Methanol pulls back in lack of advancing momentum

China methanol futures market was volatile in the first week after the Spring Festival holiday. The most active traded contract for methanol futures on Zhengzhou Commodity Exchange advancing sharply on Feb 7, the first trading day after the holiday, but then snapped the uptrend and slumped starkingly.

Firstly, crude oil consolidated at highs, but coal price declined drastically.

Prior to the holiday, the driving force for methanol came from crude oil and coal. However, the advancing momentum tapered off after the holiday as crude oil consolidated and coal price even plunged.

The most actively trading contract for steam coal futures hit daily upper limit on Feb 8, but then was overwhelmed by announcement from National Development and Reform Commission to ensure supply and stabilize coal price on Feb 9. Prices of steam coal futures lost a whopping 11% in two trading days.

As a result, methanol lost advancing momentum. As methanol supply and demand fundamentals are little changed compared to the situation before the holiday, the market could be affected by volatility in the cost for a longer period.

Secondly, demand is not good enough to support methanol market.

In coastal regions, including Taicang and Ningbo market in East China and Guangdong market in South China, methanol prices all fell back. Besides from the drop in crude oil, the pullback in methanol prices was also caused by demand reduction, as operations of traditional downstream sectors such as formaldehyde plants reduced. According to some traders in South China, most downstream plants in South China usually restart intensively in H2 Feb, therefore, trading sentiment was tepid in Guangdong and Fujian in the first half of Feb. However, the demand is expected to recover gradually.

Thirdly, methanol to olefins profits weakened.

The profits for CTO plants integrated with captive methanol units have flipped to positive, and thus CTO plants have all restarted. Ninbo Fund and Nanjing Chengzhi’s second MTO plants have also restarted. However, the profits for those standalone MTO plants which need purchasing merchant feedstock methanol were theoretically decreasing (based on methanol and PP prices) after the holiday. Profits for other traditional downstream products were lukewarm, which could hardly support methanol market.

Fourthly, plants outside China ramped up production.

Several Iran-based methanol plants were shut earlier due to gas restrictions, but then restarted in early Feb. Busher raised methanol plant operating rate in early Feb, Kimiaya restarted its plant in the beginning of Feb, and Sabalan restarted plant on Feb 9. In addition, US’ YCI achieved stable operation and was running at full swing. The average operating rate of methanol plants outside China has increased.

With overseas supply recovering, and demand being weak, methanol market could still be under pressure.