The major issue with the higher natural gas prices in Europe (and rising prices globally) is the knock-on inflationary impact it will have on products that have natural gas as a feed, rather than those buying it as a fuel. The fuel buyers will take some of the hit, but will also try to pass on some of the hit, as it is generally a small part of overall product or service costs. The focus has been on ammonia/urea production because of the knock-on effect on food-grade CO2. But other products, such as methanol, would also be impacted, although there is not much methanol capacity in Europe. Higher LNG prices in Asia could encourage more coal-based methanol production, which is precisely what the increased use of LNG was supposed to prevent – replacing a high carbon footprint route with a much lower one. In our view, it is imperative that the attendees of COP26 recognize the need for (cleaner) natural gas and LNG, and enact policies to support it. This inflationary lesson is well-timed.
The methanol supply constraint in the US will add to the price momentum that we are seeing today, in part helped by the higher natural gas price. Despite the higher US natural gas price and the much weaker Asia price, there is still enough margin in US exports to Asia to justify the trade, although US producers would see meaningfully lower margins from these sales. However, to keep the US market balanced, pushing any surpluses offshore makes more sense than pushing into the domestic market and risking price declines. Much as in the polymer markets, US domestic sellers have quite a bit of pricing protection because of the high costs of getting any competing material into the US. See more on Methanol in today's daily report.
Methanol prices in the US remain very robust and quite profitable for producers, despite weakness in China. The higher natural gas price in the US (see today's daily report) provides some support for methanol pricing, but ultimately coal-based methanol in China will win out if US costs keep rising and this may curtail demand for US methanol at the margin. As with all other chemical and polymer markets today, freight costs are making it difficult to play off some of these apparent regional arbitrages and the US methanol producers would have to be somewhat reckless to upset the balance domestically and give up the margins that they have today. Domestic demand for methanol derivatives is high and the LyondellBasell accident may provide more pricing strength through the acetic acid chain. While the incident will decrease the demand for methanol, LyondellBasell should be able to manage this, and higher pricing in the acetic chain would mean that consumers would have no issue paying current prices. Higher MMA production in the US – implied in the headline below - should keep methanol demand high.
The weakness in US monomer pricing has stalled this week, and buyers and sellers may be exploring marginal export or derivative export opportunities at these levels. Further weakness will come if attempts to export only serve to undermine pricing in the markets they are targeting. Underlying demand remains very strong and this is a supply-driven issue as US ethylene plants run back towards full rates and incremental refinery supply impacts the benzene and propylene markets. See today's report which includes detailed commentary on methanol in addition to the products in the chart.
This latest data point in the exhibit below highlights the May contract nomination from Methanex relative to the current spot price and compares it to the history of both and the implied contract premium. Based on a historic look at the contract premium, the May producer push for price hikes does not appear aggressive. For more coverage on methanol and multiple other relevant and timely topics see our daily report.
In today's daily, we discuss methanol pricing and show that the arbitrage with Asia is now negative, based on the near-term increase in US spot pricing. As with polyethylene, the major exporters are more concerned about the export margin over their costs, versus the difference between spot prices in each region. Certainly, where they have flexibility some US producers will try to divert methanol to the domestic market, but likely not at the expense of important export relationships and contractual obligations.