Chemical Conversations: Methanol Market Puts-and-Takes

Cassidy: Hi, everyone. Thanks for listening to our inaugural episode of the Methanol Market Puts-and-Takes podcast. My name is Cassidy Staggers, and I'm here with Dave McCaskill. We're excited to kick off our podcast series on all things methanol. So, let's dive right in. Dave, we all know the primary market drivers are demand, supply, pricing. Let's start with demand. What's your latest insight, and what’s catching your attention? 

Dave: First, let's ground everyone when I talk about demand. I am referencing merchant market demand, meaning it excludes China's captive CTO sector, as this sector we see and describe as self-contained. I also feel it's necessary to give some history. Global merchant market demand the last three years has really been stagnant, averaging about 90 million tons per year. This is the longest flat run in history. If we compare this to the five-year run-up to COVID, and the overall economic turn-down which followed, year-over-year demand was growing probably on average about 4 to 4.5 million tons per year. So, the last three years, the environment has been somewhat unprecedented. The good news is growth appears to be returning in 2024 and looking further ahead. 

Cassidy: So how do you see 2024 methanol demand now that we're approaching September? 

Dave: In the spring, we publish what we call our official balance. At that time, we believed 2024 methanol demand would grow about 3 million tons, which would be certainly a deviation from the past stagnant or flat 3-year history, growing to about 93 million tons, or 3 million tons delta. We tend to bucket demand drivers into three buckets: GDP forecast, China's MTO sector, and the aggregate fuels applications bucket. Clearly, these are all intertwined, because if global economies are not performing well, all three buckets are potentially negatively impacted. Our spring analysis was underpinned by fall 2023 GDP forecast and our views on China's large MTO sector, which were relatively bullish at the time. As 2024 progressed through the summer months, MTO methanol consumption remained well off pace, leading me to believe a three-million-ton year-over-year growth in '24 was going to be unlikely. Now, as a reference, MTO methanol demand has been as high as 16 million tons, 18% of total industry demand. But the last few years, we've seen demand in this sector drop to the 12 to 13 million-ton range, still a very important driver for our sector. 

If we're hoping for demand growth, good news comes from revised summer 2024 GDP forecasts, which were overall stronger than those of last fall. So, incorporating these new numbers into our set of demand drivers, and adjusting for what I do believe will be a little bit lower than earlier expected MTO demand, global methanol demand appears on pace to reach about the same 93 million ton number in 2024, still showing year-over-year growth of that three million tons, which I said will be the first notable year-over-year growth since 2019. Now, looking at the regions specifically, or thinking about them, Europe will be happy with meeting last year's demand. There are some pockets for improvement, but other derivatives are slightly off pace. The U.S. was probably poised to see better growth in 2024, but derivative production issues across several have erased some of this anticipated growth. But we still see an increase this year, maybe 300,000, 400,000 tons, out of 7 million. So, it adds to the overall growth. 

Asia, of course led by China, really underpins the bulk of this year's growth expectation, which is not at all atypical of history. Better region formaldehyde production, better acetic acid production, and of course, better MTO methanol demand, but not as strong as expected in the spring. All these lead Asia's demand growth, and thus they also lead the rest of the world. Maybe the better news is, looking out the next five years, methanol demand is seen as returning to a year-over-year growth, just not as strong as history has shown. Now, this increased demand in 2024 is not one of the drivers for the run of higher prices we've seen this year. Supply side issues continue to underpin regional strength. 

Cassidy: That's a great segue into talking about the supply side. So, we've recently seen that Methanex announced they will idle their New Zealand asset for the next several months. How significant do you think this will be? 

Dave: In a nutshell, this will likely be a bit more significant for Methanex, and I'm not trying to be rude when I say that, but probably for them more than the industry. And I really see no direct impact on price direction around this single event. Again, we kind of have to back up, and we talk about what we thought were going to be the supply additions in 2024. We expected Methanex Gesimar 3 to start up in Q1, Sarawak, Malaysia to start mid-year, Methanex to idle their Atlas unit in September, but at the same time, restart the smaller Titan unit. Just looking at these four events, annual capacity net additions was expected to be just under four million tons. Now, Gesimar 3 ended up being delayed 6 months, as they ran into technical issues. Sarawak is delayed as well, a couple of months, for technical and timing issues. We still expect the Titan/Atlas switcheroo, if you will, in September. Now, adding the loss of New Zealand capacity that was recently announced, and you referenced, for a few months, the result will see more like 2.5 million tons of capacity additions across this year. Obviously, this is down from our spring thinking, but I really don't see this as significant and jolting prices any more than they seem to have been this year. 

Now, we can't overlook that there have been many unplanned outages across the globe, year to date. And these regionalized outages have clearly been underpinning methanol price volatility, and what I really mean by that is higher prices, particularly in the Atlantic basin. When I think about 2024 capacity additions now, I also have to keep a keen eye on Iran. In the spring, we anticipated two new methanol units, starting up about mid-year. This has not happened, and if I'm taking sides now, neither may commission before year's end. However, as I've told people often, three or four units could still be commissioned this year. Unlikely, but with Iran, I never say never. 

Summarizing the supply picture, then, events to date have been absorbed. The industry has ample capacity. What it comes down to is operating performance. And as I said, the Atlantic basin has again had its share, more than its share maybe, of planned/unplanned outages, as well as new capacity delays. Again, I tend to keep a key eye on Iran, that I just talked about. Should these two expected units indeed materialize and operate in 2024, capacity additions will again far exceed demand growth. And that's been very typical of the last few years. If they fail this year, and slip into next year, I don't really see this as a supply side issue. Iran's outlets for its production are limited, and only by a domino effect tend to impact the rest of the world. 

Cassidy: Dave, I hear you made some reference to prices, higher prices, price volatility. Can you elaborate on that a little bit for us? 

Dave: So big picture, and I've said this repeatedly, and lots of people have heard me say this, China's large MTO sector is the swing, our incremental consumer in the methanol space. MTO methanol affordability tends to set the China price, and China, being some 50% of both the world's demand and supply, is positioned to set the tone for the rest of the world. However, we seldom see direct correlation. And in fact, in recent years, we've seen more disconnect than connect. Beginning in the year, we were convinced China olefin prices would finally see a long-awaited rebound, and this would pull MTO methanol affordability along with it, and this, then, underpinning directionally higher prices globally across the year. We were right with higher prices, particularly in the Atlantic basin, but this was far more due to Atlantic basin supply side issues, and little to do with the MTO, with MTO-driven prices. In fact, at this point in the year, we sadly must realize that China olefin prices have failed to firm, resulting in softer, not stronger, MTO methanol affordability prices. And thus, China methanol prices have softened along with this direction. The rest of Asia pretty much follows the China direction, so they're bucketed together, and all have been at softer price levels than we thought looking into the year. 

Conversely, the West, and particularly the Atlantic basin region, has for another year seen a plethora of planned and unplanned methanol outages, and I had referenced that sentences back. Since Q1 spot and contract prices have strengthened, and for many of these months, I've said the peak in prices was at that time and had been reached. Well, I'm giving it another shot, and I think U.S. spot and contract prices are peaking in August, probably carry September, and then directionally, I'm still convinced we're going to see some softening/correction. Maybe not fast, and maybe not in significant steps, but I do believe the startup of G3 does have sentiment weight to it, and that being bearish, just as the commissioning of the Sarawak Malaysia unit would have. So, if you're a buyer wanting lower prices, I suggest you look to Q4 for this to play out. 

Again, just kind of touching on the major regions, for Europe, and their quarterly price mechanism, I'm a bit torn. U.S. momentum in Q3 certainly opens the door for Europe's lagging mechanism to react, suggesting once again that that region, the European region, is poised to be out of sync with the U.S. But their Q4 benchmark clearly gets settled between buyers and sellers, and sellers and buyers likely will have strong arguments for raising prices and/or lowering prices. Always, time will tell. 

Now, Asia, and again, focus on China, remains quite the different story. As I've talked about, China olefins have failed to show any energy and are not expected to improve notably through year's end. As such, I expect little improvement in China prices, which will then influence prices across the rest of Asia, or fail to influence prices, if you will, higher. If I think about next year and beyond, we do remain convinced the olefin sector improves, olefin prices improve, China methanol prices improve, and directionally, this supports trending higher prices globally. However, I believe the rest-of-the-world pricing will have to back up some, to reconnect with China prices, before world pricing moves upwards in unison. 

Cassidy: So now you've set the stage for methanol market fundamentals, and I assume you'll be further expanding on these aspects in your presentation at the Argus Methanol Forum in September. What can we expect there? 

Dave: At the forum, I'll dive deeper into the demand space, both on the derivative level and regional levels. China continues to far lead the industry's methanol appetite. Supply growth expectations will be covered as well. Then, as always, I'll offer my views on how I expect prices to move looking forward. 

Cassidy: I'm looking forward to your more in-depth analysis at the forum. What other presentations are you looking forward to? 

Dave: Well, being a fossil in this industry myself, I'm always more tied to what we call the fossil methanol market, the gray methanol world. I'm not only looking forward to the interchange, or exchange I have with clients, or with the audience, reviewing the global picture, but we've got two of our consultants, Victoria and Becky, they're going to specifically focus on the European market, and then, again, the all-important Asian market. And Becky's got such insight and describes so well what's going on there. I think our viewers will greatly appreciate that. Finally, with the Methanol Institute being an advocate of our industry, it's always good for people to hear what they're doing, what they're advocating, what they're seeing. 

Cassidy: Looking forward to hearing what the Methanol Institute team has been working on lately. There are great speakers lined up for the forum. I'm especially looking forward to the panel on low-carbon methanol and unused chemical products, and then also the discussion from Dario from ISCC, speaking on global certifications of low-carbon products. 

We hope to have you join us, and for more information on the Methanol Forum here in Houston, starting September 9, visit argusmedia.com. It should be a couple days of great discussion, and at the conclusion of the forum, we're planning a special debrief episode.  

Dave: We’re planning on gathering the Argus methanol team post-forum and chatting about some of the key takeaways that all of us have heard. We'll have our colleagues from Europe and Asia joining us, and it'll be a great time to note what our team has deemed noteworthy and start brainstorming around questions that are in our minds after listening to the many presentations. 

Cassidy: Dave, thanks again for your insights. We appreciate our listeners tuning in.