INSIGHT: Global methanol operating rate cuts expected in second half

SINGAPORE (ICIS)–Although demand is slowly picking up, the global methanol market will remain soft in the second half of the year with operating rate cuts expected globally.

This is predominantly driven by oversupply, a weakened futures market in China, and lack of storage which puts pressure on second half prices.

OVERSUPPLY, WEAKEND FUTURES, HIGH INVENTORIES HIT SECOND HALF
In the midst of the global coronavirus pandemic and the lower crude oil price, global methanol prices generally continue on a downtrend.

By the end of May, most regional prices were down 45% compared with early January 2019 reaching their lowest point since June 2002.

Global methanol historical price, Jan 2019 – May 2020
The global methanol market will remain weak in the second half given the expectation that oversupply, weakened futures and high inventories will weigh on the key China market.

The lack of usually much clearer government support for the economy and for infrastructure has driven bearish sentiment in China petrochemical futures.

The third session of the 13th national people’s congress, held on 22 May, did not issue a GDP and economic target for the current year and the government’s support policy was generally not as significant as had been expected.

Most petrochemicals futures fell on this news having firmed earlier in the week. The congress did not outline any additional investment in road and waterway infrastructure, segments that typically expect government support.

In terms of inventory – by the end of May, China coastal methanol inventory reached 783,000 tonnes, the peak point since November 2019. China coastal tank capacity is around 1m tonnes.

Outside China methanol inventory has continued to increase over the past six months on ample supply and slowing demand. The lack of storage is another key challenge for global markets.

China coastal inventory
‘000t, Aug 2019 – May 2020METHANOL DEMAND EXEPCTED TO DROP 5% IN 2020
ICIS preliminary forecasts suggest that global methanol demand will fall 5% year on year in 2020 with end-use consumption only expected to fully recover in the next 1-2 years.

Demand from methanol’s oil-related sector, which has 40% market share globally, is expected to be hit the most, with fuel blending, MTBE, biodiesel demand forecast to decline 7-20% year on year, as countries remain in lockdown and because of unattractive margins following the fall in the price of crude oil.

Other traditional demand outlets for methanol, such as formaldehyde and acetic acid are expected to drop 3-4% year on year, pressured by weakened decoration segment and clothing market.

Demand for methanol for ethylene and propylene production is still expected to show positive growth this year, driven by new capacity expansion at Jilin Connell, and the recent start-up of methanol to olefins (MTO) plants with total capacity 1.8m tonnes/year, including Inner Mongolia Jiutai, Ningxia Baofeng and Zhongan Lianhe.

Thanks to the plunge in methanol prices and improving polypropylene (PP), monoethylene glycol (MEG) and ethylene prices, most coal to olefins (CTO) and MTO units are making money at the moment.

This is expected to encourage CTO/MTO producers to maintain operating rates at a healthy level.

Global methanol derivative growth rate, 2020 vs 2019Source: ICIS supply and demand database

Demand for methanol in northeast Asia, which accounts for 70% of the global total, is expected to drop by more than 1m tonnes this year with demand elsewhere falling by 500,000 -700,000 tonnes.

REDUCED DEMAND ACCELERATES REGIONAL CARGO COMPETITION
Expectations of reduced demand have led producers to reduce supply and this has also accelerated competition between regional cargoes.

As a result of the drop in demand and lack of storage availability, ICIS expects the global methanol operating rate to drop 10 percentage points to 60% in 2020.

Methanol output could be cut globally in the coming weeks and months, with marginal producers expected to face additional pressure.

According to ICIS margin analytics, Middle East  and US natural gas-based methanol units enjoy the most cost competitiveness position while China coal-based and Europe natural gas-based methanol units are the global marginal producers.

Currently, the methanol operating rate in China of 64% is expected to decrease in the second half.

In April, the coal-based methanol margin in China reached its lowest point since Jan 2014, when ICIS first started to track this margin.

Global methanol cost comparisonUSD/Tonne, Average Jan – May 2020
Source: ICIS margin analytics

A total of 2.2m tonnes/year of methanol production capacity has been idled already due to the weak market environment, including Methanex’s Titan plant in Trinidad and Tobago, Chile IV plant, as well as the Methanol Holdings Trinidad Limited’s Point Lisas, Trinidad and Tobago plants.

Some new expansions have been stalled as well, including Methanex’s Louisiana Geismar 3 project and Caribbean Gas Chemical’s Trinidad project.

These two plants were due to start-up in Q2-Q3 2020.

South Louisiana Methanol (SLM), in a letter to the Louisiana Department of Environmental Quality, requested an extension for permits of its methanol project in St James Parish, LA, US, saying construction was put on hold for an indefinite period.

It is worth noting that it is extremely rare for newly built capacity to be idled, as this will incur high costs.

INSIGHT by Rachel Qian