Cassidy: Welcome to the "Methanol Market Puts-and-Takes" podcast, part of Argus Chemical's conversation podcast series. I'm Cassidy Staggers, senior analyst, joined by Dave McCaskill, Argus VP of Methanol and Derivatives. And we have a little bit of a special episode today. We're welcoming back our lead methanol consultant from China, Becky Zhang. And Becky's been in Houston with us since last week. She joined our Methanol and Ammonia Conference at the beginning of last week. So, Becky, thank you for joining us, being here with us, and Dave, as always, for being here with us too. I just wanna start by asking each of you to share a major takeaway that you had from the conference last week, whether it be from a presentation you saw, or a conversation you had with one of the attendees, so, Dave, I know you always have lots of great conversations and thoughts, so why don't you kick us off?
Dave: Of course, and thank you for that. And likewise, welcome, Becky. As I've thought about this question since we talked last night in preparation, I have to say, I think the industry remains very confused, very perplexed. One way of saying it, I think is fair, is, our industry, like others, like global economies, are somewhat being held hostage by the Middle East situation. But in terms of methanol and conversations, there's certainly the, you know, when is it gonna end? What will it look like when it ends? Then the opposite side of the spectrum: what if it continues? What is it going to continue, or what is it gonna look like if it continues? Depending on the region, and Atlantic basin is certainly different than Asia and different than Europe as well, you know, there's, we all know, and Becky's gonna talk about it, we're gonna talk about it. The supply side issues have caused rampant price run-up. It's also caused demand destruction. So, all of those things were, you know, the primary points of conversation. When do we get it resolved? How does our industry recover? The opposite side of that again is, are we gonna be in a recession next year? So, it's just the full gamut of uncertainty. And again, I just go back to being held hostage by an unpredictable Middle East situation. So, there wasn't particular optimism. As I say, people are afraid of many things in our space: price, supply, demand destruction. How do we rebound in '27? So, concern, I guess, is the takeaway I will stop talking with.
Cassidy: Yeah. Becky, what are your thoughts or takeaways?
Becky: Yeah. Hi, hi. I'm very happy to have my voice here. My major takeaway would be supply uncertainty. I think one of our speakers had that on the stage as well. Yeah. And I think supply uncertainty continues to outweigh the demand concerns now, among a lot of conversation and discussions, and the focus are still mainly on the production disruption, the feedstock economy, trade flow changes, and participants are viewing supply as still the key drivers for market, for price directions rather than demand growth, I would say. Yeah.
Cassidy: Yeah. And good for our listeners right now. I think we're gonna continue these topics of conversation for the podcast. I will just throw in, you know, I felt like there's a lot of uncertainty, and you have both mentioned, a lot of unknowns, a lot of situations that are difficult to forecast, but it felt like, overall, the sentiment was there was, there's resiliency there, within the methanol market, so, we'll see how that looks forward into 2027. But let's dive a little bit deeper into some of those topics. Becky, can you share with us some of the latest pricing trends that you're seeing in Asia right now?
Becky: Yeah, the Asian market still performs very strong, and we have seen the CFR China price have already risen for the eighth consecutive week. And now the China prices have already exceeded $500, which we have never seen, I think, since 2008. It's the highest in the past two decades. And the FOB China prices have also climbed now, to the $620, $640 level, nearly double early July's level. And it's already close to biomethanol prices now, we have assessed, in the low $700, on FOB basis. And in other Asian countries' markets, we have seen the prices have all moved around $600 or above, because buyers need to compete for the scarce supply. The key driver is simple, because imports are not recovering, and Iran's supply remains very limited. There's no report this week of any methanol vessels passed through the blockade. And now, China's accumulative imports through August is only about 5.6 million, which is down by 32 on the year. And supply arrivals are now expected to remain well below historic norms. Now, the non-Iranian imports are estimated below 300,000 ton for September, and Iran arrival is about 160,000 ton, based on some participants. This is versus the monthly average during January to August, of around 700,000 tons. And also, the China port inventories is a key indicator of the regional balance. Now inventory have fallen for two straight weeks, a month, to below 500,000 ton, which is an alarm level for China. Compared with the healthy level of 1 million, it's only half of that level. And now the domestic plants in China are returning from maintenance, but much of their supply or output has already been sold forward. They're not enough to replenish the coastal markets. So, yeah. Well, one sentence, one simple conclusion, is supply is really remains extremely tight across Asia right now.
Cassidy: Yeah. And you see that going forward through the end of the year, into the beginning of next year as well, the tightness remaining?
Becky: Yeah, because there is no sign of recovery so far. And, yeah. That's why.
Cassidy: So, how about, you talked about the prices? Are they gonna sustain alongside that, and how might derivative users respond to those prices?
Becky: Yeah, I think whether the prices can be sustained will depend largely on, now, is demand destruction, because we haven't seen any signs of recovery yet. And the biggest downstream MTO would be the main balancing mechanism. Now, we have seen the Chinese MTO operating rates already fell to around 40%, if we exclude idle units. And this number will fall further, towards about 35% by mid of October. I would think that would be the record low since MTO emergence, their emergence from 2012, if I'm not wrong. And their margins also have plunged. We have seen positive margins of MTO in about mid of August, at around $130. Now, last week, our calculation, our model shows that margins fell to negative $270 already. Yeah. And there are five units are offline, and they have no clear restart dates. So, together, they represent about 2.8 million tons of capacity, which is about almost 8 million tons of merchant methanol demand. Yeah, so, they shut. They keep offline. One big reason is margins, but the most important reason is they have no persistent supply sustained. And I also noted at our forum last Tuesday, once MTO rates fall below about 40%, the sector's traditional role as a methanol's price ceiling weakens significantly. Yeah. So that's why we have seen the Chinese prices also flied up. And other than MTO, I think the picture is mixed right now. Acetic acid remains relatively strong. It is also supported by tight inventory and pre-holiday restocking. And there was also strong export demand. All of these have supported acetic acid prices, which has been moving up around the same pace as methanol, slightly lower. So, their margins are still quite positive and profitable, which have sustained their operation so far. But we believe if methanol prices strengthen further, demand destruction will spread beyond MTO, and not all of the downstream can absorb current costs for feedstocks. Yeah.
Cassidy: Great. Thanks, Becky. Kind of expanding this a little bit, based off of the supply tightness and the prices, how do you see any shifting of trade flows, obviously post-March, post the U.S.-Iran war? And then Dave, if you wanna chime in here too, as we start to talk about America and Europe. Dave's been patiently waiting, I think. I think he has some thoughts. So, Becky, if you wanna get us kicked off with kind of the trade flow situation into Asia and China.
Becky: Yeah. As we also highlight at the forum, there are no single merchant supply pool is large enough to replace the 9 to 10 million tons of losses from the Middle East. But during the first disruption, I think in the second quarter, we still have very high inventories and strong China domestic output. So this has allowed China to support its own market, and also parts of the Asia markets, and cargoes were redirected towards the highest-priced destinations, like India and Southeast Asia. China exported about 1 million tons of methanol during the period. And there was incremental supply also from South America and Russia. But today is kind of different now. China has largely exhausted its reserves. Now, port inventories also fell to a critical level, low level. And there are very limited incremental supply from the U.S., Latin America, Russia, and the market therefore is entering a new phase at this stage. Rebalancing will be increasingly relying on demand destruction, I would say. Yeah. So, what do you think, Dave?
Cassidy: Yeah. What do you think, Dave?
Dave: I agree, certainly, with everything you're saying, Becky. I wanna go back, from my standpoint, thinking about all the kinds of questions we get. And again, sometimes puzzled by, certainly, Atlantic Basin or Western Hemisphere folks. I think, and where I'm headed is, the MTO sector, and the MTO demand destruction that has clearly occurred. And you rightly noted that it is the key offsetting mechanism. And I think that's what people outside of China, outside of olefins, MTO, don't recognize, is, MTO, potentially 12 to 15 million tons of appetite, depending on what year you wanna talk about, unique to China. You know, nowhere else in the world, essentially, is there methanol to olefin technology or production. So, with the MTO sector absorbing the dominance of the lost supplies, the rest of the world, and maybe less so in the rest of Asia, obviously seen by pricing, but if I think about the Atlantic Basin, we have no supply issues overall. You know, we're just seeing, I'll say minor demand destruction. But really, I think people remain confused, in the Atlantic Basin backyard, if you will, around this. And so just wanting to highlight the anomaly of MTO, and its ability to be this major offsetting mechanism. Certainly, we're seeing prices now, if I may continue then to what Cassidy tabled up, and trade flows and things, you know, I think we have, again, interesting opportunities going on in the Atlantic Basin, or coming out of the Atlantic Basin.
Prices in Asia are particularly attractive for opportunistic exporters. And I think we've seen, in the month of September, significant volumes of methanol sourced in the U.S., for the purpose of moving to Southeast Asia, and/or potentially India. And that doesn't necessarily put a drain on Atlantic Basin. But here again, as we always try to say, that's what balances the Atlantic Basin, Asia being able to take excess materials. Venezuela looks to be, it looks like they're going to be able to increase their export opportunities. I think focusing or looking to the U.S. makes sense. Certainly, we know we've lost supply to our East Coast, from Trinidad, which was an economically and logical supply point. Venezuela can step in there. But at the same time, as Venezuelan material, probably less expensive, can move for U.S. spot market, buyers can source Venezuelan material, maybe, again, incrementally higher, that really means U.S. becomes longer in methanol, but then gives the opportunity for U.S. exporters, U.S. traders, to acquire that material, and pricing to Asia, pricing to Southeast Asia, at the levels we've talked about, $600 a ton plus, becomes very attractive.
Now I'm gonna elaborate longer. What a surprise to anyone. I think the European situation, we're now understanding that not only one of the major marketers reduced their selling price, their benchmark price in Europe, by some $50 a ton, but now the quarterly settlement for Europe has come in down $10 or $20 a ton. I apologize for not knowing that off the top of my head. And I can appreciate the European plight. I mean, they are really being hurt, between energy prices, between no GDP growth, marginal consumer interest in methanol-type derivatives, getting methanol derivative supplied from Asia, for example. They're under a lot of pressure, but I'll close with this. What troubles me, in my thinking about Europe, is they may be becoming the least-attractive market, margin-wise, netback-wise for producers, for marketers and such. And I just worry that a lower posted prices for fourth quarter may come back to haunt them in sourcing, needing not only traditional supplies, but maybe incremental supplies.
Cassidy: Thanks, Dave. You covered a lot of ground there, which is always great. Should we move to October pricing? I know you've kind of mentioned it a little bit here, but do you wanna elaborate on kind of what we'll see next month and going forward a little bit? Just with the ongoing trade flows, geopolitical tensions, things like that, what does your crystal ball say for October?
Dave: Yeah. Let me elaborate. Again, I'll proudly say that's my strength. Yeah, so, for October, again, interesting lay of the land. So, we have benchmark prices in Asia going up $150 a ton. China, $100-plus per ton. The U.S., depending on which of the major marketers and posters you look at, up $30 to $50 a ton. And as I just said, Europe is down $30 to $50 a ton. So, that one, I was already being lambasted, I say that nicely, about my outlook prediction for Europe, because I had it going up significantly, so, going down incrementally is certainly not what I was thinking. And I had just previously espoused the concern I have about that. But again, I'm, we, our team, we sit up in the nosebleed section of the arena, and eat our popcorn and drink our sodas, and just watch what's going on. So, it's gonna be interesting.
Again, kind of trying to tie back a little bit of what Becky said as well. From where I sit, prices have obviously moved up for the most part in October. And as I told people last week, I would expect more. We're not out of our supply problems. Iran's winter is not that far away. And regardless of whether they may be able to ship, and the Strait is open and free and clear, for three months, they don't produce methanol. So I don't think our industry climbs out of the lack-of-supply hole we're in until potentially well into Q1 of next year. So, for me, sidestepping the European arena, I think the rest of the market is poised to see ongoing strength, particularly in Q1.
Cassidy: Yeah, I feel like, coming out of the winter natural gas diversion in Iran, I feel like that doesn't usually...things maybe don't stabilize till April, even. Would you say that's a possibility?
Dave: I think that's very fair. Just, if I just pick on Iran's methanol production, they will, if history is correct and predictable, they will not operate for much of December, January, and February, and maybe only start returning to production, again, late February, middle March. So, they'll need to return to operations, they'll need to build inventory, they'll need to ship product. So, absolutely, I think some... Again, if you choose to go down this path, yes, the market doesn't start to recover, toward recovery and status quo, April, May, June. And the long...you know, if I take the downside case, the ugly case, is the continuation of the situation, that only exasperates the, or exacerbates, pardon me, the extension of our industry failing to recover from a supply standpoint.
Cassidy: Becky, do you have thoughts? You look like you wanna chime in there.
Becky: I would go back to uncertainty now.
Cassidy: Yeah. Hard to say.
Becky: Yeah. You know, if it continues, I mean, the situation in the Middle East continues, then I think a lot of talks would be how to secure more safety supply, or stable supplies, from the number of the producers, and maybe buyers are willing to pay more. I mean, because now, it's already coming to the 2027 term negotiation period. So I think the producers of, with stable supply, would definitely raise their prices for next year's contracts, but they also need to balance their profits and their market shares in certain Asian regions. And again, buyers, they might be more interested about the stable supplies from a handful of supplier producers, and they are willing to pay some premiums, but again, they need to balance their real cost and margins against secure supply. So, if the situation continues, I think we are expecting a lot of changes for next-year term negotiation, and prices as well. So, yeah, yeah, we don't see any supply recovery so far, so we will stay with the current expectation. Yeah.
Cassidy: Thanks, Becky. Well, for our listeners, if you love hearing Becky's insights with Dave's insights, with potentially our colleague, Victoria, in Europe, her insights, Argus does have a free, public, global methanol webinar happening October 21st. So, we'll see kind of how things evolve in the next few weeks, if anything will be changing during that presentation. But thanks again, Becky, for joining us. Thanks as always, Dave, for your insights. And that's all for 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.
