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The downward target for methanol is set at 2,300 yuan per ton. March 12, 2017, 22:55 – Futures Daily. Last Wednesday, driven down by falling international crude oil prices, methanol and other chemical products all saw price declines. As of the evening trading session last Friday, the main 1705 contract for methanol futures closed at 2,625 yuan per ton, dropping by 224 yuan per ton in just three and a half trading days, resulting in a cumulative decline of 7.86%. Worse still, during the overnight trading last Friday, the 1705 contract dropped below the support level of 2,650 yuan per ton, confirming a technical downward trend. The arbitrage opportunities in ports and inland areas remain open. The decline in methanol prices last week was quite significant. However, in fact, the transition between bullish and bearish trends in the methanol market began in mid-February. Due to centralized maintenance of facilities in Iran, the supply of methanol has decreased, leading to a continuous rise in methanol prices in China’s port areas. As methanol prices rise, the gap between methanol prices in the East China port area and those in inland regions continues to widen, creating an opportunity for inter-regional arbitrage. Thereafter, methanol from inland areas was continuously shipped to East China, alleviating the supply shortage in port areas and beginning to narrow the price differences between different regions. As methanol from inland areas continued to flow into East China, methanol prices in the Northwest have shown a strong trend since mid-February, while prices in East China have been weak, resulting in some reduction in the price gap between these regions. As of March 10, the methanol price gap between Jiangsu and Inner Mongolia was 600 yuan per ton, a significant reduction from nearly 1,000 yuan per ton at the beginning of the year. However, it is still higher than the average price difference for the whole of last year, which was 291 yuan per ton. It appears that there is still room for the price disparity of methanol across different regions to be reduced. The author believes that it is the correction of price differences between regions that is the main reason for the decline in methanol prices, with falling crude oil prices merely acting as a catalyst. Based on the current situation, there is still room for arbitrage across different regions, and methanol has further room to decline in price. The demand side struggles to absorb high-priced methanol. With the gradual commissioning of coal-to-olefins plants, coal-to-olefins has become the main consumer of methanol, accounting for nearly half of its total consumption. Therefore, changes in the demand for coal-derived olefins affect the trend in methanol prices. Currently, methanol prices are high, so many coal-based olefin manufacturers equipped with methanol production facilities have begun to reduce their olefin production and instead sell methanol externally. This phenomenon reduces methanol demand while increasing its supply; for methanol prices to rise again, this situation must be reversed, and the only way to do that is by improving the operational conditions of coal-to-olefins production. Based on past experience, the cost of producing polypropylene from externally sourced methanol is roughly the price of methanol multiplied by 3, plus 1,500 yuan per ton. Based on the current spot price of 2,900 yuan per ton, the production cost of polypropylene is approximately 10,200 yuan per ton, while the current spot price of polypropylene is around 8,500 yuan per ton. This has led to the shutdown of many coal-based olefin plants that rely on externally sourced methanol, further reducing the demand for methanol. Currently, the production cost of oil-based polypropylene is around 6,000 yuan per ton, with profits reaching 2,000 yuan per ton, which is quite substantial. The decline in crude oil prices has a direct negative impact on the production costs of oil-based polypropylene, but its effect on coal-based polypropylene is limited. Therefore, the cost advantage of oil-based production over coal-based production will continue to widen. Based on a polypropylene production cost of 6,000 yuan per ton, under the methanol-to-olefins production method, the price of methanol is only 1,500 yuan per ton. By lowering the requirements further, as long as cash flow can be ensured, the marginal cost of methanol calculated based on the current spot price of polypropylene is only 2,300 yuan per ton – and this assumes that the price of polypropylene will not continue to fall. Future outlook: Given that the price differences between different regions for methanol have not yet disappeared, and the cost advantage of olefins produced from oil over those produced from coal continues to increase, the decline in methanol prices is far from over. On a conservative estimate, the main 1705 contract for methanol futures is likely to trade around 2,300 yuan per ton. If oil prices continue to fall and the impact of oil-based olefins on coal-based olefins increases, there will be even more room for a decline in methanol prices. Therefore, in terms of strategy, a bearish approach should be adopted, but attention must be paid to the Federal Reserve’s interest rate hikes.