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February 2006 Headlines

Over the past few years, the global methanol market has moved forward and evolved based on a new set of scenarios for supply and demand. As the growth rate of global economies slowed and the cost of energy rose, methanol capacity altered the usual trend of requiring a new "world scale" methanol plant every year. From 2001 to 2003, net global capacity, outside of China, actually declined. Minor net gains were made in total new methanol production in both 2004 and 2005. Entering 2006, we face a brief period of no new capacity additions until the start-up of Iran's new 1.65 million tonne unit later this year. However, just as methanol supply has evolved in the past, demand has entered a new era of change. Growth in methanol demand has migrated to the East, with the Peoples' Republic of China leading the way with a phenomenal 32% increase in 2004 and a 16% year-on-year gain in demand for 2005. North American demand has been declining since 2000. This trend stabilized slightly in 2004-2005. However, with the next round of MTBE production closures now occurring, a decline for 2006 is a given.

The US Gulf-Houston Ship Channel Natural Gas FERC Index was fixed lower in February at $7.23 USD/MMbtu. A mild winter weather pattern has resulted in lower de-stocking of inventories, but natural gas prices are still holding at elevated levels. As of 13 February, the Henry Hub cash price was $7.35 USD/MMbtu. As of the close of business on the same day, Nymex posted gas prices for April, May and June 2006 at $7.427, $7.577 and $7.712 USD/MMBtu, respectively. With approximately eight weeks left in the official North American heating season, US natural gas stock levels remain unusually high. As of the 9 February EIA US natural gas report (for data up to 3 February), US natural gas stock levels were at 2368 Bcf (Billion cubic feet), 38% over the 5-year average and 24% above the level for the same period in 2005.

The US Gulf-Houston Ship Channel Natural Gas FERC Index dropped $1.45 USD to $7.23 USD/MMbtu for February, providing a little feedstock cost relief to the few methanol producers left in North America. Natural gas stock levels are among the highest seen. However, with the recent extreme cold weather in the Northeast, stocks are adjusting downward rapidly. As we go to press, prices are still declining due to the rapid approach of the end of the heating season. As of 27 February, spot cash Henry Hub natural gas prices closed down at $6.96 USD/MMbtu. Also, as of this date, Nymex April, May and June natural gas prices closed at $6.789, $6.959, and $7.121 USD/Mmbtu, respectively.

Huntsman Corporation has seen a very active start to its New Year. Last month, the company was entertaining bids for a friendly takeover, but then announced on 5 February that negotiations had ended, with the company's Board and special committee determining the proposals to be too low. The company then stated that there were "significant opportunities for our Company going forward." On 24 February, the company announced some of those opportunities, including selling their Port Neches, Texas MTBE (11,000 bbls/day) and butadiene (900 million pounds/year) assets to Texas Petrochemical, L.P. The sale, valued at $275 million USD, does not include Huntsman's PO/MTBE and oxides/olefins units at Port Neches or its Port Arthur plant. Huntsman says it will use the sale's proceeds to reduce debt and invest in other company operations, including their newest acquisition, Ciba's textile effects business. The transaction is scheduled to be complete in mid-2006. The company has also indicated they are looking into spinning off their basic chemical business into a separate company under the Huntsman name, with a possibility that they could divest this segment.

Some South American producers are having brief production issues at this time. The MII (old CMC) 500,000 tonne/year plant at Point Lisas, Trinidad shut down on 19 February and was forecasted to be out for a 7-9 day period, restarting as we go to press. There were also indications that the Atlas Methanol plant might be down in Trinidad, but we lack confirmation to support the talk. MHTL's M5000 plant in Trinidad is planning an outage of approximately one week in May. Chile I is still planning a maintenance stop in the mid-Q2 time period. We hear of progress on the planned phase two expansion of Metor in Jose, Venezuela, with a number of construction and financial details being finalized. Ground- breaking for construction is targeted for year-end 2006.

On 1 February, Johnson Matthey announced that it had purchased Davy Process Technology Limited from Yukos Oil Company for $71 million USD. The sale is part of Yukos' plan to divest non-core, non-Russian assets to generate cash to pay the troubled Russian oil company's creditors. Davy and Johnson Matthey have a long-standing association, most notably in the One Synergy group, which both companies formed with Aker Kvaerner in December 2004. Davy Process Technology's Switzerland offices were not included in the deal, but negotiations for their sale are ongoing.

Year-ending Chinese production and trade levels are now in hand. Domestic production rose approximately 1.0 million tonnes in 2005 to reach 5.356 million tonnes, an increase of 21% above the prior year. Imports year-to-year were nearly the same. Export rose only marginally to a total level of 54,500 tonnes. The net available volume rose nearly 1.0 million tonnes to a total of 6.66 million tonnes or a projected growth gain of 16%. Chinese production in December set a new record at 508,000 tonnes. Fourth quarter production was 9.5% greater than Q3 2005 and 23% greater than Q4 2004. The volume of net available methanol in Q4 2005 was 10% greater than the prior quarter and 20% greater than Q4 2004.

Following their announcement last month of interim rules for the Renewable Fuels Standard, the US Environmental Protection Agency announced this month the termination of the 2% oxygenate requirement, as authorized by the Energy Policy Act of 2005, as well as the removal of any regulations to implement and ensure compliance with that requirement. The rule will take effect in California sixty days after its' publication in the Federal Register, then on 5 May 2006 or sixty days after publication (whichever is later) for the rest of the nation, barring any contention of the rule.

While the US gasoline industry and government agencies move toward compliance with the new policies laid out in EPACT 2005, the Energy Information Administration, Department of Energy (EIA DOE) has released a review of what the nation faces as MTBE is removed from the system and replaced with ethanol. According to an informal survey by the EIA, most suppliers are aiming to complete the shift from MTBE before the start of the 2006 summer driving season. It is this faster-than-expected removal that the agency thinks may create some problems, including supply constraints for ethanol and ethanol-blended RFG, transportation issues and the numerous changes that need to be made in the distribution and blending sector, and higher gasoline prices for consumers in parts of the US. In its conclusion, the agency states that, "Overall, the complexity of the transition away from MTBE-blended RFG may give rise to local imbalances between supply and demand and associated price surges during the change. As the summer progresses and demand grows, the tight supply situation is not likely to ease significantly, leaving the market exposed to the increased potential for price volatility in the East Coast and Texas RFG regions." The EIA DOE commentary, Eliminating MTBE in Gasoline in 2006, can be found on their web site at www.eia.doe.gov.

On 1 February, Dynea Oy, ZAO MetaDynea and JSC Karbolit announced plans for a €20 million joint venture industrial resins project to be built in Orkhovo-Zuevo, Russia. The jv company, OOO Karbodin, aims to produce 400,000 tonne/year adhesive resins, as well as 200,000 tonne/year of formaldehyde. The first stages of production are scheduled for later in 2006, with the plant fully functional by the end of 2007.