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What will be the future trend of the methanol industry chain in the event of a sudden spike in crude oil prices? Author/Source: Industry Commentary Date: 2020-03-12 Clicks: 51 As the epidemic situation in China began to be brought under control, the global COVID-19 crisis remained severe. With the increase in confirmed cases worldwide, the global economy and capital markets faced significant challenges. Moreover, the failure of negotiations among oil-producing countries triggered unprecedented panic in the crude oil market, leading to a general sense of pessimism in China’s commodity markets. Against the backdrop of strong downward pressure on the macroeconomy, what is the situation in the methanol and its downstream industry chains, and in which direction will market trends evolve in the future? Methanol: On March 9th, Beijing time, the main contract for methanol futures opened at a limit-down price. It opened at 1918, down 101 from the previous trading day, a decline of 5%. The overall trend of crude oil remains uncertain, with most market participants in a negative mood, leading to a strong atmosphere of selling in the early hours. It remained at the daily limit down until the market closed. Due to the sharp drop in futures prices caused by sudden fluctuations in crude oil prices, the spot market has found itself in a relatively passive position. Moreover, the supply of goods arriving at ports has been concentrated in recent times, resulting in relatively high inventory levels in port storage areas. Lacking support, spot prices have remained weak. However, on March 10, the main methanol contract opened lower but rose later in the session. Following the \"collapse\" the previous day, market participants were inclined to buy at lower prices, leading to an overall improvement in shipments from ports, and spot prices also recovered somewhat. On the mainland side, although inventory pressures at the main factories are generally low, and with the traditional spring maintenance season approaching, there is still room for an increase in demand from downstream sectors, so manufacturers’ optimism is likely to remain strong. However, the low levels of port prices continue to prompt caution in operations in the mainland market. In the fourth quarter of 2019, there was a phenomenon of \"backflow\" of port spot goods to the inland areas; although this lasted for a relatively short period, it still had a certain impact on the inland market. Therefore, under the influence of macroeconomic uncertainties, port prices are declining; there is a need to be vigilant against another occurrence of \"backflow,\" which could further put pressure on prices in the interior regions. MTO: As for the domestic propylene market, downstream demand is still in a phase of slow recovery, and the operating rates of domestic propylene producers are not high, which provides some support for the propylene market. The mixed alkane dehydrogenation unit at Qixiang Tengda has been shut down for maintenance since February 29 and has not yet resumed operation ； Yangmei Hengtong’s 150,000-ton/year MTO unit is scheduled to be shut down for maintenance starting March 18th ； The 390,000-ton/year MTO plant in Zhejiang Xingxing is shut down for maintenance. The sharp drop in crude oil prices has once again triggered concerns in the petrochemical industry, reminiscent of the situation during the oil price crash in 2014; meanwhile, the development of the COVID-19 pandemic has also had a significant negative impact on the recovery of crude oil demand. For the domestic propylene industry, the decline in crude oil prices will first have a significant impact on coal-based olefins in terms of costs. According to Zhongyu’s rough estimates, as of March 7, the profit margin for propylene produced from oil was around 900 yuan per ton, the profit margin for PDH was around 941 yuan per ton, while the profit margin for MTO was around -291 yuan per ton. As oil prices continue to fall, the cost gap widens, and there is a possibility that the restart plans for some MTO units will be delayed. Methane chlorides: After the Spring Festival, the impact of the pandemic led to a slow recovery in downstream demand as well as traffic disruptions; as a result, some companies maintained high inventory levels, which forced most of them to reduce production or shut down their operations. However, as the pandemic situation has gradually improved recently, some companies may start to increase their workload again. In terms of raw materials, downstream enterprises across various regions that use liquid chlorine are seeing a gradual recovery, with demand continuing to increase. This reduces the shipping pressure on liquid chlorine manufacturers, thereby driving up domestic prices for liquid chlorine ； Regarding methanol, there is little inventory pressure in the main production areas, and suppliers maintain a confident attitude. Coupled with the active purchasing intentions of some traders, the methanol market remains strong. However, at the beginning of this week, factors such as the collapse in crude oil prices and a sharp drop in futures prices caused disappointment among companies, leading to a decline in methanol futures prices. Although methanol prices are currently weak due to external factors, the prices of liquid chlorine, which is a key upstream material, remain strong, providing some support for the costs of dichloromethane. In summary, at present, the operating capacity of domestic enterprises is gradually increasing, leading to an increase in supply, while demand on the downstream side remains slow; purchases are mainly driven by essential needs. Market activity is somewhat stagnant. However, the currently high costs on the upstream side may provide some support for the market. Businesses are operating cautiously and maintaining a wait-and-see attitude. According to Henan Petrochemical News, the domestic dichloromethane market is likely to experience weak fluctuations in the short term. It is recommended that industry players pay attention to the operation status of factory equipment, manufacturers’ inventory levels, and the recovery progress of downstream industries. Acetic acid: As a basic chemical product produced in the mid-tier of the industry, it has no direct connection to crude oil. However, the sharp drop in crude oil prices has a significant impact on methanol, which is used as a raw material. Most acetic acid factories in China are equipped with facilities for producing methanol as a raw material, and these facilities mostly use coal-based methanol production methods. If port-imported supplies create a price disadvantage, they will flow into the interior regions, thereby putting pressure on the prices of methanol produced from coal domestically. However, given that the correlation between acetic acid and methanol is not high, cost is not the key factor determining the trend of acetic acid. The impact of the sharp drop in crude oil on acetic acid is primarily reflected in market sentiment: domestic acetic acid prices have fallen rapidly since mid-February, and by early March they had approached the cost level of acetic acid. In addition, the accidental shutdown of Jiangsu Sopco’s 800,000 tons per year production facility on March 6, as well as the reduction in capacity by half at Tianjin Bohua Yongli’s 350,000 tons per year acetic acid plant, coupled with the announcement of maintenance plans for Celanese and Shandong Yankuang in the middle to late March, immediately drew significant attention from industry players. During the weekend, Henan Longyu stopped production unexpectedly; some manufacturers tentatively raised prices, and market sentiment turned cautious yet optimistic. However, the sharp drop in oil prices at the beginning of the week triggered changes in global markets, with domestic commodity prices falling significantly across the board. Against this backdrop, the brief \"enthusiasm\" in the acetic acid market was quickly dampened as well. In particular, buyers are more cautious in their purchasing attitude; they are not in a hurry to make purchases and tend to wait and observe first. Although inventory levels at some acetic acid plants have indeed declined, the underlying reality of overall supply exceeding demand in the industry has not changed significantly. The short-term acetic acid market is showing weak stability, but given the overall ample supply, a decline in prices is still possible in the future. Acetates: Since the underlying cause of this sharp drop in crude oil prices lies in the supply of crude oil itself, its impact on chemical products is mainly reflected in cost transfers. For the smooth transmission of costs, it requires coordination between the supply and demand sides of the chemical products themselves. Specifically, ethyl acetate and butyl acetate, as fine chemical products that are close to the end-stage of production, have very little correlation with crude oil; they are less affected by the sharp drops in crude oil prices, and the impact on them is even less than that caused by acetic acid and n-butanol, which are located further up in the production chain. In addition, due to the impact of the pandemic, acetate products are still in a phase of supply and demand tension. Therefore, this sharp drop in crude oil primarily affects the mindset of those involved in the acetic ester industry, as well as the overall international and domestic economic landscape. In the short term, since Shandong Yankuang still has the possibility of restarting its second production unit, the oversupply situation in the ethyl acetate market will take some time to be balanced, and there is a risk of further price declines during this period. However, in the long run, by April, it is expected that downstream industries will gradually resume operations, leading to a real increase in market demand. Meanwhile, the oversupply situation in the acetate market is likely to ease to some extent; a rebound cannot be ruled out. Formaldehyde: The domestic formaldehyde market is in a state of weak consolidation; there are significant uncertainties regarding the raw material methanol, and cost factors provide limited support. At present, supply in the market has increased somewhat, but demand from downstream industries is weak, resulting in a subdued trading atmosphere. A senior market analyst at Henan Petrochemical News believes that the domestic formaldehyde market may remain sluggish in the short term; it is recommended to pay attention to the resumption of operations in the market as well as the trends in the methanol supply market, with the market expected to stabilize gradually in the future.