OUTLOOK '18: Europe methanol market braces for more volatility

09 January 2018 11:00 Source:ICIS News

LONDON (ICIS)--Greater volatility could be in store for Europe’s methanol market and prices in 2018, a trend which is both feared and relished by different players on the scene.

Halfway through last year, some were expecting the relative calm of mid-2017 to continue to dominate. New methanol supplies were due to come onstream across the globe in late 2017 and take the sting out of seesaw pricing driven by China’s chop-and-change consumption.

Hopes for stability, especially on the part of some buyers who prefer steady-as-she-goes prices, appear to have been scotched by the rapid rise in spot values begun in November and escalated in early January.

This bull run boosted the quarterly European Contract Price (ECP) for Q1 2018 by 19% to €380/tonne, prompting one buyer to complain in December, “I think unfortunately we'll be back on the rollercoaster again. I believe it will be reckoned fairly high when we enter into February.”

Clearly, a rocky supply and demand balance has major implications for pricing and the present day dominance of quarterly settlements, another thorny issue likely to rear its head in 2018.

Volatility has been the hallmark of crude oil which, as the strong undercurrent of the global energy complex, is never far from view. Rising world oil prices are another big factor in 2018 because of their effect on petrochemicals such as naphtha and propane, feedstock for olefins. Olefins can in turn also be produced from methanol.

“A huge effect will be the fundamentals of crude oil... will crude bounce back to $50 or $45, or stay at $65/bbl?” asked one European methanol buyer.

“If crude is down to $45 we’ll see a long market in olefins in China… If crude increased, it will affect propane… and affect MTOs [methanol to olefins] plants. These plants are dictating the methanol market,” added the buyer.

The battle in China for methanol-based olefin plants to remain competitive with naphtha will continue to rage this year, and so any price changes will dictate how strong the pull on the methanol pool is.

Closer to home, battle for business could be sparked by the revival of a mothballed plant in the Netherlands by OCI and expanded capacity in Russia.

And as global commodity markets become increasingly digital, 2018 will also reveal whether fledgling attempts to start up paper trading in Europe’s old fashioned methanol world are a success or never make it out of the nest.

Traditional market faces fast-moving global change
There is mixed appetite for derivatives trading, and confusion over how suited the local market is for paper.

As another European methanol consumer said, “If it drives more transparency around spot pricing, if it’s large enough, transparent enough, we’d say there is an interest. Transparency helps a lot... If you look at the supply-demand balance in Europe, you can maybe wonder whether it’s realistic.”

One producing source claimed in December that the disputes over quarterly-led pricing could see a move towards paper, along with greater liquidity if players put more product onto the spot market.

“If ECP is not going to be in favour of producers in Europe, not just the importers, then we’re going to see I think changes in the way 2019 is going to shape up, either toward monthly system, growth of paper market and more liquidity in the spot market.”

However in an import-reliant market, it is unclear how keen the majority of consumers are for a more spot-heavy system, though a number of them are not opposed to higher liquidity.

The sluggishness to switch to monthly contracts, with formaldehyde makers especially preferring stability, could be a sign of unwillingness to change in some quarters.

The biodiesel sector is one which appears readier to embrace change, as it is already more familiar with paper business.

It may be a case of time. As one trader involved in the European game said in December, there is no rush to take part.

“I think [paper is] a good idea. I’ve not participated yet but I intend to… It’s not that it has to happen right away for me," it said.

For the time being, greater volatility in a more traditional setting of the physical market is the looming concern.

It has surprised some who looked at the mid-2017 plateau as a hint of things to come.

Price plateau followed by steep lift
Prices from May to late October 2017 traded in a narrow band of around €20/tonne, bottoming at €250/tonne on 20 October 2017 after a €274/tonne high on 16 June 2017. These prices are on a FOB Rotterdam basis.

Prices pressed upwards in the fourth quarter, with Rotterdam values well above the €300/tonne level for November and December.

This came amid strengthening Chinese levels, news of significant supply disruption at a major Saudi Arabia plant and a string of planned and unplanned outages in Malaysia, Brunei and Oman, plus a winter shutdown in Azerbaijan. Additional delays to OCI’s US Natgasoline plant start-up, pushed back to Q2, added to a bearish mood ahead of the first quarter of 2018.

Volatility led by China’s seesaw demand has forced some players to consider different models for contracts. This includes a type of ‘get out’ clause where they can temporarily go to the spot market should contractual levels while others are looking at monthly deals.

Extra supplies should take the heat out of the early 2018 tightness, including at OCI’s US Natgasoline plant but also at its Dutch line, effectively doubling its European capacity. Russia and Chile are also adding capacity, as is Iran but there is wariness about when Iranian material will come online.

A second trader said in late December: “We're talking about this for more than two years now, this tsunami comes from Iran. I don't see this happening. Relationships with Iranians do not get better… Mr Trump doesn't make it easier… I guess for Q1 we will not be flooded.”

Regardless, higher production is expected by some to add a softer slant to 2018. A third buyer said: “I think methanol availability will increase during the year… And so methanol prices probably will see a high, top during Q1 and then we'll see lower prices during the year.”

Whether this trend plays out or not is a question many will be asking as they look ahead to a volatile, complex 2018.

Above image, game pieces on seesaw: Photo by Achim Sass/REX/Shutterstock (758591a)

By Vicky Ellis