Another Lesson From The Past: Costs Will Matter
High prices are spurring behavioral changes throughout the supply chain. Per our analysis, it is causing buyers to look for alternatives and ways to use less material and increasing interest in new production, often without much thought about relative cost. In Exhibit 1 (from yesterday's report), we show the methanol peak of the mid-90s. This development resulted from supply shortages rather than high costs. It encouraged multiple projects to receive serious consideration – including methanol from wood chips – where costs looked good at the time but not on a historical basis, and as the chart shows, not on a forward basis. Most ideas never got past the planning stage. With sustainability driving a significant share of the growth investment decisions, we think several “renewable” ideas could encourage investment that rely on price premiums to keep returns attractive. While this setting might look supported today, it will likely look less tenable if traditional commodity prices retreat into a commodity trough or lower-cost competitive materials emerge.