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June 2006 Headlines

Even though there were a number of significant methanol production outages during the past month, the methanol market continues to show order in pricing, with spot values in North America and Europe slightly pressured and moving down. Selected producer/marketer ideas of a tighter future market linked to methanol shutdowns and turnarounds are beginning to wane. The two largest scheduled maintenance outages, M5000 and AMPCO, finished around mid-June, yet there was little reaction or tightening due to the lost volumes. When some marketers did enter the market to buy supplemental spot volumes, the price rose slightly in North America, but the return to inactivity has resulted in the spot price moving lower again. In Europe, there have been some quiet spot deals at a discount to the Q3 contract price, but no real visible spot trades in a few weeks. All of this has left many individuals to ponder the future direction and balance. There are still some supply reductions to come, but the current balance is seen shifting back to a slight oversupply position. Outside of demand growth in China, the rest of the world market appears to be holding stable. Inactivity and reduced offtake volumes linked to the summer holiday periods will shortly be impacting. Some derivative businesses are feeling economic pressures and have voiced that they will be taking longer summer holiday shutdowns.

Supported by elevated stock levels, moderate temperatures and weaker spot values, the US FERC Houston Shipchannel natural gas index price dropped $1.14 (-17%) to June's 5.74 USD/MMbtu. With the stock refill season having just begun, a number of gas groups are indicating that their inventories are already near peak and they may shortly begin to push volumes back to the market. While inventories are high, the weekly refill rate is lower compared to historic levels and is slowly correcting towards recent year's levels. As of the week ending 2 June, US natural gas inventories are at 2320 billion cf, 41% above the 5-year average, 23% above that of the same period last year, and 39% greater than the same week in 2004. Both prompt and forward natural gas prices are declining slightly, hovering on either side of $6.00 USD/MMbtu. As of 12 June, spot cash Henry Hub natural gas prices closed at $6.00 USD/MMbtu.

While crude oil values remain elevated, natural gas prices are continuing their downward trend, thanks to high inventories and softer spot values. The US FERC Houston Shipchannel natural gas index price for June was fixed at $5.74 USD/MMbtu, down 17% from April. This is the lowest gas price since February 2005. Due to the lower required refill rate, inventories are too high to encourage greater volume additions and continue to slowly adjust towards last year's record levels. As of data for the week ending 23 June, US inventories are at 2542 billion cf, now 32% above the 5-year average, 20% above the level recorded for the same period last year, and 31% greater than the same week in 2004. Both prompt and forward month natural gas prices continue to hold on either side of $6.00 USD/MMbtu. As of 27 June, spot cash Henry Hub natural gas prices closed at $5.97 USD/MMbtu.

At the very end of last week, there were indications of an early settlement in the Q3 European contract price. The €245 Euro/tonne FOB Rotterdam settlement between a German producer and at least three contract customers comes with three weeks left in the current quarter. This might represent an agreeable midpoint in a weakening market, as some buyers and sellers had been seeking levels both above and below. However, some disagreement and debate on this remain. Time will tell if it will receive wider acceptance.

As the drama of the World Cup continues to unfold in Germany, the European methanol market has seen a bit of a spectacle develop in the Q3 contract price discussions during June. Just prior to mid-month, reports emerged of a surprise settlement at €245 per tonne between a German producer and several customers. With the exchange rate at that time, this was equal to $0.93 USD per gallon/$308 USD per tonne. As the settlement was between players that do not usually lead the market, and the producer, as a normal course of business, does not comment on private pricing action, this led to some debate and disagreement amongst the market participants. The debate centered on the absolute price level and method of agreement, as well as the timing of the fixture. Clearly, the discussions underway at that time were shaping the direction of the contract bid/offers. With three full weeks remaining in June, the early settlement seemed slightly premature. In an effort to provide a moderating influence, several consumers came to separate agreements with at least three producers at €250 per tonne. Since then, further settlements have backed up this level. At today's exchange rates, €250 is equivalent to a USD price of $315 per tonne or $0.945 USD/gallon, very much in line with the July low posting that one major has entered into the US market. We feel confident in supporting the €250 per tonne agreement, but also recognize that the previous agreement of €245 may still be in place between the producer and those consumers involved in that deal. In the end, the wording of individual contracts will likely dictate the actual settlement of the issue, as the "low published value" or "average of a published value" will likely come into play.

Syntroleum Corporation and Sustec Industries announced this month that they have formed a 50:50 partnership to work together on Fischer-Tropsch projects. The two companies revealed that their first project would be a 3,000bbl/day Syntroleum Fischer-Tropsch and Synfining unit at Sustec's Schwarze Pumpe site in Spreetal, Germany.

Also this month, the Siemens Power Generation Group announced their intentions to buy Sustec Group's coal-to-electricity technology and the engineering activities of its subsidiary Future Energy GmbH. This includes a 50% stake in the JV projects Sustec has with Shenhua Ningxia Coal. In an agreement with Shenhua Ningxia Coal, Sustec's GSP China Technology coal gasification technology is to be used in upcoming projects in Ningxia, PR China. Syngas output will be used to produce methanol that will then feed proposed MTP and DME projects at the site. The MTP project, to come online in 2008, includes 1.8 million tonnes of methanol and 520,000 tonnes/year each of propylene and polypropylene. The DME project (300,000 tonnes/year of methanol and 210,000 tonnes/year of DME) is slated to start-up in 2007.

Siemens also plans to build a large-scale coal gasification unit at Schwarze Pumpe to come online in 2009, with the syngas output to be used for power generation and to produce approximately 600,000 tonnes/year of methanol. When the Sustec Group had initially announced its purchase of Schwarze Pumpe in June 2005, the company stated plans to boost methanol capacity at the site and will likely do so once the coal gasification unit begins production.

Methanex have announced that they will be taking the Waitara, New Zealand methanol unit down for a two-week maintenance next month, but have yet to outline the plant's future operations. The idea of maintenance leads to the suggestion that the unit has an operational future in the near-term. The New Zealand asset is a key swing supply unit for Methanex, especially if the Chile operations experience some gas curtailments. However, clearly the global market is moving towards a slight surplus, and the operation of the NZ production is contingent on the cost of incremental natural gas and the regional methanol price.

At a recent investor conference, Texas Petrochemicals (TPC) announced that it had amended the terms of its agreement with Huntsman on the purchase of Huntsman's butadiene and related MTBE assets at Port Neches, Texas. Due to last month's explosion and fire at Huntsman's Port Arthur olefins plant, crude C4 supply to the Port Neches unit has been seriously impacted, with work to restore supply expected to take some time. The restructured deal closed on 27 June, with TPC paying approximately $192 million USD. The company will pay the remaining $70 million USD contingent upon the Port Arthur unit being "operational and satisfying the terms of the Crude C4 Supply Agreement." According to the agreement, Huntsman must achieve three "milestones," including notifying TPC of its intention to rebuild the Port Arthur unit within six months of the sale closing date, repairing or replacing the existing main compressor at the site within six months of the notice to rebuild, and certifying the unit operational within thirty months of the sale closing date.

Celanese announced increases to its off-list acetic acid and VAM prices, effective 1 July. The company's acetic prices will go up 2 cents per pound in the US and Canada, $40 USD/tonne in Mexico, Central and South America, Africa and the Middle East, $50 USD/tonne in Asia, and €30 in Europe. Celanese will raise VAM prices in the US and Canada by 3 cents/pound, $65 USD/tonne in Mexico, Central and South America, Africa and the Middle East, $50 USD/tonne in Asia, and €50 in Europe. Indications are that Lyondell/Millennium has also proposed a 2-cent/pound increase to its North American acetic acid price and a 3-cent/pound increase in VAM, also effective 1 July. BP has announced a 2-cent/pound North American acetic acid price hike for 1 July as well. Dow announced worldwide increases to its VAM prices, effective 15 July, up 3 cents in the US/Canada, up $60 USD in Latin America, the Middle East/Africa and Asia Pacific, and up €50 in Europe.

The government of South Korea has given its approval on the 50/50 joint venture MMA and MMA polymers project to be built by Honam Petrochemical (S. Korea) and Mitsubishi Rayon (Japan). As announced by the companies in May, the partnership, Daesan MMA Corporation, is targeting bringing the 90,000 tonne/year MMA unit up in Q4 2008, while the 40,000 tonne/year MMA polymers plant is slated to start in Q2 2008. The investment cost of the project has been reported around $258 million USD.