Today's apparent exceptions are in sectors very focused on energy security and transition, as we noted in our most recent Sunday Thematic, and agriculture, where crop shortages are driving up prices and demand for yield-enhancing inputs. In the OCI results below, we see a company doing well, despite having impacted assets in Europe. Still, we also see some potential upside in methanol as we head into the European winter, with the possibility that methanol is used as a fuel, essentially as a carrier for methane, and a workaround for constrained LNG infrastructure. As a fuel, it is not directly substituted for methane in any application, as it is a liquid, but some energy users might be able to adapt, and a $30 per MMBTU natural gas price in Europe can cause you to be quite creative. Of course, the methanol export opportunity for the US will depend on the US natural gas price remaining well below the price in Europe. For more see today's daily report.
A couple of weeks ago we raised the idea that US methanol could be a significant beneficiary of the conflict in Central Europe, not just because it is very economically unattractive to make methanol in Europe, but because it might be possible for Europe to import methanol for its energy value - $40 per MMBTU natural gas can make all sort of alternates look attractive. The impetus behind the methanol spot price increase in the US may be in part rising local natural gas – or the fear of further increases – but export demand is likely the larger driving factor and this could continue or even increase further if potential European importers work out how to convert to use methanol as a fuel.
It is likely a difficult day for the European chemical industry as all of the fuel prices that they depend on are rising quickly, which will force many difficult decisions over the coming days. There are a couple of factors to consider – what happens to costs and margins if energy prices remain inflated, and what happens if energy availability becomes an issue and plant closures are necessary. In a world that is already reeling from inflationary pressure that we have not seen in four decades, there is at least an acceptance that prices can move higher, but the energy-dependent European industrial and materials companies will need to move prices quickly and meaningfully to absorb their higher costs. If natural gas supplies from Russia are halted, Europe is likely going to need to allocate supplies, as there is no easy fix given an LNG system that is already at capacity. Industry will likely take the hit to ensure power for heating and cooling. This will drive product shortages in Europe, especially for chemicals, which will likely make it easier to get the pricing necessary to cover costs.