METHANOL STRATEGIC BUSINESS ANALYSIS
The methanol industry has suffered dramatic changes in the 2008 and 2009 period. From strong demand growth and unprecedented high prices, the situation dramatically reversed as the global economic crisis impacted the sector.
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The continued weakness of the construction and automotive sectors in North America and Western Europe had a big impact on methanol consumption resulting in reduced demand for chemical uses, formaldehyde and acetic acid in particular. There was some mitigation provided by “new uses” of methanol, in particular, DME in China for heating during the winter months and gasoline blending. DME and gasoline blending account for 4 and 5 percent, respectively, of global demand and are expected to grow well above GDP as well as methanol-to-olefins when several facilities are expected to come on stream from 2010 onwards.
Methanol Demand by End Use
(2008)
Asia-Pacific, in particular China, is expected to continue to be the driver for methanol demand mitigating the slowdown of other major markets such as North America and Western Europe.
Russian producers have been operating at reduced rates and have extended maintenance and turnaround periods amid poor market conditions with methanol netbacks falling below production costs. They are serving local markets as high land freight costs and low methanol prices make them less competitive in export markets.
In China, significant capacity has shut down due to poor economics. Some coal-based producers have incurred in negative margins whereas gas-based producers have suffered supply shortages during the winter. Natural gas supply for domestic heating is prioritized over chemical uses. Hence, record high imports have been observed in the country which led to an antidumping investigation by the Chinese government. Imports from Saudi Arabia, New Zealand, Malaysia and Indonesia could be affected.
The recent surge in LNG projects, driven by strong demand for gas in the major economies and a prolonged period of high crude oil costs leading to high natural gas costs in the major markets, is leading to a shift in this historic position. As more LNG is developed, more infrastructure is put in place, leading to the improved connection of producing regions and markets. The increasing amounts of LNG used to supply natural gas demand in the major markets means that the so‑called “stranded-gas” regions are no longer stranded for large reserves (above 3-4 tcf), unless land-locked. Thus the value of the gas in locations such as the Middle East could be represented by the LNG netbacks afforded to competitively supply the major gas markets.
However, despite the recent recovery of energy prices after their sharp decline in the second half of 2008, natural gas prices in the U.S. are not expected to reach 2008 levels. Indeed in the short term they will be much lower due to additional gas supply. Alaskan natural gas will be made available in most of the U.S. LNG imports will become the swing supply with plenty regasification capacity available. High U.S. gas prices would attract LNG supply and lower prices will mean that cargoes will go elsewhere having an influence in natural gas prices in other regions. Lower natural gas prices in the U.S. could position the methanol industry in a better competitive position relative to LNG in gas rich regions such as Trinidad and Venezuela. Nexant’s multiclient report “Sailing into Unknown Waters, Where Next for Global Gas Trade and Pricing?”, contains full details on our natural gas outlook.
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There is clear upward pressure on natural gas prices around the world even in locations where prices have historically been “fixed” as the high crude oil environment generates much higher returns to such gas-based projects. It therefore seems likely that no (or very few) new projects will enjoy the low gas prices currently enjoyed by existing projects. Consequently, when new projects are benchmarked against existing competitors, the customary “lower quartile” cost position expected by investors and lenders is unlikely to be achieved.
Methanol demand will continue to grow and it therefore follows that new capacity will be required to satisfy this demand. The question now arises of how competitive will be this new capacity required to meet future demand?
Methanol Business Drivers
Nexant’s wealth of experience in the methanol sector, combined with our wider global presence in the upstream oil & gas, refined products, biofuel and petrochemical industries, provides us with a unique overview of all factors influencing the development of the methanol business worldwide. This new program distills the core issues and insights from our accumulated expertise to providing subscribers with a good understanding of not only the fundamental drivers but also likely future strategic direction of the methanol industry. We believe this is an invaluable source of insight and strategic business analysis for executives and managers at all levels of the business .
Nexant’s Unique Blend of Capabilities
This analysis is presented in ChemSystems’ Strategic Methanol Business Analysis (SBA) program subscription which provides:
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Strategic trends and challenges facing the industry such as feedstock issues, logistics, capital costs, emerging demand drivers and new pricing mechanisms.
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Business fundamentals comprising market dynamics, profitability and pricing, a technology review including coal gasification and new developments, and delivered cost competitiveness.
If you have any comments on the analysis, please contact Graham Hoar at: ghoar@nexant.com . For details on how to access our detailed Strategic Business Analysis on Methanol please contact chemsystems@nexant.com
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See Nexant’s new Ammonia-Urea SBA Program for similar coverage for this sector
©2009 Nexant, Inc.
