Methanol market grapples with poor economics and increasing supply

Crude oil plunged on Jul 5, hit by rising US dollar index, shrinking business activity in euro area, and concerns about economic downturn. WTI crude oil futures declined to below $100/bbl on Jul 5, recording the biggest intra-day drop since Mar.

The slump in crude oil dealt a blow to commodity market. China methanol futures declined to this year’s low, hitting 2462yuan/mt on Jul 5. China coastal to inland methanol price spread further narrowed, weighing on prices of domestic methanol supplies from inland China.

China methanol futures snapped the uptrend and has been extending the drop since early Jun. Inland methanol market has been impacted by lukewarm demand, with prices hovering at 2300-2400yuan/mt. With methanol futures declining, coastal to inland (Inner Mongolia, Northwest China) methanol price spread narrowed rapidly, from 530yuan/mt in early Jun to 190yuan/mt on Jul 5. Methanol prices in Henan, Shandong and Hebei Provinces were even higher than that in coastal regions.

In early Jun, several methanol plants in Shaanxi Province shut intensively. Northwest market was propped up with trading sentiment strengthening. Afterwards, however, with futures declining and cheap materials from coastal market, inland methanol market turned weak again.

Coal-based methanol producers grapple with poor economics. Domestic plants based on merchant feedstock coal are under continuous losses. In the week starting from Jul 4, coal price in interior regions increases, with mine-mouth coal rising to 1056-1236yuan/mt in Ordos, Inner Mongolia, up 90-150yuan/mt on week, equivalent to production cost for methanol at around 2200-2600yuan/mt. However, trading prices for methanol in Northwest China are in the range of 2320-2350yuan/mt.

In addition, supply is expected to increase with new plants starting and plant turnarounds coming to an end in the third quarter. Ningxia Kunpeng’s 330kt/yr new plant and Inner Mongolia Jiutai’s 2 million mt/yr fresh plant are poised to start and could materialize production in the fourth quarter. With the expectation of supply increase, concerns about excessive supply exacerbates due to new plants.

Looking forward, though methanol marked is supported by high cost, prices of domestic methanol supplies are under strains from weak futures and increasing supply. Coal-based methanol producers are pressured by poor economics.