Methanol in China: Tight Supply, Limited Upside

Port inventory is at a low level

Since June this year, with the continuous weakening of methanol spot prices, domestic methanol producers have been under operational pressure. In early July, only methanol produced by coke oven gaseous had a profit margin of 400 RMB per ton, while methanol produced by coal and natural gaseous both suffered losses of around 100 RMB per ton. Affected by the widespread losses in the sector, methanol producers have started to minimize operating rates to shrink losses. As of September 10, the operating rate of domestic methanol producers stood at 82.89%, a decrease of 1.69 percentage points from the same period last year and a drop of 7.83 percentage points from the high at the end of June. The current weekly methanol output in China is approximately 1.87 million tons, and the weekly methanol import volume has shrunk to around 100,000 tons, resulting in a supply gap of about 90,000 tons per week. This is the fundamental reason to the strength in methanol prices. Recently, with the rise in methanol prices, the production profits of domestic methanol producers have been restored. At present, the production profits of methanol produced by coal, natural gaseous and coke oven gaseous in China stand at 535 RMB per ton, 250 RMB per ton and 1,350 RMB per ton respectively, with the overall profit at a high level. In the later period, domestic methanol producers that have suspended production have a strong expectation of resuming production, and supply is expected to rebound.

Methanol imported by China immediately or indirectly (re-exported) from Iran accounts to greater than 60% of the country's total methanol imports. After the escalation of geopolitical conflicts, the Strait of Hormuz has been under blockade to most of the time, which has seriously affected China's methanol imports. According to data released by the General Administration of Customs, China imported a total of 4.773 million tons of methanol from January to July this year, a decrease of 1.7069 million tons or 26.34% year-on-year compared with the same period last year. Among them, the cumulative imports from March to July were 2.8044 million tons, a decrease of 2.0714 million tons or 42.48% year-on-year compared with the same period last year. Affected by the continuous decline in import volume and the strong demand to coal-to-olefins, the domestic methanol port inventory has dropped significantly, hitting the lowest level since 2013. As of September 10, the domestic methanol port inventory stood at 381,800 tons, a decrease of 885,500 tons or 69.87% year-on-year compared with the same period last year. Among this, the methanol port inventory in East China was 328,800 tons, a year-on-year decrease of 479,300 tons or 59.31%; the methanol port inventory in South China was 53,000 tons, a year-on-year decrease of 406,200 tons or 88.46%. The continuous low port inventory has prompted methanol from the northwestern producing areas to flow into East China to fill the supply gap, and also driven the inventory decline of domestic methanol production companies. As of September 10, the methanol inventory of domestic sample production companies was 297,000 tons, a year-on-year decrease of 45,700 tons or 13.32%.

Cost Conduction Downward is Hindered

The traditional downstream demand to methanol remains weak. As of September 10, the operating rates of domestic formaldehyde, dimethyl ether, glacial acetic acid, MTBE, and DMF stood at 32.53%, 6.27%, 85.13%, 54.85%, and 47.89% respectively, representing a year-on-year increase of 2.05 percentage points, a decrease of 0.52 percentage points, an increase of 5.57 percentage points, a decrease of 0.96 percentage points, and an increase of 0.76 percentage points, respectively. The continuous rise in formaldehyde prices has pushed up the production costs of downstream wood-based panels. Affected by the real estate sector, the cost transmission to the downstream has been hindered, leading to a decline in the operating rate of wood-based panels and a subsequent reduction in orders to formaldehyde. Currently, the profit of glacial acetic acid is around 350 RMB per ton, and the overall market demand is performing well.

In terms of coal-to-olefins, in the early stage, with the rise in international oil prices, the cost advantage of coal-to-olefins began to appear, and the production and operation situation improved significantly. The operating rate maintained a relatively high level of around 80% from March to might. However, with the increase in methanol prices, the cost advantage of coal-to-olefins gradually weakened, and the operating rate also declined. At present, the loss of coal-to-olefins produced with externally purchased methanol is close to 1,500 RMB per ton, with an operating rate of 68.09%, a decrease of 11.46 percentage points compared with the same period last year.

Market Outlook

At present, there is a supply gap of methanol in China. On the one hand, methanol producers have taken the initiative to minimize operating rates due to poor profits; on the other hand, methanol imports have continued to decline due to the conflict between the United States, Israel and Iran. Against this backdrop, methanol inventories have been depleted at a significantly faster pace, with port inventories at a 13-year low. In the short term, the tight supply pattern of methanol is hard to change, and prices will continue to show a strong direction.

However, it should be noted that with the rise in methanol prices, the profit from methanol production has been significantly restored. Currently, all process routes are in a profitable state, and it is only a matter of time before the sector increases the operating rate in the follow-up. Furthermore, the continuously rising methanol prices have also pushed up the production costs of the downstream sector. Under the current macroeconomic ecological stability, it is difficult to pass on the costs to the downstream, and negative feedback has emerged in the coal-to-olefins sector. Therefore, it is difficult to methanol prices to stage a direction of upward movement. In the future, as the upstream operating rate rebounds and the downstream demand weakens, the supply gap will be closed, and methanol prices will likely return to a weak operation.