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January 2006 Headlines

Recent methanol capacity closures and operating rate reductions are contributing to the tight balance and resultant upward push in prices being experienced in most regions. Matched against demand, supply is clearly driving the present balance entering the typically slower first quarter period. Producers are optimistic about either holding or increasing methanol prices during this quarter. No new significant methanol production volume is scheduled to come online until later in the year. Additional planned maintenance outages during the next few quarters will contribute further to the current tight balance. Consumers are equally nervous that further escalation in methanol prices will become even more difficult to pass through the derivative chain. North American and European MTBE producers are already witnessing breakeven to negative margins. While this might only last for the next few months, it might limit offtake volumes. Further improvements in global economies and industrial production levels may help sustain derivative growth and allow margins to be passed through in other product areas.

The January US Gulf-Houston Ship Channel Natural Gas FERC Index was announced at $8.68 USD/MMbtu, up 10% from the December fixture and up over 50% compared to January 2005's FERC of $5.75 USD/MMbtu. This year's winter season in North America has been one of mixed, but milder weather patterns. Some individuals openly wonder what the price level would be, if winter were to hold to historic patterns. As of 27 January, the Henry Hub cash natural gas price was $8.18 USD/MMbtu, a 40% decline in value versus the cash rates quoted prior to the December 2005 holiday period. As of the close of business on 27 January, March, April and May 2006 were posting Nymex gas prices of $8.507, $8.652 and $8.752 USD/MMBtu, respectively. Reflecting the impact of mild weather patterns in the US, gas stock levels are unusually high. EIA DOE data for 20 January, released on 26 January, show US natural gas stock levels were at 2494 Bcf (Billion cubic feet), up 21.7% over the 5-year average and 10% from the same period in 2005.

At the end of January, Huntsman Corporation confirmed rumors that it was considering acquisition proposals they had received at the end of 2005 and had convened a special committee to evaluate their options. A few days later, however, the company announced that they had terminated discussions on the proposals, as "the Board of Directors of the Company and its special committee have concluded that none of the proposals were in the best interests of the shareholders." Huntsman further stated that they saw "significant opportunities for our Company going forward."

Methanex started its new year by announcing a supply agreement with Univar Canada, who, under the long-term arrangement, will receive methanol solely from Methanex. Univar Canada distributes methanol throughout Western Canada, mainly for the oil, gas, and pulp and paper industries. In its announcement, Methanex pointed to its conversion of Kitmat to a world-class terminal operation, as well as its establishment of a terminal in Edmonton and plans for a terminal location in the US Pacific Northwest, all of which "will uniquely position Methanex to be a reliable, long-term supplier to Univar and other customers in these important markets." Methanex anticipates ramping up to full contract volumes from June 2006 onwards.

The increased curtailment of methanol production volumes in both Eastern and Western Europe has impacted the ability of some marketers to supply select consumers. The effects are being felt both in Europe and some of the outer-lying regional markets. Most large consumers indicated that volumes are adequate, and they are experiencing no shortage of contract volumes. However, the loss of key production volumes at year-end 2005 has not been easily filled. Demand is described as steady, but seasonably soft. Issues that have surrounded the delivery of barge parcels on the Rhine River since this past fall continue. Low water levels have risen slightly, but now record cold is impacting flow, with ice building in select areas. Since the fixture of the Q1 2006 non-discounted European contract price at €268, the European spot T2 price has risen steadily to match contract. Both co-producers and traders have increased buying, seeking to either augment supplies, purchase volume to cover liftings for re-export, and, as some feel, to purely push spot pricing higher on limited trades. Clearly, the current focus is on contract suppliers and their volumes, the rapid escalation of spot prices, and the seemingly early talk on the potential contract level in Q2.

It appears that a third methanol project may be in the works for the Pars Special Economic/Energy zone in Assaluyeh, Iran. National Petrochemical Company subsidiary Boushehr Petrochemical Co. is spearheading the project, which will include a 2.6 million tonne/year methanol unit, as well as ethylene, LPG and C3+ production. Construction is scheduled to start this year, with production targeted for 2010.

Early in January, published reports appeared announcing that Methanex would be restarting its Waitara, New Zealand methanol unit to cash in on the recent high methanol prices. In their earnings announcement released on 25 January, the company confirmed that it had indeed restarted the unit on 6 January due to healthier production economics. The company will use its remaining 3 petajoules of natural gas reserves, enough to produce approximately 85,000 tonnes of methanol. Methanex reiterated its intention to keep Waitara as a "flexible production asset with future operations dependent on securing economically priced natural gas." If attractively priced natural gas is not forthcoming, then Methanex said they would move forward with a final closure.

Lurgi AG has been awarded the contract to build a methanol and an associated propylene facility in PR China. According to Lurgi, this will be the first unit to use their methanol-to-propylene (MTP) technology. The facility will produce methanol from coal-derived gas. Further details on the project were not provided. Meanwhile, London-based AMEC plc has been granted the project management contract for Ningxia Coal Industry Group's coal-to-chemical complex to be built in Ningxia, Northern China. The site will include a coal gasifier plant, as well as methanol, methanol-to-propylene, and polypropylene units. Construction is set to begin next month, with production to start in early 2009.

At the end of December, the US Environmental Protection Agency issued guidelines for implementing the Renewable Fuel Standard Program, as directed by the US Energy Policy Act of 2005. However, the rules are a temporary measure, as the EPA explained in its regulatory announcement. "The issues that need to be resolved are complex, making it important for EPA to receive input from the various stakeholders, which will require significant amounts of time and effort, including analysis of important issues such as feasibility, costs, emissions inventory impacts, and benefits. This work cannot be completed in the context of a final rulemaking by August 2006." As a result, the EPA has opted to use the Act's default measures until a final rule can be established. Under the EPA's stop-gap rules for 2006, refiners, importers and gasoline blenders will collectively be responsible for meeting the 2.78% renewable fuels standard instead of being held responsible on an individual basis. At the end of the year, EPA will determine whether compliance has been met. If not, the deficit would then be applied to 2007. Also, because compliance is being assessed collectively, there will be no credit generation or trading in 2006. As for 2007 and beyond, the EPA "will determine and publish the applicable renewable fuel standard for each year and develop a RFS credit trading program per statutory direction."

As the May 2006 expiration of the oxygenate requirement approaches, a couple of producers have started to reveal their strategies with regard to MTBE. Valero has begun the planned conversion of several of its MTBE units to iso-octene production. The company's mothballed Houston unit began producing iso-octene on a regular basis in November 2005, using UOP's technology. Meanwhile, the Texas City and McKee units are in the midst of being converted, with both to be complete in May 2006. Decisions/timing for the Krotz Spring and Corpus Christi BUP plants have not been finalized. Meanwhile, during its recent earnings announcement and conference call, Lyondell Corporation noted that, "2006 represents a question mark for MTBE. On one hand, MTBE may benefit from continued tight refining conditions, while on the other U.S. refiners may choose to no longer use MTBE despite the obvious value that it brings to a structurally short gasoline pool. We have prepared ourselves for either outcome." The company stated that modifications to allow a switch to ETBE or DIB at their production hubs have been underway and that they could be ready in the summer, if the company chose. At this point in time though, Lyondell is opting to "stay the course" with MTBE, evaluating export opportunities should domestic demand waiver.