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April 2006 Headlines

In a market that is largely described as quiet, new supply and demand issues are developing, with most of the action building behind the scenes. Steady to slightly softer global demand has allowed methanol inventories to recover in Europe and North America, while Asian customers are largely in balance. Some tightening in the Indian market appears linked to continued methanol supply disruption in Iran and the lower domestic operating rates. The Asian market is holding in price, with some developing weakness. Consumers here are mindful of the spot price reductions and are awaiting further potential contract price declines. The lack of a strong spring seasonal build in methanol demand linked to the traditional MTBE production ramp-up is noticeable. While methanol production outages have been ongoing during the spring, inventories have rebuilt and, in some cases, marketers have been forced to cut pricing to move product. In the near-term, planned maintenance outages will help to keep the balance somewhat in check, but some individuals question that the loss of nearly 80-100,000 tonnes/month of demand in North America, on top of filling inventories, may not be enough to hold pricing at the current elevated levels.

Despite the seemingly high price of North American natural gas, the elevated posted methanol price and the resulting net contract barge price are supporting the continued operation and profitability of those remaining North American methanol producers. The US Gulf-Houston Ship Channel Natural Gas FERC Index for April rose slightly, being fixed at $6.82 USD/MMbtu. As of 12 April, spot cash Henry Hub natural gas prices closed down slightly at $6.78 USD/MMbtu. Also as of this date, Nymex June, July and August natural gas prices closed at $7.018, $7.243, and $7.438 USD/MMbtu, respectively.

For April, the US Gulf-Houston Ship Channel Natural Gas FERC Index saw a 16-cent increase, settling at $6.82 USD/MMbtu. The end of the traditional heating season, more moderate temperatures and higher forward market values are contributing to the US natural gas inventory rebuild. As the week ending 21 April 2006, inventories are at 1851 billion cf, 62% above the 5-year average, 31% above the level recorded for the same period last year, and 60% greater than the same week in 2004. Despite near record inventories, prices are holding at elevated levels based on their relationship to crude oil and future demand/value trends. As of 26 April, spot cash Henry Hub natural gas prices closed at $7.19 USD/MMbtu. Also as of this date, Nymex June, July and August natural gas prices closed at $7.271, $7.521, and $7.771 USD/MMbtu, respectively.

Slightly softer demand, falling spot prices and adequate methanol volumes with rising domestic inventories are today's topics. Minor price decreases have been offered in both April and now for May. Reductions in some domestic formaldehyde operating rates, losses attributable to MTBE shutdowns and the large number of MMA plant turnarounds are adding to the lower methanol demand levels. Marketers and offshore producers have begun to adjust posted non-discounted contract barge prices downward, but consumers indicate that the adjustments are not as rapid as market factors would suggest. The "growing gap" between spot and contract pricing is adding pressure, this as the discount of spot prices to that of contract are now running some 20-22%, with forward spot pricing falling even further. Spot prices have now reached or fallen below contract pricing in all major global markets, but due to tight control on contract offtake volumes, only a limited number of buyers can benefit. Marketers still anticipate some further supply/demand tightness linked to planned turnarounds and the likely impact of supply reductions in Chile due to natural gas interruptions.

For the second week now, methanol production for both MHTL and Methanex in Trinidad is being affected by surprise interruptions of natural gas supplies to the Point Lisas Industrial Estate. Starting back early last week, delivery problems developed for natural gas collection from field sources, resulting in the reduction of available natural gas volumes for all industries and companies at Point Lisas. As of this time, the Atlantic LNG (ALNG) facilities located at Point Fortin are not indicated as impacted. The major natural gas operator, BP Trinidad and Tobago, has been meeting with the local National Gas Company to keep them informed of the situation and is working to correct the problems within the coming week. For methanol, the result has been reduced operations and at least one short shutdown. Despite the overall global methanol industry having limited knowledge and early details of the news, the greater market has shown little immediate price reaction to the event as word has spread.

The remaining operational Methanor facility (running at a 50% operating rate) is about to cease production, removing an additional 238,000 tonnes/year of supply. Meanwhile, after being down for scheduled maintenance during March, the Shell DEA methanol unit in Germany is reported to have returned to production. Romania's Viromet unit is due to go down next month for a lengthy turnaround. At mid-month, the Kikinda methanol and associated acetic units went down unexpectedly with mechanical issues, but are now believed to have returned to production. The Mider-Helm Leuna facility in Germany will also be taking a three-week shutdown in June.

In the face of supply disruptions and production outages in Saudi Arabia, Iran and Indonesia, methanol prices have held, with developing minor weakness in the spot markets of Korea and Taiwan. Product directed at the Indian market is indicated to have increased slightly in value, this as traditional supplier Iran has had ongoing production issues and some noted outages in domestic production. Chinese demand continues to steadily improve, with Q1 imports up slightly, while domestic production surges to record levels. Consumers are watchful of returning methanol production following maintenance and the spot/contract price weakness now witnessed in North America. Buyers remain hopeful that improving supply flows will result in further downward price adjustments. The Asian Labor and Constitutional holiday period will shortly impact business in early May

As China's President Hu Jintao was readying for his visit to the United States this month, China's central bank announced a number of measures to relax regulations on foreign exchange. The new rules will loosen controls on foreign exchange accounts, simplify foreign exchange payment approvals and increase individual currency purchase limits (up to $20,000 USD). The People's Bank of China is also easing some corporate foreign exchange rules to increase flexibility for fund management firms, insurance companies and other investment entities. The moves are said to be steps toward making the yuan freely convertible, something that has been a point of contention with the US, which has maintained that the undervaluation of the Chinese currency has hurt American business and contributed to the nation's skyrocketing debt. However, in his meetings with US President Bush, President Jintao did not give any indication that the yuan's exchange policy would change soon.

With prices now topping $3.00 USD per gallon at the retail pump, US gasoline prices continue to be the hottest topic in the nation. Consumers are desperate for relief, while politicians on Capitol Hill are clambering to help or at least look like they're helping. After all, it is an election year. Proposals range from rebates to gasoline tax reprieves. Even President George W. Bush, in his recent speech to the Renewable Fuels Association, outlined several steps to address the situation. The President has ordered the Federal Trade Commission and the Department of Justice to investigate possible price gouging and manipulation, and called on Congress to fast-track legislation to remove $2 billion USD in tax breaks to energy companies over the next ten years, as well as streamline the approval process for refinery construction and modification. Further actions include increasing federal tax credits to hybrid and bio-diesel vehicle makers, temporarily halting crude deposits to the Strategic Petroleum Reserve for the summer, and directing the EPA to allow waivers for local fuel requirements. Many recognize that the removal of MTBE and its replacement by ethanol is one of the main factors behind the price and supply issues, but only Senate Majority Leader Bill Frist has publicly voiced second thoughts on not providing liability protection to MTBE.

Lyondell and Citgo Petroleum Corporation revealed plans to possibly sell the Lyondell-Citgo Refining LP (LCR) refinery in Houston, Texas. The location, which can process 268,000 bbls/day, is considered a strategic asset as it can process very heavy high-sulfur crude oil into clean fuels, including reformulated gasoline and low-sulfur diesel. Lyondell has the majority share in the facility (58.75%), with Citgo holding the remaining 41.25%. The companies just recently announced the appointment of Morgan Stanley as financial advisor for the sale.

In late March, India's Industrial Organics Limited filed a prospectus with the Indian Securities and Exchange Board to issue public shares that would fund expansions at its Barnala site, including a 20,000 tonne/year boost in acetic acid, as well as increases to ethyl acetate and acetic anhydride capacity. Total acid production at the location would then be 50,000 MT/year. According to the company's web site, the expansion work would be complete by July 2006.