Possible implications as Iran looks to divert methanol to domestic petrol demand

Recent news from Iran suggests intentions to produce petrol from methanol to bridge the gap in the increasing domestic fuel shortage. Currently, the Iranian government subsidies petrol and diesel fuel, but a fuel shortage continues to grow amongst increasing consumption. The government is apparently suggesting methanol be used as a transportation fuel, either blended with gasoline directly or to produce synthetic gasoline (MTG - Methanol to Gasoline). The Iranian government will seemingly offer methanol producers incentives and tax exemptions as well to mitigate potential revenue losses.

What might this mean for the methanol industry? We’ll offer a high-level, back-of-the-envelope breakdown of some possible implications.

Iran consumes approximately 25mn t of gasoline per year, of which about 5mn t is imported. Considering the straight blending of methanol into gasoline and assuming they blend methanol at 20pc, Iran will need (by volume) 5mn t of their methanol production each year to blend into gasoline. This does not consider the energy density conversion issue, which would likely result in even more need for methanol as a fuel. This amount of methanol is over half of their current annual methanol production, which stands at approximately 8mn t/yr. Of the 8mn t of methanol production, only 300,000 is currently consumed domestically (MTBE, formaldehyde, acetic acid), with the rest exported (mostly) to China and India. Supplying 5+mn t to the domestic petrol pool would eliminate the same amount in exports to China and/or India.

With Iran exporting 5mn t less methanol into the global arena, the most significant disruption would be to China, as China is the largest export target for Iran methanol. Globally, China is—for the most part—considered the high-cost methanol producer, as such operating their methanol facilities at reduced rates. To make up for the lost imports, China would increase domestic methanol production to fill in the gap; however, this would be at a higher cost. Methanol selling prices would likely be pressured upwards. With China’s methanol prices setting the floor globally, China prices (and other regions prices to follow) would likely rise some $25-50/t; however, this likely would not devastate the industry. 

A different scenario would be if Iran methanol producers need the current 5mn t of imported gasoline with the domestic production of synthetic gasoline. This would require 13+ mn t of methanol, as MTG consumes approximately 2.6t of methanol to produce 1t of gasoline. Not only would this eliminate all of Iran’s exports, but it would also require additional methanol capacity to come online in the next several years. This is plausible as additional capacity is already expected through the remainder of the decade. But one must factor in new MTG manufacturing facilities will likely take two years at a minimum; thus MTG would not be an immediate solution.

However, these new global methanol dynamics would be more difficult for China, having then to account for the loss of even more Iran exports, as would India but to a far smaller degree. While China could more comfortably close a 5mn t/yr gap in lost imports via increasing domestic methanol production, having to cover up to 13mn t (or more) each year would stretch their reasonable methanol production capabilities. This would require much higher operating rates and additional online capacity in China. Additionally, thinking about the production cost curve, this scenario could easily drive prices up an additional $100/t—maybe into the low- to-mid $400/t range, which would, again, cause pricing pressure upward and percolate globally.

If the second scenario occurs, this could have even further implications domestically in Iran. If a methanol producer could export at $400+/t, a nominal netback of about $320/t would result, which translates to $1/USG equivalent, or $2.60/USG just in the raw material costs of making MTG. This $2.60/gal MTG would be selling into an already heavily subsidized gasoline market where the current cost is a mere $1.36/gal, which would require even further subsidies from the Iranian government to be economically attractive.

Above is a whirlwind thought process for the two possible scenarios and implications from Iran’s decision to begin producing petrol from methanol. It will be an interesting development to follow Iran’s incentives for methanol producers, whether it be tax exemptions or heavily discounted natural gas to make blending into petrol more economically feasible. The common thread to watch is the ultimate impact on China. The world’s methanol production and prices will likely not be directly impacted by Iran’s decisions, but any effects for China from Iran’s reduced exports would fast send a ripple throughout the industry. 

Author Dave McCaskill & Cassidy Staggers