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December 2005 Headlines

There are several significant issues in the global market, all equally important, but mixed in impact and understanding. Consumers and marketers are witnessing a rise in the price of methanol against mixed demand lvels. Supply volumes will be further stretched to start the year, with new production volumes not entering until later in the second half. The first half of 2006 will finally bring to term the true impact of pending lost MTBE production in North America, this as refiners and MTBE producers move towards the US Energy Policy Act of 2005 enactment date of 2 May 2006. The rationalization and reshuffling of existing methanol production capacity continues, this as energy costs have escalated and some production is no longer economically viable. Consumers are presently searching out additional and new supply partners, as the changes at year-end 2005 have left some with little time to deal with altered product availabilities and supplier relationships for 2006.

The December US Gulf Houston Ship Channel Natural Gas Index dropped strongly from November's posted level and that of the comparable prompt Henry Hub spot cash level. December was announced at $7.88 USD/MMbtu. While low in comparison to today's spot Henry Hub price, this monthly index price is linked to a better supplied Houston market, and was fixed when prices were weaker at the end of November. Sudden cold weather and winter storms, as well as continued reduced rig production count in the Gulf of Mexico, are influencing the higher priced Henry Hub cash quote. As of 9 December, the Henry Hub cash gas price was $15.02 USD/MMbtu. As of the close of business on the same day, the Nymex gas prices for January, February and March 2006 were posted at $14.312, $14.391 and $14.311 USD/MMBtu, respectively. The US natural gas market is in its third week of stock drawdown. As of the 8 December report for data as of 2 December, US natural gas stock levels were at 3166 Bcf (Billion cubic feet), a level 6.9% over the 5-year average, but now 1.8% below the level for the same period in 2004.

Compared to today's Henry Hub prices, December's US Gulf Houston Ship Channel Natural Gas FERC Index seems incongruous, having been announced at $7.88 USD/MMbtu, down $3.04 USD from November. At the time of fixture, the spot gas market was below the strong spikes seen in the wake of the wave of cold and stormy weather in the US. Many expect high price premiums to continue in the Louisiana Henry Hub market due to its linkage with residential buying and the ongoing impact of the recent hurricanes on the area's production. The FERC Index is based on the more commercial Houston market, which is not suffering the limitations seen in Louisiana. The US natural gas market is in its fifth week of stock draw down, with the level of withdrawals rising significantly linked to the recent colder weather patterns. According to data as of 16 December, US natural gas stock levels were at 2802 Bcf (Billion cubic feet), 7% below the level for the same period in 2004. With inventories running low and spot prices running high, it is likely that the FERC Index will see a big increase in January.

Supply and demand pressures remain in the United States, but, for the moment, spot prices have quieted down and individuals have settled in for the slower holiday period. Contract prices for January have been announced and Europe settled on a non-discounted quarterly reference price (€268 Euro per tonne, $319 USD/tonne, or $0.958 USD/gallon) just below the bottom of the posted US barge range. Volumes are variable and region dependent. Some of the outer lying terminal locations, especially if they are isolated and inland, are feeling the effects of the colder weather on river traffic and availabilities. Volumes and flows are returning to a slightly better balance in the US Gulf, but some suppliers are still indicated to be tight on volumes. No planned outages have been announced to regional supply sources, but reduced production continues to those few remaining US methanol plants. Demand is seasonally strong, but some concern is heard for selected products entering the new year. The potential for downward adjustments in methanol demand to the MTBE sector is still a worry, this as several producers and blenders have voiced plans to phase out MTBE in Q2 2006, with others targeting shutting down North American production capacity by year-end.

Methanex began the debate over the Q1 2006 methanol contract price in Europe, sending a letter to customers proposing a €50 increase to its non-discounted contract price, raising it to €285 per tonne. With this as a starting point, several domestic producers/sellers in Europe began targeting €270-275 per tonne, while consumers were holding to discussed levels of €240-255 per tonne. It was heard from more than one party that €285 was unacceptable in Europe, as it was based on price parity with an "artificial" price in the United States. Just prior to mid-month, several surprisingly rapid Q1 2006 contract agreements occurred at €268 per tonne, a level of approximately $318 USD/tonne. The first fixture was heard between Statoil and Perstorp, with a fixture between Helm and BP Chemicals rapidly following. Since then, additional settlements between domestic producers and German consumers were put in place. At least one other major marketer then indicated to consumers that they would support this level as well.

UOP and Total Petrochemicals have announced plans for a UOP/HYDRO methanol-to-olefins (MTO) demonstration facility that will integrate the Total Petrochemicals/UOP Olefin Cracking process with the UOP/HYDRO MTO process in an effort to increase production. Basic engineering for the unit, to be built in Feluy, Belgium, is said to be complete, with detailed engineering, procurement and construction activities to commence soon. Production at the site is slated for 2007.

In a press release dated 13 December, Johnson Matthey Catalysts announced that Iran's Kharg Petrochemical Company had signed an engineering, procurement and construction agreement for a second Kharg Island methanol facility with Namvaran Consulting Engineering Company of Iran and Iran Industrial Network Developments. The release further states Johnson Matthey will supply the process technology license and catalyst for the 1.5 million tonne/year unit, with Davy Process Technology providing basic engineering and technical assistance. Output from the unit is earmarked for export.

Phase II of the Oman Methanol Company's (OMC) project is understood to be moving forward. Indications out of Trinidad are that board approval was recently given to move forward with the planning, financing and construction phase of the second MII train. In December 2004, it was announced that the first unit, MI, was proceeding (1.0 million tonne/year), with the partners in the project including Methanol Holdings Trinidad Limited (MHTL), Oman Methanol Holdings Company and MAN Ferrostaal Aktiengesellschaft.

China's Shenhua Group announced a third coal-to-olefins (CTO) facility, this time to be located in the Ningxia province. The Ningxia Coal Industry Group, in which Shenhua is a majority stockholder, will provide feedstock coal to the 1.8 million tonne/year methanol unit, which will in turn feed a 520,000 MT/year methanol-to-propylene plant. Production is to start in 2008. As for their proposed CTO project in Inner Mongolia, it appears that just the 1.8 million tonne/year methanol plant has full government approval at this time, with some questions as to whether the methanol-to-olefins unit will receive government authorization.

Celanese announced a number of moves with regards to its acetyls business in December, including revealing plans to build a VAM unit at their Nanjing, PR China site. The 300,000 MT/year unit is slated to begin production in late 2007/early 2008. Celanese's acetic acid plant (600,000 tonne/year) at Nanjing, scheduled to begin commercial sales in late 2006/early 2007, will supply feedstock. Celanese also announced that it intends to start implementing its next generation Vantage Plus TM VAM process technology in 2006, which it will phase into its operations over the next several years. At Celanese's investor conference on 13 December, the company announced their intention to seek strategic alternatives for its butane-based 290,000-tonne/year acetic acid unit at Pampa, Texas, USA. Celanese also updated the status of the Tasnee Petrochemicals/Celanese joint venture project, stating that discussions "have been temporarily suspended due to the current high demand on contractors and vendors which have affected the project cost," and that development will be reassessed at a later date. Celanese is also presently believed to be evaluating plans to expand acetic acid production capacity (currently 440,000 tonne/year) at the Acetex Pardies, France location.