contract price in the first quarter of 2019 teamed with supported natural gas prices could be too low for other European production such as in BioMCN’s Dutch plant to break even.

In this event, two sizeable European plants would be taken out of this net-import reliant market, which would likely have a corresponding effect on spot values, depending on how much the global market can plug the gap.

An unexpected shutdown at SABIC’s Saudi methanol plant in late 2017 – which lasted several months – helped tighten Europe’s market and support prices.

On the other hand, market players see prices as less directly hit by single plants.

“We [saw] 10 years ago the change from a few large, huge plants to where, if a plant in Chile [such as major producer Methanex’s] had a hiccup, immediately the price was switching. Today nothing changes if one of the major production plants is having a major shutdown,” said one European trading source.

“When the size of methanol plants changed 15 years ago, the markets changed as well. With the new hedging [futures] scenario I think it will change as well but I don’t know how. I’m sitting and watching,” the trader added.

The Norwegian fire comes at a time when the market crashed on crude oil prices. Europe is led by Asian values which were pressured down by crude, as Chinese MTO plants require lower methanol prices to compete with naphtha-based olefins.

“The market is really bad,” a Middle Eastern supplier remarked in late December 2018 as spot prices had fallen to around €280/tonne, while contract prices for 2019’s first quarter had settled down significantly from the fourth quarter of 2018. Despite that concern, sellers will have been hoping for a rebound, with the supplier pointing to two new MTO plants due online in China.

“They’ll suck methanol from the market,” said one seller.

Since China is such a guiding light for European prices, the trade war with the US will be watched closely.

So too, will the US sanctions on Iran.

This has already driven a wedge in the two-tier Chinese methanol import market between Iranian material – forced down in price as it has few places to go – and the rest of the world.

Despite uncertainties, some things are unlikely to change. China’s Lunar New Year usually brings a slowdown in consumption and a corresponding softening of global prices in late January to early February. What happens around those holiday festivities in the year to come – thanks to fire, economic jitters, trade wars and all – is less clear.

Additional reporting by Kite Chong and Sam Liang