Viewpoint: European methanol prices under pressure

European methanol contract prices for the first quarter of 2019 have mirrored declining global values, pressured by dwindling Chinese demand from the Methanol to Olefins (MTO) sector, and the start-up of new production capacity in the US and Iran. But European spot prices should remain stable in the first half of 2019.

The European Quarterly Contract Pricing (EQCP) for methanol was agreed at €350/t $($400/t) for the first quarter of 2019, prior to the Christmas break when several settlements were confirmed. This is down by €78/t compared with the fourth quarter of 2018. Canada's Methanex — the world's largest global marketer of methanol — published its first quarter EQCP on 31 December, at €360/t, from €428/t in the fourth quarter.

At the end of 2018, global methanol prices have trended sharply lower, particularly in the Asia-Pacific region, following a sharp decline in crude prices that started in early October. MTO production economics in China were also impacted by sharp declines in the prices of ethylene and various derivatives, and operating rates were quickly adjusted downwards. Long awaited new production from the US and Iran finally reaching the market has also affected values.

Spot trades for January 2019 barge lots in the second half of December were concluded under €280/t fob Rotterdam, prior to an unplanned outage at Norway's state-controlled Equinor's 900,000t/yr methanol plant. But European methanol spot prices will likely stabilise during the first six months of 2019, as crude prices are set to recover somewhat on the back of new Opec and non-Opec production cuts starting this month.

European methanol demand should also return to more normal levels at the start of 2019, so long as recent improvements in Rhine and inland river levels are sustained. The prolonged period of low water levels since mid-2018 put major constraints on methanol consumption. Barges were unable to carry sufficient product to sustain operations at several consuming plants for much of the fourth quarter of 2018.

Several consumers along the Rhine are targeting increased output in order to catch up on back orders. In addition, they seek to rebuild local inventories for raw materials — including methanol — which have been too low for too long, and have restricted market flexibility.

But the lower methanol benchmark and spot prices will put pressure on higher cost global methanol production units. Operations at a Netherlands-based producer may not return until after winter as seasonally higher natural gas prices and lower realised selling prices will likely translate into negative margins. Incremental product from the US and Caribbean will keep Europe supplied.

China — a major methanol producing and consuming country — will continue to have a key impact on global supply and demand. Lower delivered prices on imports of methanol into China will place pressure on domestic Chinese production at the higher end of the cost curve. But lower methanol prices and a stable outlook for olefins and derivatives should help increase MTO operating rates and improve overall demand for methanol.

The combined effect should translate into rising methanol imports for China, which will help reduce surplus methanol in other global regions and eventually underpin global market prices.

Chinese buyers will consistently review the relative price of imported methanol against domestic methanol production economics and, once again, the global industry will start to see China acting as the marginal producer at the global level.

Imports from Russia have been erratic during the second half of 2018 but should begin to normalise into early 2019 as rail related logistics are finally resolved. A number of issues remain in play at the macro level, including concerns about the impact of ongoing trade wars between China and the US, which cast a cloud over growth rates around the globe.

The other major factor bearing on methanol is the impact of US sanctions on Iran that have, so far, had little effect on the country's increasing importance as a supplier of methanol, particularly to India and China. The countries are receiving additional product from the new 1.65mn t/yr Marjan Petrochemicals methanol plant in Iran.