Methanol Market: Geopolitics, Hormuz & China Q4 Outlook

Cassidy: Welcome to the "Methanol Market Puts-and-Takes" podcast, part of Argus Chemical Conversation Podcast Series. I'm Cassidy Staggers, senior analyst, joined by Dave McCaskill, Argus VP of Methanol and Derivatives. So, if you've been paying attention to global news and commodity markets, you'll know the world is in turmoil over ongoing and returning Middle East fighting, even expanding beyond the Strait of Hormuz area. This is sending crude oil sentiments and pricing higher. And methanol has fundamental ties to oil, but so far, the methanol prices haven't reacted as aggressively, at least, perhaps not yet.

So, Dave, I'd like to kind of suggest diving into the methanol area in three different parts. One, just talking to the listeners about where the industry has been the last few months, and then bringing us up to current. And then also, talking about the current environment the best you can, given the daily changes. And lastly, if you could close with kind of, what do we see looking ahead towards the end of the year and maybe beginning of next year? So, let's start with the first part. Can you talk to our listeners where the industry has been, and kind of bring us up to speed to where we are currently?

Dave: Absolutely. And thank you for that. And I'll try to be brief, but our listeners that know me, I'll just tell you, grab a cup of coffee and a comfortable chair. But let me try to define the timeline. And again, I'll jump quickly. But bottom line, February 28th, we saw Operation Epic Fury begin with U.S.-Israeli attacks on several key Iranian strongholds. Within days, the IRGC closes the Strait of Hormuz and oil prices begin to spike. The flow of vessels transiting the Strait quickly declined. And of many products, methanol being our focus, was won.

Exports of methanol through the Strait, as a little bit of background here, exports of methanol through the Strait last two years have averaged over a million tons per month. Looking at just the last three months, our April, May, June, March, April, May, that fell to less than 200,000 tons per month on average across this timeline. So, it was a huge loss of methanol flows. That was not only Iranian material, but it was also the combination of countries producing methanol upstream of the Strait, if you will, Saudi, Bahrain, Qatar, and to a lesser degree, Oman.

Historically, the bulk of these methanol exports or methanol flows from these Middle East countries targeted, has targeted, Asia-Pacific countries. And as we saw, methanol spot prices fast doubled, even moving higher than doubling from February averages over the proceeding next two months. Now, jumping ahead quite a ways, toward the middle of June with the memorandum of understanding sign, and theoretically, the Strait of Hormuz reopening what we saw, again, quickly, crude oil, other petrochemicals, and methanol in the case of what we're talking about, methanol vessels made a dash to get outbound through the Strait. And many did.

There was quite a backlog waiting patiently for safe passage. And as soon as it was clear for, again, a number of days, there was a tremendous uptick in these backlog of ships waiting. The result, global sentiments, oil prices, and methanol prices started falling, not a surprise there at all. Of course, as we know, looking back still, this 60-day peace pact didn't make it a month. And now, we've literally seen 11 straight days of military actions, and the Strait, again, said to be closed per the Iranians.

So, exactly what have, did we see from March to the first week of July from an analytical standpoint or from a methanol industry standpoint? We've estimated some 4.5 million tons of methanol production was lost from the Iran, Saudi, Qatar, Bahrain, Oman bloc of producers, again, just up to early July. How did the industry absorb these losses, which the industry we have had to do? And most simply put, three major actions, if you will, kept supply-demand fundamentals "balanced." Not in any particular order, but across this time, some 2.7 million tons of industry demand destruction was recorded. The bulk of this ex-China, and actually the bulk of it in the MTO sector.

Second, China coastal inventories were drawn down to the tune of some 1 million tons. Lastly, China domestic methanol production increased a million tons, maybe up to 2 million tons, if not more. While there were certainly courses of actions and reactions globally, these three things I just mentioned were mostly the offset of the losses of Middle East production and supply. In the second half of June and into early July, spot methanol prices were seen slipping, leading one major seller in North America to actually reduce their posted price benchmark. While we had thought there was an opening for Europe to see a lower benchmark price in Q3, marketers successfully had other views. Now, that's just a quick overview, but the point of that was to, if you will, let me say, that brought us up to balance as we started the month of July.

Cassidy: Great. Thanks, Dave. That will save listeners from listening the past few months of podcasts from your recap. It sounds like there is a decrease in the methanol movement, you said, like, 3 million tons. But it sounds like with some minor tweaks, that was able to keep the market balanced and maybe a slight oversupply historically had helped that this year. Moving to point two, now that we're caught up to the current, what can you say about today, this week, this next coming month going forward, maybe the next couple months? Look into your crystal ball for us and make a guesstimate.

Dave: Sure. And of course, where we're going in a couple of months, we'll save for part three. But addressing the where we are today are, again, from how I tried to close the previous response. The industry settled round one going into July. There were losses, there were upsets. And I'm not taking light of any of the actions and damage that has occurred and did occur. But the methanol industry kind of had rebalanced itself. Albeit, we're clearly sitting at higher prices, but supply-demand had found ways to make it work.

So now, we get into July. Where are we today? And particularly in the last 7 days...excuse me, 11, with the resumption of military actions across the Middle East, first, you know, I mean, not, again, in any particular order, but first, at a minimum, Iran says the Strait of Hormuz is closed again. Now, conveniently or nicely, the U.S. says it's open. And we're all going to wait and see, but certainly, in the last handful of days, there's been issues suggesting the gate's not swung wide open. The U.S. has reinstated a shipping blockade against Iran, but said they would help facilitate other countries to ensure safe passage of vessels through the Strait.

And again, in the last number of days, a number of ships have been attacked attempting to exit the Strait or transit the Strait. So, I don't know the answer to that right now. I'm clearly divided. And is it opened or closed? I probably would jokingly respond, yes, it's one of those. What we know this week is the bombing of key infrastructures and power plants, in particular, has now forced almost all Iranian methanol productions to idle. Of the eight or nine that are capable of running, I would have said a few days ago, four or five were, but now, we're probably down to two at best, as again, the best information we have says, in particular, utilities and infrastructures have been damaged, not direct hits on methanol units, again, to the best of our knowledge.

So now, as I previously and continue to chat and dialogue with our Asian colleagues, I tried to raise a bit of a white flag or a caution flag and say, "Let's not get alarmed in the near term that Iran isn't producing methanol." Because just like it was the case in April, May, and part of June, you can't ship. It's kind of a moot point. You can't produce. The not shipping leads the issue, not the not producing, at least in the near term. So, let's not over-harp, and I say that very nicely internally and externally, on the production side. If the torts are blockaded, which they are, we understand they are, and methanol and many other, any other products can't get out, that's the key point to focus on. I think the lack of operations and the further physical loss of supply is not an issue to overlook, I'm not saying that at all, but I think it's far more a Q4 issue looking ahead, depending on how the situation plays out.

Still, and we all know markets have reacted. Oil prices are on the rise, continue to rise, and we see Asia, in particular, methanol prices starting to strengthen as well. I believe most in our space have more uncertainties than certainties, unclear, rather versus clarities. It remains anyone's guess, mine as well, what's not only actually happening, but what's gonna happen. My thoughts are this. If non-Iranian methanol, again, Saudi, Bahrain, Qatar, Oman, being right there on the perimeters of the Strait of Hormuz, if these countries are able to move their methanol out continually and more freely through the Strait, then most Asia-Pacific countries should be more calm in talking about methanol.

With methanol prices, maybe seeing more moderate increases across July than we saw, as I said earlier, the deer doubling at the peak of fear, if you will. So, for me, it's just kind of, as I've said it, what I'll describe as the battle in the methanol space, maybe it's a poor choice of words, but the supply versus demand rationalization really comes down to, I think, lost Iranian supply versus how China, and to a lesser degree, India, will respond or how they are responding. And so, I think the response will be similar to what we've seen the last few months, and that's to say, China domestic methanol production has to remain high, may even increase further.

There's maybe a bit more room, but not a lot in coastal inventories to draw down from, but most importantly, MTO operations already down at 40% to 50% levels when they traditionally run at 70% and 80% plus. But at 40% and 50% levels, they're actually just going to have to drop further. And we're seeing that. It's going to be painful for China, but that's what would be required. And I think that's my predominant scenario for how I see things playing out, let's say, through July, at least.

Cassidy: Thanks, Dave. I just want to put a little color, if you don't mind, on some of the situations with some data points. When you talk about Iranian methanol capacity total, I think you've previously said, is that 10, 11 million tons?

Dave: Correct. Now, they'll historically make about eight. They don't run as well as other countries and facilities, but, yes.

Cassidy: And of that eight, if there's one, maybe two units still online producing, how much of that eight do you think is actually being realized?

Dave: To our knowledge right now, there's a very small card unit, or at least that's the way I pronounce it, which is a nominal 600,000 tons, very small. And then there's one of their large 1.6 million ton capacity units said to be operating or believed to be operating. So, that's 2.2. Do I think they're running better than 80%? Not at all. So, whatever, 80% of 2.2, 1.5 million tons on an annual basis. I mean, very small. When traditionally, Iran exports to China alone could be 6 million tons a year. So, they're way off pace. But like I said, I'm not getting too concerned about the immediate because, again, the blockade is the obstacle, not whether they're running or not. Lack of supply is a forward-looking issue that our industry should indeed be concerned about.

Cassidy: So, what's the volume and the capacity you're looking at for non-Iranian Middle East methanol if they can get through the strait?

Dave: You weren't supposed to ask questions, but if my numbers are right...

Cassidy: I'm curious.

Dave: ...I think those countries impacted by this, let me say, 20 to 21 million tons. So, Iranian capacity is about half of it. But again, because the far dominance of Iranian capacity goes to China, if the remaining countries can come close to replicating historic performance, the rest of Asia, again, why I'm saying it's not ideal, clearly for lots of reasons. But Asia won't potentially get hit with the near removal of all Middle East supplies. The region, in a total, can survive Iran. I'm just saying, it's China that has to be the off-setter of the forward-looking Iranian supply or loss of supply.

Cassidy: Okay. So, sticking with China, and maybe you'll answer this kind of in part three, but I'm curious to know, and you kind of alluded to it just a few minutes ago that they've drawn down their inventories, MTO demand has decreased. Maybe a slightly longer or medium-term picture, how does that play out? When will they really start to kind of feel the pressure if Middle East production stays on a decline? So, maybe that's part of your answer for point three. But if you want to close with maybe answering that question and anything else you have about looking forward the next couple months into the end of the year, what do you see happening in the market there?

Dave: Yeah, I'm going to push the answer to that toward the back end of this part three question, which of course is what do I see? What do I think I see? What do I think about going forward? And I'm going to put in one, I should have put in caveats from the very beginning, but anyone in the industry and anyone familiar with my thoughts and what I've said in the past, and in particularly, about forecasting accuracy or inaccuracy in the current environment, once again, just please take this all with, these are my best views talking with our team, coming up with ideas, looking forward, I would be the first one to say, there's an equal chance it can all change tomorrow. And there's an equal chance it'll change the day after and potentially the day after day after. This is an entirely influx situation, and we're trying to get our opinions and our views and our thoughts out there to the industry where we think what we think about. So, this is the culmination of that.

So, again, I'm going to kind of fall back a step to take a step forward. All of my forward thoughts, bottom line are based on this right now. If indeed non-Iranian methanol export flows can transit the Strait to, again, similar historical levels, then most of Asia, non-China, non-India, the remaining large block of methanol appetite there is relatively unscathed from a supply standpoint. That does not mean sentiments won't continue to play out and uncertainty and prices can indeed be higher. But again, I think China has to be the focal point for making the adjustment to and for the methanol industry.

So, what's going to have to happen? Again, China domestic production is going to have to continue at a higher rate, or at least, as high as they have been producing and maybe even higher. Now, that comes with pain because they're the incremental methanol producer in the world. So, if they have to step up to make more methanol, their cost of production is higher, circa, the price of methanol in China has to go up. But at that same time, in that parallel negative space, if you will, MTO is going to have to cut back and have to cut back and have to cut back. So, they're not going to be, A, they won't be willing to pay the prices, B, they don't have the volume or the material, the feedstock really to make it happen. So, there's an MTO ceiling on just how high methanol prices could go in China.

But I'll say this, China prices had reached as high as $400 towards $500 a ton. In late June, they fell under $300. In the last two weeks, last week particularly, they're up into the early $300s, $310, $320. Could they go up to $350? Very easily. Are they going to go a whole lot higher than that? I'm going to tell people that want to listen to me, I don't think so for the reasons I just said. MTO is just going to continue to ratchet back and ratchet back. And I think there will be other derivatives that we will see demand decay in China. We saw it last time. We saw it globally. But MTO is the biggest bucket to point out where we saw a million working to 2 million tons of methanol demand go away due to economics, due to lack of feedstock.

So, China domestic production steps up. MTO ratchets down even further. There's not a lot of room for China coastal inventories to draw much more. They've already pulled a million tons out. They only have about 0.5 million tons left in coastal inventories that are reported. So, they don't have that same luxury. So, really it has to be much more the combination of MTO and any other peripheral demand destruction and China increasing domestic production.

So, China prices are going to firm some, but I think they're capped. The rest of Asia, I think they will follow, just as they did, the direction of China. Now, in some cases early on, they leapfrog, how you want to say that, China prices significantly. But I don't see that particularly happening now. Again, assuming, assuming we get some kind of methanol flows out of the rest of the Middle East producing block there. India is caught in a cross hairs of typically relying on Iran supply, clearly not available now. So, their prices too are probably going to fly up a little bit more extraordinarily than Southeast Asia, China. But it's a small, somewhat removed sector, 2 to 3 million tons total demand. So, it's going to be significant to them. It's not as significant to the rest of the world. So, Asia is going to firm some.

Now, the Atlantic basin and the rest of the world and those are interesting beasts among themselves. You know, fundamentally, there's no particular connection to the Atlantic basin and Asia Pacific. It's much more of a sentiment kind of thing, or that's the way it has evolved as Atlantic basin pricing and market fundamentals have well distanced them from the interactions and the relationships that we see in Asia. So, do Atlantic basin prices, do I expect them to go up significantly, as long as Asia Pacific stays within this controlled mindset that I have? I don't necessarily see the reason for Atlantic basin prices to go up.

Now, just as I say that, and just because, again, as we're recording, tropical Storm Bertha is sitting out there, and it's running along the Florida panhandle and on the way to the Texas Gulf. What damage might it cause, specifically, to methanol? Again, don't know, don't have an idea. We'll find out by the weekend. But it doesn't look like it should upset the methanol industry. So, looking towards August, I think there's an ample opportunity for Atlantic basin to move more sideways. Here, again, underpinned by the uncertainty of just not knowing.

I think then, as I tried to allude to earlier, and kind of close out with this, if someone, and I like to use this phrase, asks me what's on my radar screen, I'm putting a big Q4 out there right now. Because I think whatever arena we're in right now and the loss of longer-term methanol supplies physically won't be felt as much in Q3, but they will potentially set the stage for, excuse me, significant supply side issues in Q4 when Asia is waiting for the next round of methanol exports from the Middle East to arrive and they're just not there. That's the big dot on my radar screen as I close out my thoughts.

Cassidy: Great. Thanks, Dave. Thank you for answering my ad hoc questions on some data. If we've learned anything about listeners and clients, they want the data. And I know you have it on the top of your head, so figured we would share that. And, yeah, interesting area to watch. Obviously, it changes every day. We don't know what's going to happen from day-to-day or week-to-week. But, yeah, we'll look at Q4 of the market as kind of a reaction point to see what happens for the rest of the year. Speaking of almost Q4, the Methanol and Ammonia Conference, Argus' conference will be in Houston. And that's 61 days away, starting on September 21. And there's an early bird price until August 21. So, if anyone wants to come here, Dave's updated view, we, of course, will be keeping up with our podcast in August and September. But if you want to hear his updated view, you can join us that week in Houston. We'd love to see you. And any other closing remarks, Dave, or we're going to wrap it up?

Dave: Well, jokingly, I'll say, and again, the audience knows me, the September forum will give everyone the opportunity to hear my excuses on whatever, why everything I just said did not happen.

Cassidy: Your crystal ball was cloudy maybe.

Dave: So, that's the one... Crystal ball is as good as anybody's, I think, almost right now. These are unprecedented times. Things change overnight. So, I'm sure we'll have different events having happened by then and different outlooks. But that's the good thing about these podcasts or about the forums, is it gives us an opportunity to give our opinions. And that's exactly what we're trying to do. If listeners believe the assumptions we make, I would tell them, then you should come up with the same conclusions. If you have a different set of assumptions you would hear by, then clearly, you're going to likely come up with different conclusions. This is so much more about just discussing and sharing views and visions and thoughts of how the industry is going to react to A, B, C, or D. And that's what keeps it all interesting, from my perspective.

Cassidy: That's what keeps you coming back.

Dave: That's what keeps me coming back.

Cassidy: All right. Well, thanks, Dave. That's all for our episode of "Methanol Puts-and-Takes" podcast. This series is a presentation of Argus Media, a leader in market reporting and commodity pricing information. For more details on all things methanol, visit argusmedia.com/methanol.