Consumers of methanol are facing supply challenges yet pricing remains below levels required to support investment in new production capacity.
The global conventional methanol market is 113 million tons. Methanol is an essential feedstock for many important chemical value chains, supplying mainstream consumer products and markets. Construction and automobile sales are leading indicators of demand for methanol, and the derivative products that supply these industries have a robust outlook with no substitution threats envisaged. Similarly, textiles, polymers, plastics and coatings industries are large consumers of methanol and can be relied on to underpin future methanol demand growth.
China accounts for two thirds of global methanol demand and half of global methanol supply, most of which is produced from coal. China has rapidly expanded its methanol industry over the last 20 years, due mainly to the investment in methanol to olefins technology there and a strategy of diversification in strategic raw materials by the Chinese government. China consumes around 40 million tons of methanol to produce olefins, two thirds of which is supplied by integrated coal to methanol plants. These are often termed Coal to Olefins or CTO plants and have limited impact on the merchant methanol market. The remaining 14 million tons of olefins production is supplied from the merchant methanol, most of which is sourced from international suppliers. This merchant MTO production competes directly with naphtha cracking, is a highly marginal play and methanol demand into this application is very price elastic. A substantial amount of the methanol traded in Asia Pacific is eventually sold to a merchant MTO producer.
The cash breakeven point for MTO producers is driven by the cost of producing ethylene and propylene from naphtha. Methanol prices fluctuate with supply and demand changes but are now highly correlated with naphtha cracking economics. When methanol prices break through the cash breakeven point for MTO then producers will idle plants or reduce operations until prices correct. Consequently, the outlook for naphtha and olefins markets and naphtha cracking economics is determining how quickly methanol prices can adjust upwards to support reinvestment economics.
Globally, there is sufficient methanol supply to meet demand, and pricing remains capped by MTO economics and below levels required to incentivise reinvestment. New plants in the USA and Malaysia (Methanex and Petronas 1.8 million tons each) will also keep markets amply supplied in the near-term. However, there are underlying supply concerns and regional hotspots such as Europe due to attrition of existing methanol capacity. Competition for natural gas from adjacent and higher value LNG and ammonia production in Trinidad, Egypt, Equatorial Guinea and Norway is significantly impacting methanol supply from those locations too. Gas shortages in New Zealand and Chile means plants there run intermittently. Meanwhile, EU sanctions on Russia have more than halved the 2.4 million tons that were previously exported to Europe. Iran has more than 15 million tons of methanol capacity but has a growing demand for natural gas during the winter and very limited upstream development ongoing. Consequently, most of Iran’s methanol production now shuts down over the winter. When the plants do run, the only markets available for supply are China and India due to global sanctions.
Long-term supply growth looks set to underperform demand growth.
Consensus economic forecasts have global GDP growing at [2.5%pa] over the next 15 years. As methanol historically grows with GDP, this would imply that global demand for methanol would reach 172 million tons by 2040, requiring 60 million tons of new capacity to be added over the next 15 years. That is at least 35 new world-scale methanol plants due to very limited latent capacity in the industry today.
Historically, the project development timeline for new methanol plants is between 6 and 10 years from conception to commissioning. Projects that are added by existing producers or from the balance sheets of large oil and chemical companies typically progress faster. Those that are entirely project financed take much longer to develop and most never reach a Final Investment Decision. There are around 10 world-scale projects on the slate currently being developed in the Americas, Africa and the Middle East currently. Most are being project financed and at this point, two or three may reach FID in 2025 with full operation not possible any sooner than 2029. Of the other projects, some may eventually progress to FID while others will inevitably be shelved.
Implications: Short term pricing and feedstock competition will be a challenge for current producers and project developers but those that stay in the game look set to prosper.
MTO economics act as a ceiling for methanol prices, and with olefins markets over-supplied by new capacity and naphtha supply in surplus in the short term, this situation is set to continue. However, merchant MTO producers will increasingly seek backward integrate opportunities to lower input costs and reduce their reliance on imported methanol. This transition will progressively reduce the size of this important methanol clearing market and free up marginal pricing.
Demand for methanol will cycle-up as global economies rally, and consumer spending improves. The pandemic and subsequent high interest rates put the brakes on construction and there is now a significant backlog of new housing. The construction and automotive industries are reliable demand drivers for methanol and will support methanol demand growth. Meanwhile, the new capacity set to be added over the next 5 years will be largely offset by attrition of existing supply. Therefore, towards the end of the decade and into the 2030s, methanol prices will move towards the upper-cycle and reward those who secured financing for new plants or managed through the current downturn with existing plants.
If you would like to understand more about methanol and ammonia and related implications for your business, please contact Simon Maddren at Energex Partners smaddren@energex.partners.