OUTLOOK ’14: Europe methanol prices to stay historically high
Ross Yeo
03-Jan-2014
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)
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