CHAPTER III
STRATEGIC
CONSIDERATIONS
Chapter III – Strategic Considerations
STRATEGIC CONSIDERATIONS
In the study forecast, the methanol industry will continue its bipolar evolution as a
critical petrochemical intermediate cum refined product replacement. This evolution
will create significant opportunities for methanol demand growth, and at the same
time require a scaled up and perhaps longer (in terms of shipping distance) supply
infrastructure, which is now almost exclusively set up for the traditional
petrochemical intermediate role, and which also appears deceivingly abundant on
paper. New, larger scale, and innovative manufacturing operations would help
unlock energy related markets for methanol. On the other hand, “business as usual”
mindsets could well limit growth opportunties.
As such, significant strategic decisions will need to be made in upcoming years.
Industry participants along the chain should think about how they might be able to
participate, benefit, or perhaps even be threatened by such developments. This
section of the study offers thoughts about what various segments of the methanol
industry should consider in planning for the near and long term sustainability of
their businesses. Certainly these thoughts are not exhaustive, but are meant to offer
some perspective on the possible behavior of market participants. Further
communication with MMSA on any of these ideas is, as always, more than welcome.
Methanol Feedstocks
Globally, the weight averaged cost of methanol production has slowed its rise on the
increased contribution of higher coast coal based production. In China, coal prices
continue to fall, although not enough to counter the weight of the significant
addition to production from that country, which is still higher than from most other
locations globally. In the Middle East and Southeast Asia, natural gas expectations
continue to be influenced the high value of delivered LNG to Northeast Asian
locales. (See Chapter VI, “Methanol Supply - Feedstock Dynamics” for more details).
Much to the contrary, natural gas values have plummeted relative to crude oil in
North America, stimulating project activity there.
Methanol project sponsors, on one hand, find themselves relatively insignificant to
most large natural gas owners, especially as values for LNG have achieved record
highs of late. Alternatively, methanol has improved its allure as an outlet for natural
gas, mostly as it can begin to pay higher prices (an odd benefit of the increased cost
structure of the industry), and also consume larger quantities (due to larger energy
related markets). In the United States, improved production technology to access
“tight” gas (shale and coal bed based) has changed the balance of natural gas. As of
this writing, this phenomenon has led to the restart of three idled methanol
production facilities (including one relocation), along with the relocation of another
facility, as well as announcements for more greenfield projects. Thus, the use of gas
to make methanol in the US, while facing more challenges, is again commercially
real. Thorough investigation into the valuation of natural gas for a methanol project
is case dependent, and MMSA is willing and able to assist in such activities.
33
Chapter III – Strategic Considerations
Additionally, efforts to lever vast coal resources, especially in Asia, and increasingly
in North America, using new and cleaner technology, continue. Belying these plans
is strategic intent of countries to wean themselves of oil-based economies and
increase energy self-sufficiency. Many of these schemes involve the use of methanol.
Chinese MTO project development will remain a very important facet of the
methanol industry, having developed from concept to commercialization. In the
longer term, projects involving the use of coal to produce gasoline via methanol also
will be evaluated at larger scale. Thus, generally, while much needs yet to happen,
hydrocarbon owners can also more reliably view methanol as a high volume outlet
for their products. As covered in this study, these new markets can be economically
advantaged versus conventional energy products.
Thus, the perception of methanol by hydrocarbon owners as a “small use” is well on
track to change to that of a “flexible intermediate to make conventional fuels and
chemical feedstocks.” That indeed would be a game-changing feature for the
methanol world. Overall then, hydrocarbon owners are continued to be advised to
reassess the role that methanol may play in their strategic future.
Methanol Producers
MMSA has long pointed out how poor operational performance (mostly feedstock
related) of global methanol facilities in aggregate has rendered the large “paper gap”
between future supply and demand of methanol as misleading. This gap also makes
up part of this year’s forecast, and the pain for methanol producers associated with
any oversupply will remain mostly in China. China will be the price-setting country,
and the place where, for the most part, realized margins for methanol producers will
be the lowest. As a result, operating rates will remain the lowest in that part of the
world. However, the existence of “hindered capacities” (producers either forced to
take frequent shutdowns and/or sidelined by feedstock and other operational
problems), in addition to operations which are dedicated to downstream facilities
such as MTO, is widespread. Thus the impact of the significant amount of new
methanol capacity which is still under construction in China will have limited
impact on the profitability of methanol producers outside of China. In fact, given the
high cost of production in China, a margin cushion exists for most suppliers outside
of China, particularly those with access to reliably low cost natural gas feedstock.
New methanol capacity additions will be focused on dedicated offtake to MTO
production. This trend presents opportunities for project developers. Strategically,
methanol producers will have to make decisions regarding the sustainability of low
natural gas prices as well as the persistence of high coal prices in China. Continued
reinvestment North American methanol operations looks to be one of the better
options for project sponsors, although it incurs significant risk. Additionally, given
higher coal pricing at the marginal producing locations, methanol production will
also be able to provide an increasingly attractive option in regions with abundant
natural gas resources. Most importantly, given the size of demand potential for
34
Chapter III – Strategic Considerations
energy based methanol consumption, additions must happen, or pricing, which can
creep up in Western countries above energy parity, might depress very sizable and
elastic demand for energy use in Asia.
Methanol producers should consider the need for market development outside of
China. There is massive scope for increased activity in development of new
applications for methanol. In fact, the conversion of hydrocarbons to energy related
markets via methanol becomes more cost efficient as crude oil prices hold their
premium over natural gas and coal. Yet many of these markets need dedicated
resources in order to develop, and here a broad perspective (and the involvement of
many additional parties) is required.
Methanol Consumers
While methanol prices are below their historic peaks, and are expected to remain so
in the forecast, (see Chapter IX – Price Forecasts) they remain high enough to
encourage reinvestment. Methanol affordability, especially in MTO and, to a lesser
extent, in other alternative energy applications will act as a price ceiling that will rise
in line with continued increase in energy pricing. As such, “traditional” consumers
must plan for the need to pass along costs to their customers.
One notable trend in the consuming end is the increasing quanitities needed by
methanol energy derivative project sponsors. With the advent of non-integrated
MTO facilities in China, it is clear that these consumers’ plans are limited by the
scale of supply available from individual producers. Sourcing in an era when larger
consumers of methanol are developing will continue to be an area for strategic
thinking in the forecast years.
Generally, a return to business growth for methanol consumers will lie in innovation
and further cost savings. These comments may sound trite, especially to those who
have recently invested in lower cost technologies only to see the markets disappear,
but such consumers should take heart that they have taken the first steps towards
recovery.
Consumers are still advised to consider investing, or partnering with existing
investors, in upstream methanol production. This will be especially true in China,
where many large coal based facilities would benefit from more regular sales of
product, making any merger and/or acquisition between methanol buyer and
producer a synergistic proposition.
Methanol Traders/Distributors
Over the next few years, record volatility in methanol prices, which served the some
members of the trading community very well, will not completely disappear, aided
by a relatively tenuous balance which does not tolerate the stops and starts of
“hindered” capacity around the world. Recent examples include operations in
35
Chapter III – Strategic Considerations
Trinidad, Southeast Asia, and Iran, which slowed, then ramped up, causing
disruption to world methanol pricing and trade patterns. Nevertheless, traders and
distributors would be served well to continue focusing on longer term
developments. Especially as the distance between the floor (production cost of
methanol in China) and ceiling (ability of marginal consumer to purchase) has
narrowed as crude has adjusted downwards (please see price forecast for details). In
particular, the bridging of hydrocarbon owners with new means of supplying
energy in the form of methanol, as well as finding consumers for the large overhang
of methanol production which exists in China, are glaring areas within which to
strategize. Tactics for such plans include assisting producers to develop new markets
for methanol use, expanding partnerships with manufacturers, taking extended
commitments to purchase, reaching agreements with shippers to increase scale of
shipments (especially US to Asia), and/or reducing risk via getting extended
commitments from consumers of methanol.
Others
For methanol industry catalyst suppliers, shippers, and EPC firms, continued focus
on helping the industry save cost is merited. However, as the industry seeks to move
from a supplier of chemical feedstocks to a supplier of energy markets, offering
means to scale up methnol operations on all levels cost effectively will be a major
focus of strategy.
One good example is in logistics, where consuming products like DME and olefins
require the potential for much larger quantities of material to be shipped from the
point of methanol manufacture to consumption. The opportunity to scale in these
areas is large, but requires actionable solutions from the logistics industry. In fact,
because of the potential for methanol to be manufactured in North America, but
consumed in China, these opportunities appear actionable and profitable.
As has been the case, there is a good chance that the next generation of methanol
projects will benefit from such advancements.
36