Commodities 2021: Methanol supply tightness to dissipate in H1 2021 amid higher run rates

MTO margins could be under pressure

India awaits Biden decision on sanctions

Petrotahlil — Global methanol markets head into 2021 with supply concerns due to a prolonged period of lower run rates during 2020 and stronger than anticipated demand, despite the coronavirus pandemic, but market sources expect idled capacity returning to the market, new plant startups and a potential change in trade flows following Joe Biden's victory in the US presidential election could bring back supply length.

China's demand growth threatened by new polyolefins capacities

The Chinese market is expected to head into the first half of 2021 with renewed vigor from healthy downstream demand, underpinned by a surge in Chinese retail sales of consumer goods and upbeat GDP growth.

Prices of imported methanol in November were already 10% higher year-on-year, averaging $238/mt CFR China. This upward momentum will likely continue into Q1 with expectations of tight Iranian supply in January and February.

While Iranian methanol, through new capacities over the past two years, accounted for around 60% of China's spot methanol imports in 2020, questions surrounding its supply to China during winter remain as Iran typically diverts natural gas supply from petrochemical production to household heating.

At the same time, polypropylene margins, which have been profitable for methanol-to-olefin plants in 2020, could face headwinds from new PP units in China and higher feedstock methanol costs. A total of 1.55 million mt/year new PP capacity in China, added in September 2020, is expected to weigh on local PP prices unless domestic and export demand for personal protection equipment continues. MTO-PP margins over January to November have been 39% higher compared to the same period in 2019, averaging $170/mt, S&P Global Platts data showed. Their stellar performance, however, will be tested in 2021.

Biden's victory could change India supply mix

Meanwhile in India, supply constraints are likely in the first half of 2021 amid uncertainty over the resumption of Iranian supplies and a steady demand outlook.

In the immediate aftermath of the COVID-19 outbreak, India could attract sufficient methanol supplies given lack of strong demand in some adjacent markets and its own limited requirements. However, post -August 2020, with the presence of a handful of Middle Eastern producers, supply grew limited as broader Asian demand recovered, and strict banking controls impeded the purchase of Iranian volumes.

The scenario may well extend into 2021, unless US President-elect Joe Biden seeks a return to the Iran nuclear deal.

Iranian methanol constituted about 75% of Indian imports before February 2020, as buyers made the most of relatively lax banking provisions and customs norms, despite the withdrawal of the US' waiver to trade with Iran in May 2019.

Over March-August 2020, Iran supplied only 6-7% of all monthly shipments, India customs data showed.

Adding to such supply concerns, the Bureau of Indian Standards is expected to introduce stricter mandatory quality controls on all methanol imported to India in 2021. While India's usual suppliers will be able to produce as per new specifications, some traders expressed concerns over whether BIS inspectors would be able to hand out necessary certifications amid procedural delays due to COVID-19.

US, Europe supply to lengthen

The European and US markets will likely see supply lengthen moving into H1 2021, despite ending 2020 with low storage levels. A slew of unplanned outages in Q3 and Q4 helped temper supply in the face of lackluster demand resulting from the pandemic.

The market saw the return of some supply in H2 2020 from the restart of idled units, which will bring relief over the coming months.

On top of this, additional production is expected to come online in early 2021, with the startup of the 1.8 million mt/year YCI Methanol One plant in St. James, Louisiana, and the ramp-up to full rates of Caribbean Gas Chemical Ltd's 1 million mt/year production facility in Trinidad, according to market sources. Neither company has commented officially. The speed with which these two facilities come online is likely to impact how soon the market can expect to see spot prices decrease as a result of increased production, market sources said.

Following the startups, Europe will likely see more imports coming from the other side of the pond. However, A key question mark remains over Russia. There is still uncertainty on Tomet's 900,000 mt/year complex, which stopped production in late October and resumed operations at reduced capacity in early December. It remains unclear when the units will run at full rates. The company was not available to comment. The plant outage will continue to impact spot availability in the European market, sources said. Unless the complex resumes full operations, part of the lost volume could be replaced by new imports as well as Shchekinoazot's new 500,000 mt/year unit in the Tula region, starting up in mid-2021, the company said.