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August 2006 Headlines

It is usually the unexpected and unpredictable events that have the greatest impact in the market. Just after mid-month, critical supply disruptions in Trinidad and Equatorial Guinea were announced, with methanol prices just beginning their upward run. Quickly, the methanol market went from balanced to tight and from bad to worse. Now, after a little time has passed and a better understanding of the situation has been gained, the far-reaching impact on some derivative operating rates is being seen. However, the end is not in sight. Downstream derivative volumes and production costs are still running their course. Both official and unofficial sales allocation (a cautionary watch on sales) on some key derivatives are underway. Some relief is expected in early September, once the affected methanol facilities can return to production. The initial volume impact on supply will linger until October at the earliest, but methanol output will have to be stable and strong while stocks rebuild and volumes are shipped. The true impact is likely to last beyond that, as events are still unfolding.

For the few remaining North American methanol producers, natural gas prices are rising, but the potential to make a profit is also available due to the rising value of methanol. Higher summer electrical demand and slower stock refill levels are again influencing the price of natural gas in North America. The August US FERC Houston Shipchannel natural gas index was fixed at $6.36 USD/MMbtu. This is $0.67 USD gain, or 11.7% increase, on July's index. For the second time in recent weeks, the US EIA natural gas report on stock levels showed a net withdrawal from inventory. As of the data recorded for week ending 4 August (released 10 August), US natural gas inventories are at 2763 billion cf, about 16% above the 5-year average and about 12% above the level recorded for the same period last year. As of 14 August, spot cash Henry Hub natural gas prices closed at $6.91 USD/MMbtu. Also as of this date, Nymex October, November and December natural gas prices closed at $7.088, $8.803, and $10.318 USD/MMbtu, respectively.

The US FERC Houston Shipchannel natural gas index rose $0.67 USD to $6.36 USD/MMbtu in August. Despite the increase, remaining North American methanol producers are still able to benefit with strong margins due to rising methanol values. As of the data recorded for the week ending 25 August, US natural gas inventories are at 2905 billion cf. With the impact of nearly full stock levels, the recent slower refill rate, and the noted withdrawals during the past few weeks, the overall natural gas inventory level is now only 12% above the 5-year average and 10.6% above the level recorded for the same period last year. As of 29 August, spot cash Henry Hub natural gas prices closed at $6.23 USD/MMbtu. Also as of this date, Nymex October, November and December natural gas prices closed at $6.876, $8.80, and $10.470 USD/MMbtu, respectively.

On 21 August, Methanol Holdings Trinidad Limited - MHTL declared "Force Majeure" on supplies, with a 52.5% allocation program on contracts in place. This declaration is said to be for both the United States and Europe. While the total production losses suffered there over the past few months are a contributing factor, this latest action is more directly a result of M5000 going down unexpectedly on 19 August. Last week, MHTL had indicated that M5000 was at reduced rates, but "ramping up to full production," as of 17 August. It is as uncertain how long the unit will be down, but preliminary indications are from 2-3 weeks.

After going down at the end of July, Methanol Holdings Trinidad Limited - MHTL's M5000 unit (2.0 million tonnes/year) was running at reduced rates and "ramping up to full production," as of 17 August. However, further production problems forced the unit down again on 19 August, with the company estimating the outage to last three weeks. As a result of this and, to a lesser extent, the production losses at the site over the past few months, MHTL declared "force majeure" on 21 August, putting customers on a 52.5% allocation program on contracts in the US and Europe. As we go to press, we have been notified that repairs are fully underway and the plant is planning to return to production in early September. The current "force majeure" situation will be re-addressed once the plant returns, with preliminary plans to "lift the force majeure the first week of October" or as soon as possible.

On 15 August, Atlantic Methanol Production Company - AMPCO began formally notifying customers that their production plant in Equatorial Guinea, Africa had abruptly stopped production the previous day. The company's early estimates are that the unit could be offline for repairs until early-to-mid September. They are still going to ship pro-rated volumes that are on hand presently over the next several weeks. However, due to the extreme lack of product, they were being forced to declare force majeure on contracted methanol sales.

On 14 August, Atlantic Methanol Production Company's (AMPCO) plant in Equatorial Guinea, Africa went down with mechanical problems, prompting them on 15 August to formally declare "force majeure" on contracted methanol sales due to a severe shortage of product in the market. Initial estimates indicated that the unit would be down until early-to-mid September, however, at press-time, it appears that the plant could return to production in the coming week. The company did not mention when they hope to lift the "force majeure" declaration.

On 16 August, Methanex Corporation announced that methanol production at its Waitara Valley, New Zealand (530,000 tonnes) facility has resumed. The company had taken the unit down around mid-July for a brief maintenance, then kept it down as they investigated sourcing attractively priced natural gas. In his comments, Methanex Senior Vice President of Global Marketing and Logistics John Floren noted that "As a result of continuing strong demand as well as planned and unplanned supply outages, inventories of methanol are at extremely low levels. We believe that, in this environment, the methanol industry will experience tight market conditions over the next year. Operating our New Zealand plant will help address some of the additional customer demand that we are experiencing today and offset some of the shortages that are evident in the market."

On 18 August, the Shanghai Petroleum Exchange resumed trading activity with a limited number of oil products. The Chinese government shut down the exchange in 1994 after it had been in operation for just one year. There are indications that methanol, glycol and other products will be added in the coming months.

Saudi Formaldehyde Chemical Company (SFCCL) has granted an engineering and procurement contract worth $150 million USD to Indian engineering firm Larsen & Toubro Limited (L&T) and consortium partner Haldor Topsoe for a proposed 700 MT/day methanol and 100 MT/day carbon monoxide project. The units, to be built at Al-Jubail, Saudi Arabia, will backward-integrate into SFCCL's formaldehyde and derivative operations at the location. L&T will provide engineering, procurement and project management, with Haldor Topsoe supplying the technologies and licenses for methanol and carbon monoxide production processes.

After announcing last month that plans to sell the Houston, Texas Lyondell-Citgo Refinery operations had been shelved, it was revealed this month that Lyondell Chemical Company has purchased partner CITGO's 41.25% stake in the refinery. The $2.1 billion USD deal, which includes the assumption of CITGO's share of the refinery's debt, makes Lyondell the sole owner of the 268,000 bbls/day facility. The unit is considered an advantageous asset, as it is capable of processing very heavy high-sulfur crude oil into clean fuels, including reformulated gasoline and low-sulfur diesel. The deal is immediately accretive and was funded using proceeds from a seven-year Lyondell term loan. Lyondell also announced the successful negotiation of a new five-year, 230,000-barrel/day crude oil contract based on market prices with a subsidiary of Petroleos de Venezuela, S.A. for the refinery.

On 24 August, Hexion Specialty Chemicals announced that it has signed a definitive agreement with Orica Limited to purchase Orica's adhesives and resins business for an undisclosed amount. The deal will add three formaldehyde and formaldehyde-based resins facilities (Deer Park, Victoria, Australia; Mountview, NZ; Hornby, NZ) to Hexion's portfolio. No closing date was given, and the deal is subject to the requisite regulatory approvals.