A new wave of deindustrialization is coming

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The OPEC meeting’s decision to maintain high production levels further intensified pessimism in the crude oil market, causing oil prices to continue falling. Against this backdrop, the futures price of methanol fell below the 1,600 yuan/ton mark. In the process of realigning demand and supply, we believe the industry will inevitably go through another round of capacity reduction, with a new dynamic equilibrium determining new prices. The willingness to cut production is likely to increase. At present, prices in the industries related to ferrous metals, non-ferrous metals, and energy chemicals have all dropped significantly, with industrial products continuing to be subject to severe deflation. Against the backdrop of a sharp decline in aggregate demand, next year reducing aggregate supply will still have to be achieved by eliminating high-cost, inefficient enterprises. We believe it can be tracked through two indicators: one is price, and the other is the operational risk of the enterprise. In the methanol industry, although the decline in natural gas prices has slowed down the process of phasing out methanol production facilities that rely on gas as a feedstock, the withdrawal of such facilities due to high costs will remain the norm in the long term. In the coal chemical industry chain, coal-to-methanol production is considered an oversupplied sector that cannot attract new bank loans. Once cash flows continue to decline, companies will face various problems such as operational difficulties and even bankruptcy, especially private enterprises. Under the supply-side reform policies, the pace of capacity reduction is expected to increase. The impact of the short-term supply reduction is limited. Since this week, spot prices of methanol have continued to fall; prices in Inner Mongolia have dropped further, with export prices at 1170 yuan per ton in the southern region and 1150–1180 yuan per ton in the northern region ； Shandong: 1,610–1,650 yuan/ton ； The price in East China dropped below 1,800 yuan per ton ； In South China, it’s around 1,870 yuan per ton. Although there were instances of some plants shutting down and production declines increasing in Shaanxi and Inner Mongolia, the plant in Weihe, Shaanxi, stopped operating in mid-November, while Yutianhua’s 600,000 tons per year coal-to-methanol plant ceased operations at the end of November and resumed operation this week. However, these short-term reductions in production were not enough to reverse the downward trend in spot prices. Currently, the rain, snow, and fog in the northern regions have had a significant impact on the transportation of methanol. On one hand, the transportation time has increased; on the other hand, due to weak demand, rising freight costs have forced companies to lower their export prices. Coupled with the increasing inventory pressure in the main production areas, spot methanol prices will remain weak in the short term. From the demand side, falling crude oil prices continue to squeeze the viability of methanol-to-olefins processes, while the sharp decline in polypropylene prices in the second half of the year dampens expectations regarding the operation of methanol-to-olefins plants that rely on imported methanol. One of the reasons for the continuous decline in methanol prices is that downstream companies are reluctant to build inventory during the off-season. Low port inventories have led to a divergence in the term structure. The latest data show that the total social inventory of methanol at the ports in East China and South China amounts to 365,700 tons. Affected by the concentration of imported goods arriving at the ports, methanol inventory in East China rose to around 290,000 tons, with inventory in Taicang increasing to 120,000 tons. Overall inventory in South China continued to decline, with the total inventory in Guangdong and Fujian remaining around 75,000 tons. The spot price difference between ports in South China and East China widened to 70 yuan per ton. Looking at the market trends, the January contract is relatively strong, while the May contract is weaker. The price difference between the January and May contracts reached as much as 200 yuan per ton; currently, the price of the 1601 contract is close to the spot price in East China. With the rapid decline in inventory levels for January contracts, their delivery price is expected to be around 1,850 yuan per ton. The price of contract 1605 has fluctuated within the range of 1,580–1,730 yuan per ton over the past two weeks; being near the lower end of this range provides a good safety margin for long positions. Overall, in a bearish market for commodities, the decline in commodity prices is to some extent irreversible, and it is necessary to wait for excess production capacity to be eliminated. Macroeconomics determines the trend, while fundamentals influence the pace. Short-term cost support has slowed the decline in methanol prices, but increased demand is the driving force behind price rises.