New plants evaporate supply tightness and latest price spike
Jason Seigel -- Purchasing, 7/15/2004 2:00:00 AM
Methanol prices, stable for many months, suddenly spiked in May and June when natural gas prices to industrial customers soared to a four-year high. Supply is about to expand—since the world's largest methanol plant has started production in Trinidad—so analysts now suggest late-summer prices for the chemical will slide.
Soaring natural gas costs, solid demand and tight supply pushed methanol spot prices to 95¢/gallon in May and 96¢ in June off a stable price average of 78¢ in the previous four months, according to buyer surveys posted at Purchasingdata.com. Some analysts suggest the spot price peak has ended, but so has price stability. "We've gone through a period of about four weeks of extreme volatility," says a market analyst interviewed in June. But she and others also suggest that energy feedstocks are poised to return to stability—and that will take some steam out of methanol pricing.
The majority of the world's methanol supply comes from natural gas feedstock conversion. Peaking natural gas prices in May likely gave a "psychological knock" to methanol's price stability, analysts agree. The Energy Information Association predicts natural gas prices to stay above $6 per million Btu through 2004 with 1.4% growth in demand. Natural gas, therefore, will likely not induce any significant methanol price decline within the next few months. High natural gas price, however, is not the direct cause of methanol's volatility and hiked price. Instead, increased demand for methyl tertiary-butyl ether (MTBE)—the primary derivative of methanol—likely jolted the market.
MTBE is a high-octane oxygenate that is often blended with gasoline. As gasoline reached record high prices in May, methanol demand to make MTBE reformulated gasoline (RFG) surged. "With the price of gasoline so high, the value of buying methanol and converting it to MTBE was very, very attractive," explains reporter Brian McIntyre at Houston-based ICIS-LOR, "so there was a push by MTBE producers in the U.S. to maximize production, and they needed additional methanol to do it." MTBE producers "could afford to pay the sellers whatever they wanted in terms of price, so the (methanol) price went steadily higher on spot trades," McIntyre says.
Increased methanol demand for MTBE production cannot continue indefinitely. MTBE leakage into groundwater from underground storage tanks was significant enough to make the Environmental Protection Agency issue a Drinking Water Advisory in 1997. Between public health concerns and 2% oxygen requirement for all reformulated gasoline to decrease smog in some states, several are banning MTBE and replacing it with ethanol as a reformulated gasoline blending alternative. More states are likely to jump on the bandwagon, so MTBE could possibly be gone from the U.S. by about 2010. Its use already is half what it was in the 1999-2001 peak-demand period.
Nonetheless, new buyers competed with traditional ones to pull spot methanol in May. "There were so many new guys that they made supply tight" and drove up spot price, says McIntyre. Even without the increased demand from MTBE producers, domestic production of methanol has been tight. The U.S. is now a net importer of methanol since feedstock prices are putting chemical plants out of business. Waning U.S. production even faltered during May, as domestic "plants had blips—a week or two of downtime," an analyst says. Fortunately for traditional methanol buyers, PURCHASING's Price Alert online newsletter for June 7 predicted that gasoline prices will "keep falling unless there is a supply disruption." Since their revenues would be smaller, new MTBE producers should not cause a June methanol demand influx replicating that of mid-May. "The blend value for MTBE has fallen in line with what's going on with gas prices," McIntyre says, "so those MTBE producers without immediate spot demand requirements who have reasonable supply for the month of June have backed out of the market." Decreasing gasoline prices should help return lower-priced stability to the methanol market.
The U.S. imports methanol from countries like Venezuela and Trinidad that use "cheap feedstock costs to manufacture material at a much better cost than could be done in the U.S.," explains McIntyre. Outside the U.S., chemical companies are readily investing in methanol production. CNOOC-Kingboard Chemical contracted a $90 million, 2,000-mt/day methanol complex at Hainan Island, China. Methanol's largest producer, Methanex Corp., contracted up to 40 petajoules of natural gas from New Zealand, increasing its production capacity to 500,000 tons by 2005. Atlas Methanol recently opened a 5,000-mt/day plant in Trinidad that will reach a full operating rate of 1.7million mt/year. The Trinidad plant's "first volumes will be moved out of the facility later this month; the plant will solve supply anxieties" to some extent, explains McIntyre. Nonetheless, U.S. domestic production "will diminish, particularly as the demand for MTBE continues to diminish and we get more and more imports," he adds.
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