Methanol capacity growing too rapidly; supply glut looms

With about 6 million metric tons/year of methanol capacity expected to come on stream during 1998-2001, the world is headed for a serious supply glut, says James R. Crocco, executive vice-president of methanol studies for Chemical Market Associates Inc. (CMAI), Houston.

Demand growth for the period will be only half that amount, resulting in a global methanol capacity surplus equivalent to about 3.5 world-scale methanol plants, says Crocco. This will cause plant operating rates to move even lower than those experienced in the mid-1980s.

"This comes at a time when the current crisis in Asia results in reduced methanol demand for that world region, MTBE (methyl tertiary butyl ether) demand for oxygenated and reformulated gasoline has leveled off in the U.S. and is not progressing very rapidly in other countries, and methanol demand for fuels purposes in Brazil has practically come to a halt," said Crocco.

Utilization

New methanol plants are currently under construction in Trinidad and Tobago, Chile, Saudi Arabia, Qatar, Equatorial Guinea, and Iran, and a plant in Delaware is due to be restarted. By early 1999, construction is expected to begin on plants in Kuwait and Argentina.

"Within the 5-year forecast time frame," said Crocco, "still more methanol plants could begin construction, and even come on line, in Qatar, Venezuela, Trinidad, Peru, Estonia, Russia, Norway, West Africa, North Africa, and other locations as well."

As a result of these projects, predicts Crocco, global operating rates for methanol plants will average 76.7% in 1999 and fall to a low of 72.1% in 2000. A slight recovery will follow, to 72.4% in 2001, 73.9% in 2002, and 76.1% in 2003.

If it occurs, the predicted trough in 2000 will bring with it the lowest methanol operating rate seen since CMAI began tracking the methanol industry 16 years ago. In fact, according to Crocco's predictions, operating rates throughout 1999-2003 will fall below the historical low of 77% recorded by CMAI in 1985.

At that time, methanol prices deteriorated to the point that margins were negative for many producers, and a similar pattern can be expected in the coming years, says Crocco.

Common sense needed

The driving force behind this capacity ramp-up appears to be on the supply side, rather than the demand side.

"For the most part," said Crocco, "the rationale behind most of this expanded methanol production does not appear to have much to do with commercial or economic considerations. The key reasoning is to 'monetize natural gas' by resource producers.

"Environmental concerns put a great deal of pressure on crude oil and natural gas producers to eliminate, or at least greatly reduce, the flaring of methane or associated/waste natural gas. There are very few feasible alternatives, but methanol does fit into this category."

Crocco warns producers-especially those building new capacity-against building new plants while relying on high-cost methanol manufacturers to shut down uneconomic ones. In the mid-1980s, such high-cost methanol plants continued to run, he said.

"Decisions to rationalize production are not that easy, as they include: cash flow; labor and feedstock contracts; captive uses of a strategic raw material; offtake contracts with customers; synergy with other products and feedstocks, such as ammonia; and the sharing of some costs, (such as) facilities (or) administration.

"It could be dangerous for new entrants into the methanol industry to simply assume that a sufficient number of current high-cost producers will close their gates," said Crocco. "It is very possible, and also probable, that the higher-cost merchant market methanol producers will curtail production, and we have already seen this in the East European countries.

"The rationalization process has begun in the U.S., but it is doubtful that many large captive users will decide to shut down completely."

Longer term

The global methanol industry is in a transition period from the days of 5.7%/year demand growth to the 2.8%/year growth expected during 1997-2003.

"In the longer term, beginning 5-10 years from now," said Crocco, "it is quite possible that the industry will experience even greater demand growth for methanol from the fuels and olefins sector, and perhaps some others as well. But, in the meantime, the global industry can expect a softness not experienced recently, caused by new entrants."