Buyers could see relief in 2001

By Staff -- Purchasing, 11/2/2000

Methanol prices have seen quite an upswing this year. In the past year, buyers and producers have seen spot prices rise about 52% (from the low 30¢/gal range to close to 70¢/gal).

Several market conditions combined to bring about the dramatic upswing in methanol pricing. Strong, steady demand for methanol was augmented by some planned and unplanned production outages in the U.S. These outages tightened the supply situation significantly. During the fourth quarter of last year, most sources forecast oversupply in 2000, but instead, supplies tightened and producer inventories dwindled by the start of 2Q00. In turn, the tight supply situation was affected by higher crude oil and natural-gas costs, which essentially raised the price floor on methanol and gave producers added momentum to push price increases through to buyers.

And though the factors that caused the price upswing are still being felt in the marketplace, most buyers are banking on a price plateau in the near term and some price relief on the horizon.

Prices should plateau

Buyers responding to Purchasing Magazine's monthly chemical transaction price survey saw some dramatic upward movement in methanol prices this year. Prices averaged about 36¢/gal for contracts and about 44¢/gal on the spot market in the first few weeks of the year, and then began rising. For the first quarter, prices averaged 45¢/gal (contracts) and about 51¢/gal (spot tags).

Higher energy costs during second quarter 2000 gave producers additional momentum to raise methanol prices. Rising crude oil and natural gas costs raised the floor on methanol pricing and brought contract price averages up to about 55¢/gal, while spot tags surged to about 62¢/gal, according to buyers' data.

With energy costs remaining high throughout the third quarter, producers have continued to propose price hikes and market prices have continued to climb. Third-quarter prices averaged 62¢/gal for contracts and around 66¢/gal on the spot market. In September, spot prices reached an average of 69¢/gal, say buyers.

As energy costs should soften in the next few months, strong demand and tight supplies of methanol should be enough to keep prices at their current levels through the first quarter of next year. For 2Q01, buyers forecast softening prices. Look for contract and spot prices to slide to average 62¢/gal and 65¢/gal for contracts and spot tags, respectively. From there, buyers could see some further gradual slippage in methanol prices. Buyers forecast prices of 56¢/gal (contracts) and 60¢/gal (spot tags) for fourth quarter 2001.

"I see prices beginning to soften, probably during the second quarter of next year," says John Ross, purchasing manager at Ciba Specialty Chemicals, McIntosh, Ala. "How much they will soften is unknown, but about 10¢/gal seems reasonable," Ross says.

Others are taking a "wait-and-see" posture. One buyer based in the Midwest says, "Producers are trying to get additional increases through with the current supply and demand balance," he says. "They may get those increases now, but it is tough to say if the market will stand further price hikes in the near term. Price changes in the next six months will depend on the U.S. economy and shifts in the supply and demand balance," he says.

But while buyers see prices coming down slightly in the next six months, producers see continued upward pricing movement.

"High natural gas prices raised the floor on methanol pricing, which has a psychological effect on the market," says Brad Boyd, director of investor and corporate relations at Methanex, based in Vancouver, British Columbia, Canada. "For the next few months, we see nothing that would indicate a significant change in the supply and demand dynamics of the market," he says.

"The combination of tight supply with strong demand and high operating costs should be enough to push additional price increases through in the coming months," Boyd says.

Demand cooks with gas

Producers and buyers alike point to above-average demand as the primary reason for the run up in methanol prices in the past year.

According to one source, global demand growth for methanol was between 4% and 4.5% for 1999. Last year, Methanex estimated global methanol production at approximately 29 million tonnes.

One reason for the strong demand is that methanol is used in a very wide variety of markets. The primary use for methanol raw material is in the production of methyl tertiary butyl ether (mtbe). mtbe is an oxygenate fuel additive designed to make gasoline burn cleaner.

Despite talks of a potential phaseout of mtbe use by the U.S. Environmental Protection Agency, (EPA), Methanex's Brad Boyd says that current demand for methanol has been led by demand growth for mtbe (more than 5%/yr).

Other end uses for methanol include the production of formaldehyde resins, plastics and restructured particleboard. Methanol is also a component of acetic acid production, which is used to make polyester fibers. Other markets for methanol include paints, solvents, refrigerants and disinfectants.

Supplies remain snug

While buyers forecast flattening methanol prices in the near term, most sources agree that the market situation will remain tight for the foreseeable future.

"Supply is tight and has been for several months," says Methanex's Brad Boyd. "Forecasts early this year were for long supply and flat-to-falling prices," Boyd says. But that situation changed dramatically in the first and second quarters of this year.

Planned and unplanned production outages have played a role in the tight supply situation.

"Some producers have shut down their plants because they couldn't remain competitive in the market due to the high natural gas costs," says Ciba Specialty Chemicals' Ross. "As more of the domestic producers have pulled out of the methanol market, buyers have had to rely more on barge material, and supplies have become substantially tighter," he says.

In June, Methanex Corp., a producer of methanol headquartered in Vancouver, British Columbia, Canada, entered into an agreement with Sterling Chemical, Jacksonville, Fla. The agreement provides Methanex with exclusive rights to output from Sterling's methanol plant located in Texas City, Texas. However, due to the current high natural gas prices in the U.S. Gulf, Methanex decided to shut down the plant for at least six months, effective July 1, 2000.

Also, Methanex closed a 500,000 tonne/yr methanol plant in Kitimat, British Columbia, Canada, due to significant losses caused by high production costs and increased competition in the methanol market.

Sterling Chemical, Houston, Texas, also shuttered its 150 million gal/yr methanol unit in Texas City, Texas, for six months, starting in July 2000. The company cited high production costs for the temporary closure.

Also, Millennium Chemical declared force majeure for the month of August, due to a problem with its natural gas supply at its 200 million gal/yr methanol facility in LaPorte, Texas. According to a company source, Millennium put its customers on 70% supply allocation.

Some new capacity is planned for the global market in the next couple of years. For instance, Amoco plans an 825,000 tonnes/yr expansion at its facility in Equatorial Guinea. That new capacity should come on stream by the summer of 2001.

Also, Repsol YPF, an international oil and petrochemical company based in Spain, plans to expand its methanol production in Argentina. The company will bring approximately 400,000 tonnes/yr of new capacity in mid-2002.