14:28 PM | June 20, 2016 | —Marc Alvarado
The global methanol industry has undergone dramatic changes in the past 15 years. These changes have included a shift in regional demand dominance, the development of new end uses, and the emergence of new production centers. These factors have resulted in new tradeflows, pricing and economic dynamics which have previously not existed in the industry with closer links to other chemical product areas, adding further complexity in determining market direction.
A newer and very rapidly growing demand segment for methanol is in the production of light olefins (methanol-to-olefins, MTO). In an MTO unit, merchant methanol is used as a feedstock; it is not a unit which is back integrated to the feedstock for methanol. Such integrated coal-to-olefins (CTO) or gas-to-olefins (GTO) units do not have an impact on the methanol markets as they neither buy nor sell methanol as it is simply an intermediate phase in the overall process. For these reasons, the subsequent comments related to MTO refer to only those units that consume methanol produced by non-associated methanol units. As of 2016, MTO units exist exclusively in China with production beginning in late 2011 at very modest levels of methanol consumption. However there has been staggering growth in methanol consumption into this end use with as many as seven MTO units running by the end of 2015, while a stoichiometric relationship that requires three tons of methanol to be consumed for every one ton of olefins produced has resulted in MTO becoming the sixth largest methanol derivative in just four years of commercial existence (see chart 2).
Feedstock costs for methanol make up as much as 90% of the total cash cost and as such access to low cost feedstocks is key to overall methanol economics. The primary feedstock for methanol has been natural gas, representing as much as 85% of installed global capacity and historically methanol production primarily existed in Europe and North America. Other regions with access to low cost natural gas have also seen a surge in methanol capacity additions, such as the Middle East, Africa and South America. With the growth in Chinese demand for methanol and the country’s rich coal reserves, the industry has seen a sharp rise in coal based methanol production beginning in the early 2000s. Currently coal based methanol capacity represents around 35% of installed global capacity.
The capacity additions in regions based on more competitive/stranded gas economics lead to capacity rationalizations in the more mature western markets of North America and Europe in the early 2000s with North American capacity all but extinguished by 2008. However the fairly recent exploitation of unconventional natural gas supply through hydraulic fracturing in North America has seen this region regain its position as a methanol production powerhouse, with methanol capacity additions at cash costs close to those of South America. Understanding methanol production economics requires insight into natural gas prices around the world and coal prices in China.
West coast, coal-based Chinese methanol capacity has been the marginal ton needed to meet global demand and as such that last increment of production sets the price in China and in the world. As mentioned, there are other low cost regions such as the Middle East with more competitive production; the Middle East acts as a swing supplier to Europe and North America based on the price that China sets. Thus global pricing originates in China and the regions are priced according to freight and duty differentials. The US having closed nearly all of its production capacity in the early 2000s became the highest priced region, having to pay a premium to pull tons from international markets. However with the re-emergence of a North American production base to a level that will far exceed domestic demand, the region has undergone a dramatic shift from being the highest priced market to the lowest price market with economics and prices now based on export alternatives. Europe has benefited as the North American capacity additions have added supply in the Atlantic basin.
Supply and demand pressures drive methanol pricing, dictating where on the cost curve that last critical increment of production resides. Now that methanol has significant volumes of derivatives that compete as alternatives to crude oil derived products, however the picture becomes significantly more complicated with some methanol derivative affordabilities dependent on crude oil price fluctuations. The analysis of these requires an understanding of global fuel markets as well as light olefins markets. Understanding the interactions between these markets and production cost comparisons for olefins from the various manufacturing routes will be key to determining methanol market direction.