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June 2005 Headlines

The downward shift in Asian spot pricing for May and June and the weaker Euro impacted the calculation of a weighted average global methanol price trend. The PCI - Ockerbloom & Co., Inc. "Global Methanol Trend Value" (GMTV) for June declined slightly less than 2% to $259 USD/tonne. The second quarter Trend Value averaged $263 USD, a decline of nearly 2.5% from the estimated first quarter level. A review of forward month developments in the trend has price weakening further, impacting in July. The next few months remain in flux with respect to pending supply additions and subtractions, with demand hopefully ramping up entering the fall period.

The Institute of Supply Management's US Purchasing Manager's Index (PMI) decreased again in May to 51.4%, down 1.9 points from April. Although this is the fifth month in a row of decreases, it is still above the 50% benchmark indicating growth. On a global basis, the trend appears to be that growth is slowing, with JP Morgan/NTC Research's Global PMI down 0.8 points from April to May's 51.1%. While North America and Asia are still indicating growth, with countries posting PMI above the 50% benchmark, European manufacturing is stagnating and gone negative, as seen not only in individual countries, but also in the Eurozone as a whole, where PMI dropped from 49.5% in April to 48.7% in May. Slower global demand growth is apparent in the fact that, despite the higher PMI levels noted in Asia, many of the absolute levels are declining.

At the start of June, downward pressure on crude oil pricing combined with adequate natural gas stocks and still colder than normal weather patterns to push natural gas pricing slightly lower. For June, the US Gulf-Houston Ship Channel Natural Gas Index price declined to $6.21 USD/Mbtu. Since that settlement, hot summer weather patterns have developed and crude rebounded upward slightly, pushing spot gas pricing back up. Strong seasonal electricity demand created by this recent hot weather is pushing prompt gas pricing up again. As of the close of business on 10th June, the daily US Gulf Henry Hub prompt cash natural gas price was $7.09 USD/Mbtu. Forward monthly gas pricing has also recovered, but is still holding at or below the prompt gas price. The forward months of August, September and October 2005 are showing posted Nymex gas prices at $7.011, $7.041 and $7.093 USD/Mbtu, respectively.

The June 30th release of US natural gas inventory levels by the US Energy Information Administration, for the week ending 24 June, continues to show a shrinking differential between current stocks and those reported last year. Natural gas stocks are still rising strongly, but hot weather patterns in the South, West and East Coast are encouraging a slightly lower refill schedule. Weaker gas prices were apparent early in June, but values rose strongly in the last two weeks, triggering a trend that will likely result in a significant rise in the forward July FERC Index. The US Gulf-Houston Ship Channel Natural Gas Index for June was fixed at $6.21 USD/Mbtu. For the week ending 24 June, US natural gas stock levels were at 2123 Bcf (billion cubic feet), an increase of 92 Bcf from the previous week. Stock levels are still relatively high, 15% greater than the 5-year average, but now only 10% greater than the level posted for this week last year.

On 20 June 2005, Methanex Corporation formally began advising customers, investors and the public that curtailments of feedstock natural gas from neighboring Argentina have begun to significantly disrupt methanol production at their Punta Arenas, Chile location. Very minor supply disruptions began in late May, but supply issues related to the southern hemisphere's core winter electrical generation period (May to September) arose last week, having significant impact. Methanex is advising that, due to factors outside of their control and linked to the actions of the Argentine government, gas curtailments and the subsequent loss of methanol production could be worse in 2005 than in 2004. Methanex indicated that they felt they only lost approximately 50,000 tonnes of methanol production in 2004. Total lost methanol production during this last week alone is estimated at 27,000 tonnes.

Methanex has issued a formal press release, which can be found at their web site. Subscribers to our Methanol Report Service can find further information on the situation in the PCI - Ockerbloom News Bulletin released on 21 June.

On 20 June, Methanex Corporation formally began advising customers, investors and the public that curtailments of feedstock natural gas from neighboring Argentina have begun to significantly disrupt methanol production at their Punta Arenas, Chile location. Very minor supply disruptions began in late May, but issues related to the southern hemisphere's core winter electrical generation period (May to September) started to impact in mid-June, with Argentine curtailments running 35-55% of daily average aggregate nominations.

At the time of the announcement, the company estimated total lost methanol production for 2005 thus far at 27,000 tonnes. Because of this, Methanex conceded that the curtailments and actions of the Argentine government would likely result in a higher methanol production loss in 2005. In response to the situation, Methanex shut down the Chile IV unit, which was in start-up, choosing instead to allocate feedstock to existing capacity. However, during the last few days of June, there were indications that the latest Argentine gas restrictions might not be as bad as the initial series of reductions.

Update (July 2005)

Methanex has since announced that Chile IV had restarted and was producing on spec material at 85% of capacity. Methanex President and CEO Bruce Aitken commented, "Increased quantities of natural gas delivered to our Chilean methanol facilities over the past week have enabled us to restart the Chile IV plant." He also noted that the situation remains "very dynamic," stressing that the company was continuing its efforts to reduce and possibly eliminate future disruptions.

In the last few weeks, the focus in Europe has been on the pending contract discussions for the third quarter. Prior to the continued spot price slide in the US and the slow declines in Asia, buyers were positioning for a rollover in Europe at €230 per tonne, while sellers were hinting at a possible increase due to the tight balance and the higher costs of production. However, in the last few weeks, posted contract prices in Asia were reduced, US spot prices have started to decline (discounts on spot are now at 14% of low posting), and global demand has begun to show signs of selected weakness.

Demand in Europe is clearly flat to down and described as "sluggish." Looking forward, consumers see little change, as they are about to enter the typically slower summer months. Both sides still recognize the minor spot price reductions, but also the reduced and very infrequent number of spot trades. Of course, there is also discussion on the recent trend in the Euro/USD exchange, with the Euro weakening over the past month, moving from cross US dollar levels of 1.32-1.34 to the current rate of 1.21. Domestic European producers who might buy natural gas or crude oil based on US Dollars are seeing their cost in Euros rise. With these factors in mind and an industry event occurring this week, the last two weeks of the quarter should prove to be very interesting. One individual commented that the market truly appears to be entering "the calm before the storm."

European second quarter contract discussions were drawn out this month, with most hoping to have a universal, widespread agreement in place by 1 July. A German producer had tentatively agreed with some consumers for a €10 decrease to €220 per tonne in the Q3 non-discounted Rotterdam price. Several major domestic and offshore sellers had been holding to their argument for a flat €230 per tonne in Q3. There was such disagreement that some talks were suspended or debated to roll into the start of the quarter. Europe was clearly looking to the July contract settlement in North America and the actions of the spot market, following the cumulative effect of all the recent supply issues. Demand is generally softer, with spot trades infrequent.

SVZ announced in June that it was close to settling on a deal for its holdings, with investor group Swiss Sustec Holding AG being granted exclusivity. The transaction will include the 140,000 tonne/year Schwarze Pumpe methanol facility. According to SVZ's press release, Sustec plans to "install a new coal gasification plant according to the 'GSP-Entrained-Flow Gasification' technology and new methanol production." The transfer of assets to the new owners is targeted for 1 July 2005.

Update (July 2005)

Due to delays related to German government approvals, the transfer date of the SVZ assets has been moved forward to 1 August 2005.

Another methanol unit is being proposed in PR China, with Mitsubishi Gas Chemical (MGC) having recently secured utility and infrastructure arrangements for an 850,000 tonne/year plant in Chonqing. MGC is looking to take on partners for the project, but is expected to hold a majority stake. Start-up of the unit is tentatively scheduled for 2008. Meanwhile, financing issues will delay the start-up of Eurochem Technologies' (Singapore) Lagos, Nigeria methanol-to-olefins (MTO) project from 2007 to 2008. The company hopes to have financing secured by the end of this year. The facility will include a 2.5 million tonne/year methanol unit to be run by Eurochem subsidiary Viva Methanol. Start-up of Shandong Jiutai Chemical's methanol/DMT projects in Inner Mongolia is being delayed further for unknown reasons, with the units not expected to start now until 2008. Last month, an announced change in location, from Shandong, PR China to Erdos, Inner Mongolia, was expected to delay start-up of the 400,000 MT/year methanol unit and 300,000 MT/year DMT unit until later in 2006.

On 28 June, the US Senate finally passed their version of an energy bill by a resounding vote of 85-12, paving the way toward what could be a heated conference with the House, as the two try to reconcile their proposals. Unlike the House version, the Senate's bill does not address drilling in the Arctic National Wildlife Refuge (ANWR) or MTBE liability, both of which are expected to provide significant fireworks during the reconciliation debate. There has been word that members of the Senate may agree to a compromise that would allow inclusion of the liability protection language, but whether this will smooth over the debate remains to be seen. Both the Senate and House proposals include an RFS, although the Senate agreed to an 8 billion gallon/year threshold by 2012, whereas the House only agreed to a 5 billion gallon/year allowance of renewable fuels, chiefly ethanol. The Senate RFS program also includes liability protection for ethanol producers, elimination of the federal oxygenate requirement, and language to ban MTBE usage four years after passage of the full energy bill. Whether full legislation will be hammered out by the 1 August deadline set by President George W. Bush remains to be seen, but chances are starting to lessen, particularly due to the more divisive issues like ANWR and MTBE. However, it has been suggested that the White House could possibly step in and arbitrate, especially if these issues threaten the bill's chance for passage.

In a decision that could have repercussions on the Congressional debate over US energy policy, the US Environmental Protection Agency recently rejected oxygenate waiver petitions from New York, Connecticut and California. According to EPA assistant administrator Jeff Holmstead, "Congress has required the use of oxygenates as part of the clean fuels program and has made it clear that this requirement can only be waived if a state demonstrates that it prevents or interferes with the state's ability to meet national air quality standards. California, New York and Connecticut did not make this demonstration." All three states have MTBE bans in place and therefore would be required to use ethanol.

In a related note, the full US Senate has begun debate this week over their proposal for an energy bill. Issues such as MTBE liability protection, a renewable fuels standard and the possible elimination of the federal oxygenate requirement are expected to be addressed. Congress hopes to finalize a bill by the August 1st deadline set by President George W. Bush.

BP West Coast Products granted the contract for a Licensor Engineering Package to Halliburton subsidiary KBR for a conversion project at BP's Carson City, California refinery. KBR will be responsible for switching the site's MTBE production to iso-octene, using Fortnum Oil Oy's NExTOCTANE technology. No timeline on the project was revealed.

Saudi International Petrochemical Company (Sipchem) and Helm Arabia have struck a joint venture agreement on Sipchem's proposed acetyls project (460,000 tonnes/year acetic acid, 300,000 tonnes/year VAM). The $400 million USD complex is to be built in Al-Jubail, with production targeted to start in 2008. Helm Arabia will have a 25% stake in the project, with long-term marketing and offtake agreements for product sold outside of the Middle East. Holding the majority 75% share, Sipchem will market offtake for the Middle East market.

Dow Chemical restarted its Texas City, Texas VAM unit in early June, after being down for most of May due to damage suffered during a storm. Meanwhile, production at Acetex's acetic acid and VAM units fluctuated this month due to feedstock issues. Early in the month, the company had to reduce rates to 70% of nameplate due to a 7-day strike at a feedstock supplier, forcing them to declare force majeure on oxygen and nitrogen. After returning to full at mid-month, the Acetex units went back to 70-75% rates due to an outage at its supplier's CO facility. In Malaysia, BP-Petronas' acetic acid unit (500,000 tonne/year) went down for four days of repairs, but has since returned. BP also had some minor losses at Hull, UK, while rates at the US operation are slightly below maximum.

On 20 June, Shanghai Petrochemical Company shut down its VAM unit for maintenance and is expected to return to production in early to mid-July. Jiangsu Sopu's 450,000 tonne/year acetic unit was down again, this time for two weeks of maintenance and new equipment installation. With this latest downtime, capacity at the site is expected to increase to 600,000 tonnes/year. At the end of June, production at Dairen Chemical Corporation's 300,000 MT/year VAM unit in Mailiao, Taiwan shut down for a three-week maintenance period.