Methanol: The glory days of methanol in 2009 are over; seeking a market balance point

Thread Content

Methanol: The glory days of methanol are over in 2009; seeking a market balance point. Source: Zhongyu Information. Date: 2009-2-3. After six years of high growth, high demand, and high profits, China’s methanol industry saw its domestic market drop to rock bottom in the second half of 2008. The vast majority of methanol producers were forced to reduce production or shut down due to the high costs resulting from high coal prices. By February 2009, the overall operating rate of methanol plants in China was less than 30%. Moreover, the influx of low-cost imported methanol into the Chinese market made it even more difficult for many local methanol producers to survive. Domestic supply: Most methanol producers in the mainland are operating at a loss; most methanol production facilities in regions such as Shandong, Shanxi, and Henan, as well as those that produce methanol from coal, have stopped operations or reduced production. Some methanol production facilities that use natural gas in the northwest region are also operating at a loss, resulting in reduced pressure on domestic supply. During January and February, the production capacity affected by domestic plant shutdowns for maintenance and planned repairs, as well as unstable plant operations, amounted to over 10 million tons per year. According to statistics from Zhongyu Information Network, methanol prices in China have remained low for several months now, and the operating rates of related facilities have also declined; the average operating rate of the nearly 200 methanol production enterprises in China has dropped to 30%. According to statistics, the national methanol production in December 2008 was 720,000 tons, a 23.1% decrease compared to the same period last year. The cumulative production from January to December was 11.2628 million tons, representing only a 6.4% increase over the corresponding period last year. Compared to last year, China’s methanol production capacity increased by nearly 8 million tons in 2008, representing a growth rate of 47%, yet output only rose by 6.4%. Based on the current operating status of methanol producers in China, Zhongyu Information predicts that national methanol production will further drop below 700,000 tons in January 2009. It has been declining for 3 consecutive months, and production in January 2008 was 875,800 tons; it is expected to drop by around 25% on a year-on-year basis. Looking at current domestic demand, on the one hand, oil prices are expected to remain in a relatively low range of 40–80 dollars per barrel throughout the year. This will suppress rises in the prices of liquefied gas and natural gas, thereby removing the price advantage of dimethyl ether; as a result, its consumption is unlikely to increase. It also makes it more difficult to promote the use of methanol-based gasoline, and its consumption may even decline ； On the other hand, as the impact of the global economic crisis intensifies, demand for methanol in traditional consumption sectors such as downstream derivatives like formaldehyde, acetic acid, and pesticides also finds it difficult to increase significantly. Since demand in 2009 is expected to be weaker than predicted, any feasibility studies conducted before the third quarter of this year are likely to be highly inaccurate, as there is a great deal of uncertainty regarding the growth in demand for 2009. In 2009, countries around the world introduced a series of economic stimulus measures to address the economic downturn. However, as it took time for these policies to take effect, the global economy remained in a phase of adjustment throughout that year. The overall economic environment does not support a strong methanol market, as the impact of the financial crisis on the real economy has not yet fully manifested itself. Although countries around the world, including China, are taking every possible measure to prevent an economic downturn or recession, the global economy, which has experienced rapid growth for many years, is now at a point where adjustments are necessary. The measures taken by various countries can only delay the timing of adjustment, but it is difficult to change the direction of that adjustment; demand for various products will not recover quickly, and there remains significant pressure for price increases. When will Chinese methanol companies emerge from their difficulties? When will demand in the downstream sector recover? How much longer will the impact of imported methanol last? I’m upset about how coal, natural gas, and oil prices are adjusted In 2009, the Chinese methanol market will experience severe tightening, leading to further substantial adjustments in the methanol industry. Whether China, along with the global methanol industry, can emerge from this difficult period and experience a prosperous future depends crucially on the recovery of the Chinese and global economies. In 2008, methanol prices in China soared to record highs, before plummeting sharply in the second half of the year, with a decline of over 60%. Against the backdrop of a gradual decline in coal prices, the impact of cheap imported methanol, and slowing demand, China’s methanol market will seek a more reasonable price equilibrium in 2009. Methanol prices are likely to continue to experience significant fluctuations in the first and second quarters of 2009, while a reasonable equilibrium point may be reached in the third quarter. Looking ahead to the methanol market in 2009, as the global economic crisis continues, the recovery of demand from downstream industries will be slower, and there is considerable uncertainty regarding whether a full recovery will occur. The economic slowdown and recession will have an adverse impact on international methanol prices to a certain extent. The domestic chemical industry has ended its previous period of prosperity and entered a downward trend, which in turn exerts pressure on methanol prices. The specific trend of the methanol market will depend on factors such as the economic situation and energy trends. Overall, however, the methanol market in 2008 will face more uncertainties, showing characteristics of consolidation and volatility; imported supplies will dominate the market, with prices likely to fluctuate around cost levels. The main factors affecting the methanol market in 2009 were: 1. The economic trend in 2009 depended to a large extent on policy adjustments. Affected by financial problems, the U.S. real economy is likely to show signs of weakening in 2009; issues related to employment and income growth will worsen, and demand in the U.S. market will further decline. Influenced by the U.S. financial and economic problems, it is expected that the economies of the EU and Japan will also weaken, possibly even before the U.S. As a result, demand in the international market will also weaken further. Affected by the widening fiscal deficit, the dollar may continue to weaken. There is a potential slowdown in the upgrading of China’s consumer demand and consumption structure, as well as a potential slowdown in real estate investment and business investment; furthermore, the growth rate of foreign trade exports may continue to decline. The economic slowdown and recession will have an adverse impact on international methanol prices to a certain extent. The domestic chemical industry has ended its previous period of prosperity and entered a downward trend, which in turn exerts pressure on methanol prices. 2. International methanol prices will continue to dominate the domestic market. Although domestically produced methanol is playing an increasingly dominant role in China’s methanol market, this does not mean that the Chinese market is completely separate from the international methanol market and has become a closed one. In fact, the changes in the international methanol market will continue to have a greater impact on China’s methanol market. The commissioning of new methanol plants in Southeast Asia in 2009 could trigger another round of competition in China’s import market. 3. Economic recession and slowing demand: The global economic crisis has dealt a severe blow to the real estate industry, and China’s real estate sector has also suffered as a result. Due to a decline in the export volume of panels used in the construction industry as well as domestic demand, there has been a surplus supply since this year. The sharp rise in methanol prices in the first half of the year caused many companies to suffer from low profits. The main reason for this was that, under the pressure of high costs, declining demand meant that it was difficult to increase the prices of end products, and the increased costs could not be passed on to downstream users. The continuous sharp decline in the second half of the year meant that the price of formaldehyde could not keep up with the drop. Amidst the sharp fluctuations in raw material prices, formaldehyde manufacturers are suffering greatly and are unable to carry out stable production; \"production cuts\" and \"high inventory levels\" have been common terms since the second half of the year. In our country, formaldehyde has always been the main driver of methanol demand, accounting for about 40% of the total methanol demand. Formaldehyde used in panels accounts for about 70% of the total consumption, with the remainder being mostly polyformaldehyde plastics, polyoxymethylenes, and methacrylate solvents. Urea-formaldehyde resin, phenol-formaldehyde resin, etc. are widely used as adhesives for panels. The decline of the formaldehyde industry in 2008 was undoubtedly a major negative factor for the methanol market; its significant share of demand for methanol played a role in keeping methanol prices low. Some optimists expect that China’s policies aimed at boosting domestic demand, which focus on infrastructure development, coupled with the post-earthquake reconstruction efforts in Sichuan over the next five years, will help increase demand for cement, steel, and sheets, thereby providing a temporary buffer against the decline in domestic formaldehyde production. The glacial acetic acid industry is well-known for its high profits. A financial crisis struck, causing prices throughout the methanol supply chain to plummet, while acetic acid manufacturers struggled to stay above the break-even point. In the fourth quarter, many acetic acid manufacturers began to reduce costs in three ways: first, by turning to imported methanol as a source of supply; second, international producers shut down their high-cost production facilities; or third, they expanded their industrial chains by establishing their own gas production systems and purchasing coal mines, thereby using a long-term strategy of controlling upstream resources to cut costs. In recent years, China’s dimethyl ether industry has experienced explosive growth. Especially after 2007, new projects were launched in large numbers across the country. By the end of 2007, China’s dimethyl ether production capacity had rapidly increased to 2.4 million tons, four times that of 2006. 2008 remained a peak period for capacity expansion, with new production capacity adding up to about 3 million tons throughout the year, bringing the total to 5.8 million tons – double that of 2007. By 2010, once all the currently under construction dimethyl ether projects come online, China’s total dimethyl ether production capacity will exceed 10 million tons. The development of alternative energy sources, coupled with an excessive reliance on traditional energy sources, results in a limited market for dimethyl ether at present. Due to the sharp drop in international oil prices in the second half of 2008 and the continuous decline in sales of domestically produced liquefied petroleum gas, growth in the demand for dimethyl ether was hindered. Industry experts analyze that if oil prices remain at $50 for an extended period, the substitution cost of coal-based chemical products is relatively high, making a decline in demand in the short term inevitable. **On June 19, 2008, the Ministry of Finance and the State Taxation Administration issued the \"Notice on the VAT Rate Applicable to Dimethyl Ether,\" reducing the VAT rate for dimethyl ether from 17% to 13% as of July 1, 2008. Lowering tax rates directly benefits dimethyl ether producers and their downstream industries, and will play a positive role in promoting the healthy development of the dimethyl ether industry in the long term. 4. In 2009, methanol production facilities were put into operation on a large scale, leading to further increases in capacity. That year, numerous new methanol production plants were established in China, resulting in an excessively rapid growth rate in capacity. It is estimated that domestic methanol production capacity will reach around 30 million tons in 2009. Once all the new methanol production facilities are completed and put into operation, the additional production capacity will be at least 5 million tons, which will have a significant impact on the supply and demand dynamics in China’s methanol market, particularly in the area where these facilities are located. This will put considerable pressure on methanol prices to rise. Until the macroeconomy improves, this website believes that the pace of domestic capacity expansion will slow down in 2009, and there will be no surge in production. A large number of new methanol production facilities are emerging, and production capacity is increasing at an excessive rate. The high capacity growth rate in recent years will pose capacity risks to China’s methanol industry. From 2004 to 2006, the average annual growth rate of China’s methanol production capacity was 28%, 36%, and 50% respectively. In addition, there are many methanol production projects under construction in our country, with a total capacity of over 17 million tons; the vast majority of these projects will reach full capacity between 2007 and 2008. Based on the above data, it can be predicted that before 2009, China’s methanol production capacity will continue to grow at an annual rate of nearly 30%, a rate far higher than that of traditional demand, resulting in a severe surplus of methanol production capacity. The rapid economic growth has led to a high demand for methanol in our country. However, it remains uncertain whether the country will be able to utilize all the newly added production capacity. Although some companies have already built downstream facilities, this is far from sufficient to handle the rapid increase in the production capacity for raw methanol. In the long run, this will inevitably result in an oversupply of methanol in the domestic market. 5. The operating rate of methanol production facilities in China fluctuates significantly, indicating that the country’s methanol industry is vulnerable to external influences and faces considerable cost risks. Given the low energy prices in China, relevant policies have been introduced to gradually align domestic energy prices with international levels, which will further reduce China’s price competitiveness in the methanol market compared to that of other countries. From a cost analysis of large-scale methanol plants, it can be seen that international large-scale methanol plants have lower manufacturing costs, higher price elasticity, and stronger risk resistance, whereas Chinese methanol plants have higher costs, higher price elasticity, and weaker risk resistance. Methanol produced in natural gas facilities currently has low costs, but it is under significant pressure to see price increases. 　 6. The economic viability of the methanol project is also questionable; logistics and transportation pose challenges to the development of the methanol market. China’s energy bases are mostly located in inland areas, which increases transportation risks. Since most of the methanol plants under construction are located in western regions such as Inner Mongolia, Shaanxi, Henan, and Shanxi, rail transport is the main method for delivering the product to major consumption areas. However, China’s railway capacity is currently quite strained, and there will be no significant improvement in this capacity for a long time to come; as a result, freight costs are on the rise. Moreover, the properties of methanol require the use of specialized tank cars, resulting in empty returns and wasted transport capacity, which further exacerbates the strain on rail transportation. This tension results in a lack of stability and flexibility in the supply of methanol from the interior areas to coastal regions, preventing timely adjustments in response to customer demands. Transportation costs account for a large proportion of methanol prices (15%–30%), which is why methanol prices rise. Overall, current methanol investments in China will face issues such as rising costs and regional imbalances in supply and demand. The rush to build methanol plants is likely to lead to an oversupply, which in turn will result in a sluggish market and poor economic performance for these enterprises. 7. The standards for methanol gasoline were delayed in release. In 2008, the highly anticipated standards for methanol gasoline failed to be introduced despite repeated calls for their establishment. By the end of the year, the draft text for the M85 standard for methanol-based gasoline was approved by the National Alkyl Ether Fuels Subcommittee of the Standards Committee; it is now awaiting approval from the Standards Committee itself ； The 80,000-kilometer road test of M15 methanol gasoline conducted by the Shanghai Internal Combustion Engine Research Institute is expected to be completed in the first half of 2009. Industry insiders say that the **standards for M85 methanol gasoline, which were originally scheduled to be announced at the end of 2008. The main reason for the delay is the lack of appropriate management regulations. Issues such as safety management rules for methanol fuel, quality standards for methanol fuel, packaging standards, criteria for establishing fuel stations, and exhaust emission standards all need to be further specified. In the second half of 2008, the shortage of gasoline and diesel ceased, and the urgency to use methanol as a substitute for them gradually diminished; as a result, the amount of methanol used purely for profit-making purposes decreased significantly starting from that second half of the year. The implementation of some domestic local standards has seen an increase. In addition to Shanxi Province, which has already fully adopted methanol gasoline, 14 other provinces and municipalities including Henan, Shaanxi, Sichuan, and Heilongjiang have also started to adopt it, with Zhejiang being among them. In the first quarter of 2009, Zhejiang initially planned to introduce M15 methanol gasoline in pilot cities such as Hangzhou, Huzhou, Jinhua, and Quzhou. By then, each city will have 10–20 methanol gasoline stations, and its use will first be promoted in government vehicles, vehicles used by public institutions, taxis, and buses in Zhejiang Province. Increased promotion efforts help to support the consumption of methanol gasoline as an alternative fuel.