Environmental regulations lead to reduced production and rising costs of raw materials; methanol prices reach three-year highs

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Environmental regulations leading to production restrictions and rising raw material costs push methanol prices to three-year highs. Author/Source: Date: 2017-12-04 Clicks: 61 On November 30, methanol prices in various regions exceeded 3,400 yuan per ton, reaching a three-year high. Following this round of price increases, the overall price of methanol has risen by as much as 21.13% compared to mid-October. The rise in methanol prices is caused by the combined effect of various factors; the large-scale use of natural gas for domestic purposes during winter leads to a shortage of raw materials, which is an important factor. Furthermore, after the year-end maintenance periods at downstream manufacturers such as those producing formaldehyde, there is a concentrated period of recovery, leading to a sharp increase in demand for methanol in the short term; yet the maintenance period for methanol itself has not yet fully ended. Prices reach three-year highs; the domestic methanol market saw an unexpected rise at the end of the month, with daily increases of 100–200 yuan per ton in various regions. In some areas along the southeast coast, prices continued to rise, showing a 21.13% increase compared to mid-October. The large-scale allocation of natural gas for domestic use in winter, along with a reduced supply of natural gas to methanol manufacturers, are the main reasons for this sharp increase. Wang Xianghong said. Currently, classified by production process, methanol can be divided into coal-based methanol, natural gas-based methanol, coke oven gas methanol, and combined methanol. Among them, coal-based methanol accounts for as much as 70%, while natural gas accounts for about 20%. On an annual basis, methanol prices have risen sharply, which is partly due to supply-side reforms and environmental regulations that limit production, thereby disrupting the supply-demand balance ； On the other hand, the price of raw material coal remains high. Currently, extremely low social inventory of methanol and the recovery in downstream demand are also important factors behind this price increase. Industry insiders say that some coking enterprises have already started to limit production, with the Bohai Rim region being particularly affected by environmental regulations regarding production restrictions. Coupled with the longer maintenance periods held by manufacturers at the end of the year, the market is facing a supply shortage, with overall inventory levels remaining low. In the traditional downstream sector, the operating rates of formaldehyde and dimethyl ether have seen some increase, along with a slight rise in demand. Specifically, this wave of upward movement originated from the southeastern coastal areas. The maintenance periods for the facilities of methanol downstream manufacturers are relatively concentrated, and the recovery of production capacity also occurs at similar times. However, the restart of methanol maintenance facilities upstream was delayed, resulting in a short-term shortage of methanol in certain areas and a supply deficit; this phenomenon spread across the country. In the short term, the market is focused on digesting the gains. As the weather turns colder, the maintenance season for methanol plants in the northwest region has temporarily come to an end, resulting in a slight increase in supply. Furthermore, as environmental restrictions on heating production in the northern regions continue during winter, the operating rates of downstream manufacturers will also return to normal, and a new balance between supply and demand is expected to be established. In the long term, it will be difficult for prices to return to their level before the rise. Leading manufacturers benefit from this. Data shows that methanol production is currently concentrated in regions such as Shandong, Henan, Shaanxi, Inner Mongolia, Sichuan, and Xinjiang. The market price and production cost of methanol exhibit distinct regional characteristics. Specifically, the cost in Xinjiang is between 1,300 and 1,400 yuan per ton, while in Shandong it is around 2,100 to 2,350 yuan per ton. Based on current market prices, the profit per ton is around 1,000 yuan. The high market price of methanol has led to a significant increase in the gross profit margins for methanol producers. The price of methanol has risen from less than 2,000 yuan per ton at the end of 2016 to 3,400 yuan per ton today, with an annual increase of over 70%. Since the beginning of this year, methanol producers have enjoyed substantial profits. In terms of the strategies adopted by listed companies, Yuanxing Energy is the largest producer of methanol from natural gas in China, with an annual production capacity of 1.33 million tons; SNOW Energy is a leader in methanol production from coal, with an annual output of over 800,000 tons, while Shanxi Coking has an annual production capacity of around 400,000 tons of methanol derived from coke oven gas ； Hualu Hengsheng’s methanol production is around 700,000 tons. It is worth noting that since the beginning of this year, several listed companies in the methanol sector have begun to engage in hedging activities in order to cope with the sharp fluctuations in methanol prices. Taking Jinniu Chemical as an example, the company states that due to macroeconomic factors, the methanol market is highly volatile. In order to effectively avoid market risks and mitigate the impact of fluctuations in methanol prices on its operations, its subsidiary companies plan to use futures hedging strategies to control risks and reduce the effects of such price fluctuations on business activities.